U.K. industry specialEurope's Northrop Grumman/EADS group wins $35 billion aircraft deal

Published 3 March 2008

A big loss for Boeing, as its European rivals win a $35 billion U.S. Air Force tanker deal; Boeing may have paid the price for the tanker contract it had in 2003, but which was annulled after revelations of procurement fraud; Boeing paid a record $615 million settlement to the government

U.S. lawmakers have reacted angrily after the U.S. military awarded a $35 billion aircraft deal to Europe’s Northrop Grumman/EADS group, in a major blow to U.S. manufacturer Boeing. “It’s stunning to me that we would outsource the production of these airplanes to Europe instead of building them in America,” said Senator Sam Brownback (R-Kansas) about the Pentagon’s decision. “I’ll be calling upon the Secretary of Defense for a full debriefing and expect there will be a protest of the award by Boeing.” The U.S. Defense Department (DOD) announced Friday that it was awarding the deal for a fleet of in-flight refuelling craft to the Northrop Grumman/EADS team, in a huge coup for Boeing’s main rival Airbus. The surprise choice of EADS marks the European group’s entry into the lucrative U.S. defense market, where so far it had had only a marginal presence.

Boeing voiced strong disappointment after the contract slipped through its hands and said it would ask for an explanation. “Once we have reviewed the details behind the award, we will make a decision concerning our possible options,” said Boeing spokesman William Barksdale, hinting at a possible protest. While European political and industry leaders have hailed the decision, many Republicans have been left seething. “We should have an American tanker built by an American company with American workers,” said Representative Todd Tiahrt (R-Kansas). “I cannot believe we would create French jobs in place of Kansas jobs.” Boeing, the second leading U.S. defense contractor after Lockheed Martin, had been considered the heavy favorite for the contract and according to its website is the largest employer in Kansas. The contract for the newly named tanker, the KC-45, is one of the largest Pentagon contracts in recent years and the first order on a tanker market valued at more than 100 billion dollars in more than thirty years. Los Angeles-based Northrop Grumman and the European Aeronautic Defense and Space Company (EADS), parent of Airbus, will provide up to 179 tankers for the U.S. Air Force. “The tanker is the number-one procurement priority for us right now. It is the first step in our critical commitment to recapitalize our aging fleet to move, supply, and position assets anywhere,” said General Duncan McNab, U.S. Air Force chief of staff, in a statement.

The stunning victory for EADS comes as group CEO Louis Gallois seeks to build up its presence in the defense sector, judged to be less cyclical than civil aeronautics. Gallois told AFP the contract was a “great subject of pride” for the company and would “encourage it to pursue its strategy in the United States.” A spokesman for French president Nicolas Sarkozy said he had called Gallois “to pay homage to this historic success. He is delighted that after recent difficulties, EADS has come back brilliantly with record orders, particularly in one of the most difficult and demanding defense markets in the world,” said David Martinon in a statement. German Chancellor Angela Merkel, in a statement, called the deal “an immense success for Airbus and for the European aerospace industry.” Airbus will assemble the tankers in Mobile, Alabama, and has vowed to transfer assembly of its commercial 330 aircraft there, creating jobs. Senator Richard Shelby (R-Alabama) welcomed the decision. “Not only is this the right decision for our military, but it is great news for Alabama,” he said. The contract was expected to bring up to 1,800 jobs to the Mobile area and 5,000 to the state, he added.

Boeing and the EADS-Northrop team had been competing for more than a year for the prize, which offers a cushion for decades in case of a downturn in the highly cyclical market for commercial aircraft. EADS’s winning offer is a modified version of the Airbus 330. The commercial plane will be militarized by Northrop Grumman and its American partners to prevent the transfer of sensitive technology to a foreign entity. Boeing had proposed a version of its long-haul cargo plane, the 767-200. In May 2003 a similar tanker contract was awarded to Boeing, but it was annulled under allegations of procurement fraud, for which Boeing paid a record $615 million settlement to the government.