Tanker shock heaps more bad news on EADS

By Tim Hepher and Matthias Blamont - Analysis

PARIS (Reuters) - Boeing's success in appealing a U.S. air tanker deal completed a triple whammy for Europe's EADS on a day when its domestic legal woes deepened and it confessed to delays in forging a vital new restructuring plan.

In a move that could also cause diplomatic shockwaves in Europe, U.S. auditors on Wednesday upheld Boeing's protest of the award of a $35 billion deal to a U.S.-European team including Airbus, part of Franco-German-Spanish EADS.

The Government Accountability Office's decision to call for a rerun was the latest twist in an epic fight for what could be one of the biggest ever military contracts, awarded in February to a consortium of Northrop Grumman and EADS.

In Paris, EADS Chief Executive Louis Gallois put a brave face on the decision, saying the GAO had not commented on the quality of the Northrop-led offer but only on technicalities.

"I am very confident in the quality of our bid," he told Reuters, adding that if the tender were reopened, EADS would be a "quality competitor."

Gallois was speaking at a party thrown by the EADS defense division at a Paris museum. As the news broke from Washington, what should have been an upbeat effort to divert attention from a host of troubles plaguing the company turned into a wake.

"I am thunderstruck," said a source close to the company, asking not to be identified.

After a drawn-out and dramatic process that has seen both sides rise and fall, a nightmare scenario that is beginning to flicker onto European radar screens is that Northrop could eventually turn its back on EADS and cut a deal with Boeing.

Another, possibly more likely, outcome is that the massive defense order would simply be split, industry analysts said.

As airlines go bankrupt amid rocketing fuel prices, a series of deals to make mid-air tankers is seen as a lifeline to EADS.

It is banking on expansion in defense, particularly in the United States, to haul itself out of a maelstrom of difficulties driven by over-reliance on loss-making civil jetliner subsidiary Airbus, reeling from past management feuds and a weak dollar.

Other pressures include an insider trading probe triggered by delays to the world's largest airliner, the A380 superjumbo, and doubts over the timing of an expanded Airbus restructuring plan to restore Boeing's only civil aerospace rival to profit.

The probe intensified on Wednesday when the company's former number two, ex-strategy chief Jean-Paul Gut, was placed under formal investigation, according to a reliable judicial source.

The move came two weeks after the former co-chief executive of Europe's largest aerospace group, Noel Forgeard, was also placed under formal investigation -- a French legal step which falls short of charges but which can ultimately lead to trial.

Both have denied wrongdoing.