Big Bird

Christopher Drew has an article in The New York Times about Boeing's latest:

In a surprise twist to a long-running saga, the Air Force said that it would award a $35 billion contract for aerial fueling tankers to Boeing rather than to a European company that builds Airbus planes. William J. Lynn III, the deputy defense secretary, said Boeing was “the clear winner” under a formula that considered the bid prices, how well each of the planes met war-fighting needs, and what it would cost to operate them over forty years.
After weighing all the factors, the Pentagon determined that Boeing’s bid was more than one percent below that of its rival, the European Aeronautic Defense and Space Company, Mr. Lynn said. If the bids had been within one percent, the Air Force would have considered 92 additional requirements for the plane as a tiebreaker, and some of those were widely thought to favor the larger EADS plane.
The Air Force said the first phase of the contract would be worth $3.5 billion, and it would cover the construction of the first eighteen tankers by 2017. Boeing would build 179 tankers in all for about $35 billion.
Boeing, its supporters in Congress, and independent analysts were all surprised by the outcome, because in recent days, the Chicago-based company seemed to have given up hope of winning.
Lawmakers from Washington State, where Boeing assembles a substantial portion of its planes, had complained that the Pentagon had given EADS extra time to bid and had put in place several evaluation rules that seemed to favor the European company, which had submitted its bid through a North American subsidiary.
And the choice could still face opposition from lawmakers on the Gulf Coast, who were counting on EADS’s promise to build an assembly plant in Mobile, Alabama, that would have created thousands of jobs. “I’m disappointed but not surprised,” Senator Richard C. Shelby, Republican of Alabama, said. “Only Chicago politics could tip the scales in favor of Boeing’s inferior plane. EADS clearly offers the more capable aircraft. If this decision stands, our warfighters will not get the superior equipment they deserve.”
Senator Patty Murray, Democrat of Washington, called the decision “a major victory for the American workers, the American aerospace industry and America’s military.” In a phone interview, she said: “Everybody here is ecstatic. Our economy has been struggling, and this is a good news announcement that we really needed.”
EADS had contended that its plane was bigger and better. EADS had also lined up companies from other politically important states, like Ohio, to supply parts. The company has ten days to decide whether to protest the decision. But it gave no indication of its plans in a statement; EADS said only that it was concerned that the Air Force had selected a “high-risk, concept aircraft” over its “proven, more capable” refueling tanker.
Under the contract, Boeing will eventually build fourteen planes a year at plants in Washington and Kansas. The victory will also enable the company to keep open the 767 production line at its assembly plant in Everett, Washington.
EADS’s confidence that it could win the competition stemmed partly from the success that its A330 series had in commercial sales over Boeing’s 767 jetliners. And Boeing had planned to phase out the 767 when its new 787 Dreamliner is ready for delivery.
The contract, which could be the largest awarded for many years as military budgets tighten, could eventually reach $100 billion. The tankers are like flying gas stations; they transfer fuel in mid-flight to fighters, bombers, and cargo planes.
Richard L. Aboulafia, an aviation analyst at the Teal Group in Fairfax, Virginia, said the victory could also help Boeing in its battle with Airbus in their much larger fight over sales of passenger jets and freighters. If EADS had won the tanker contract, it planned to eventually assemble commercial freighter planes at the plant in Mobile, giving it a manufacturing foothold that could help expand other sales in the United States. And with sharp budget cuts in Europe, “EADS also faces a home defense market that is imploding like a black hole,” Mr. Aboulafia said. “So it was imperative that they get this contract.”
The award could signal the end of a long and often embarrassing effort by the Air Force to replace its aging tankers, which date to the Eisenhower and Kennedy years. The bidding represented the service’s third attempt to obtain new tankers since 2001. The first effort collapsed after Senator John McCain, Republican of Arizona, blew the whistle on corruption involving an airplane-leasing proposal with Boeing.
Northrop Grumman and EADS then won in 2008, only to have government auditors block the award after Boeing protested that the evaluation had been too subjective.
Northrop dropped out last year, prompting the Pentagon to extend the bid deadline to give EADS more time out of concern that Boeing could charge a higher price if it were the only bidder.
Boeing had complained that EADS could rely on subsidies from European governments to undercut Boeing’s price, or to absorb losses if it won the contract with a low bid. Boeing’s concerns were heightened after a World Trade Organization panel concluded last year that Airbus could not have fielded all its models, including the A330 series, when it did without the subsidies.
Boeing’s chief executive, W. James McNerney Jr., had said it would be hard for Boeing to match EADS’s price while still meeting shareholder expectations for a reasonable profit. At an investment conference this month, Mr. McNerney described Boeing’s final offer as “an aggressive but responsible bid”. He also told the investors: “I think the people in this room would be glad if we won at the bid level we put in and would be happy if we lost at a lower level.”
Under the proposed leasing deal in 2001, the Air Force would have paid Boeing over $20 billion for one hundred tankers, or more than $200 million per plane. Northrop Grumman has said that the bids fell to around $184 million in 2008. Most analysts thought they could come in five to ten percent below that this time, and that Boeing would have to accept low profit margins to win the contract.
But Boeing’s triumph could also irritate European leaders. And it could set back Pentagon efforts to encourage bids from foreign companies to create more competition and bring down the cost of weapons systems.
The mayor of Mobile, Samuel L. Jones, said city officials had been confident that EADS would win. “It’s very, very disappointing,” he said, “especially since we had won this competition in 2008.”