EADS could pick L-3 as partner for tanker bid

Tue Apr 6, 2010 3:09pm EDT

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By Andrea Shalal-Esa

WASHINGTON, April 6 (Reuters) - Europe's EADS EAD.PA would likely choose L-3 Communications Holdings Inc (LLL.N) as a key supplier, should it decide to challenge Boeing Co (BA.N) for a U.S. aerial refueling contract worth up to $50 billion, according to analysts and sources closely following the matter.

"Based on what we know today -- and things can change -- it appears that L-3 seems to be the likely subcontractor," said Scott Hamilton of Leeham Co, noting that there is a large faction within EADS that wants to move ahead with a bid.

Analysts say a strong teaming agreement could help EADS in what is seen as an uphill battle against Boeing, maker of the current fleet of KC-135 aerial refueling tankers, especially given simmering protectionist sentiment among U.S. lawmakers.

EADS, the parent company of Airbus, has been in discussions with several companies, including L-3, Raytheon Co (RTN.N) and the U.S. unit of Britain's BAE Systems Plc (BAES.L), the sources said.

But BAE Systems, which owned 20 percent of Airbus -- a unit of EADS -- until 2006, would not join the EADS team, according to industry sources not authorized to speak on the record. BAE declined comment.

Raytheon had no immediate comment, but the company has few if any major aircraft integration operations in North America, having sold its E-Systems unit to L-3 in 2002, said Loren Thompson with the Virginia-based Lexington Institute.

"From what I know, L-3 would appear to be the most likely candidate," said Thompson.

L-3 spokeswoman Jennifer Barton said the New York-based company does not comment on rumors or speculation.

EADS declined comment on the latest chapter in a long-standing rivalry between Boeing and Airbus.

This is the Air Force's third attempt to begin replacing its aging KC-135s, which are nearly 50 years old on average.

EADS was a key subcontractor to Northrop Grumman Corp (NOC.N) when the team won the last tanker competition in February 2008, but the Pentagon canceled the deal months later after government auditors upheld a Boeing protest.

EADS DECISION AS SOON AS NEXT WEEK

Northrop withdrew from the competition last month after concluding that the revamped terms of the Air Force competition were skewed to favor Boeing's smaller 767-based tanker versus the larger A330-based tanker that Northrop and EADS were offering.

But the Pentagon told EADS, which would have provided about 87 percent of the plane's content, that it could bid as a prime contractor. Last week, defense officials said they would give EADS 60 extra days if it agreed to bid -- a significant extension, but short of the 90 days EADS had sought.

EADS, which had also wanted some changes in the request for proposals, is considering the Pentagon's offer. Industry sources expect a decision from EADS as soon as next week and say any announcement could name a U.S. partner.

Boeing last week said it was disappointed that EADS was trying to delay the tanker competition further and was reviewing its options. Some analysts said that suggests Boeing could protest the competition terms if EADS entered the fray.

Analysts said a teaming agreement would clearly benefit L-3, which has been trying to expand its profile as a major player in the U.S. defense market. L-3 was the Pentagon's No. 8 supplier in fiscal 2009, with $7.1 billion in prime contracts, according to www.usaspending.gov, a federal website.

L-3 is the prime contractor on the Pentagon's Joint Cargo Aircraft, the C-27J, but it is partnered on that deal with Alenia, a unit of Italy's Finmeccanica SpA (SIFI.MI).

That plane is "far smaller and less complex but certainly along the same lines" as the refueling tanker, Hamilton said.

EADS North America Chief Executive Sean O'Keefe has also known Robert RisCassi, the retired Army general who runs L-3's Washington office, for years.

RisCassi was vice chief of staff of the Army when O'Keefe was the Pentagon's comptroller in the late 1980s.

EADS NEEDS DOMESTIC POLITICAL COVER

But Lexington's Thompson said L-3 lacks the stature of bigger prime contractors like Northrop, Boeing or Lockheed Martin Corp (LMT.N) to undergird an EADS bid for the tanker work.

"EADS really needs a major aircraft integrator ... to give it domestic political cover in the United States. They don't really need a partner at all, but an American imprint for purposes of presenting themselves to the political system."

An agreement with L-3, a second-tier company, would not allow EADS to "present their team as having a big American footprint," Thompson said. "It will be obvious the government is buying a European plane if EADS prevails," he said.

EADS is the prime contractor for a large Army helicopter program, and also builds equipment for the U.S. Coast Guard and Department of Homeland Security.

But Boeing supporters in Congress argue that EADS should not be allowed to bid for the tanker work given a recent World Trade Organization ruling that the company benefited from illegal government subsidies, including aid to develop the A330 wide-body that it would pit against Boeing's 767 tanker.

The trade organization is due to rule on a European Union counter claim about illegal aid to Boeing in coming months.

Any EADS bid would also include many of the same companies that were involved in the joint Northrop-EADS bid, including General Electric Co (GE.N), Honeywell International Inc (HON.N), Rockwell Collins Inc (COL.N), Goodrich Corp GR.N, and the U.S. unit of Britain's Cobham Plc (COB.L). (Additional reporting by Tim Hepher in Paris and Rhys Jones in London) (Reporting by Andrea Shalal-Esa, editing by Gerald E. McCormick)

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