Tanker shock heaps more bad news on EADS

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.

Police are investigating share sales weeks before news of worsening delays to the A380 sparked a 2 billion euro profit warning and sliced a quarter off EADS stock in June 2006.

TARGET USA

Gallois meanwhile acknowledged at a press briefing on Wednesday that Airbus would miss its target of end-June for completing the next stage of a restructuring plan at Airbus.

The existing Power8 plan calls for 10,000 job cuts and 2.1 billion euros in savings from 2010 but cannot keep up with a declining dollar, forcing Airbus to ponder new measures.

Highlighting the twin forces driving EADS into the United States, as it expands in defense and places production in the cheaper dollar zone, Airbus has pledged to assemble some civil freighter jets in Alabama alongside the Air Force tankers.

Gallois declined to say whether this would still happen.

The tanker controversy is also being scrutinized by a host of European firms anxious to use strong euros to muscle into the U.S. defense market, which combines access to 50 percent of the world's arms spending with the lure of attractive dollar prices.

There was no immediate comment from European governments on the GAO decision to call for a new tender.

Judging by earlier comments from European diplomats, however, Boeing's successful appeal could cause diplomatic tremors, coming days after President George W. Bush cemented improving ties by hailing France as America's "first friend" in Europe.

"The potential fallout if this is overturned should not be underestimated," a senior European diplomat said, speaking on condition of anonymity when Boeing filed its appeal in March.

Airbus and Boeing are already involved in what could become the world's biggest trade dispute involving airliner subsidies.

(Additional reporting by Jim Wolf, Bill Rigby; Editing by Gary Hill)