Lockheed chief says U.S. tanker not trade issue

By Jim Wolf

LONDON (Reuters) - The chief executive of Lockheed Martin Corp (LMT.N), the Pentagon's No. 1 supplier, called the overturn of a $35 billion U.S. Air Force tanker deal involving Europe's EADS a contracting hitch, not a trade issue, and urged Europe to boost its defense spending.

"The tanker issue shouldn't be viewed as a trade issue as much as an acquisition issue," Robert Stevens told reporters on Sunday at a dinner on the eve of the world's biggest air show in Farnborough.

The U.S. Defense Department said last week it would reopen bidding after a botched competition for a new fleet of midair refueling tankers.

This gave Boeing Co (BA.N) a shot at wresting the deal from a Northrop Grumman Corp (NOC.N) partnership with EADS (EAD.PA), parent of Airbus, Boeing's commercial aviation rival.

The Northrop-EADS team beat Boeing for the contract in February. Boeing challenged the award with the Government Accountability Office, the U.S. Congress's audit and investigative arm. Meanwhile, congressional backers assailed the choice of Airbus over Boeing, which had supplied tankers to the Air Force for 50 years, as a blow to American jobs and a threat to the U.S. defense industrial base.

GAO said last month it had found "significant errors" in the Air Force selection process. Boeing might have won if not for flaws in evaluating the rival bids, it said in urging a new competition. Defense Secretary Robert Gates said on Wednesday he had concluded the deal could not go forward under the circumstances and ordered a new, fast-track competition.

Stevens said the perspective of Lockheed Martin was that of "an interested industry observer."

Everyone wanted "a process that's open and transparent where the rules are understood and they're followed," he said. The U.S. Air Force calls replacing its aging KC-135 tankers, used to refuel warplanes in mid-air, its No. 1 acquisition priority.

In his prepared remarks, Stevens said the U.S. market remained open to European products and interests. He cited inroads by Britain's BAE Systems Plc (BAES.L), now the Pentagon's No. 6 supplier, as well as by Rolls-Royce Group Plc (RR.L); France's Thales SA (TCFP.PA); and EADS among other European companies.

On the other hand, Stevens said Europe as a whole was continuing to lag in defense spending, building "a transatlantic capabilities gap that threatens to become unbridgeable."

Very few European allies were meeting a nominal requirement to spend 2 percent of gross domestic product, or GDP, on defense, with Britain "a welcome exception," he said.

By contrast, U.S. spending on defense continues at rates approaching 4 percent of GDP, Stevens said. He said the United States was devoting twice as much as its European partners to arms procurement and about six times as much to defense-related research and development.

"In addition, U.S. spending, by virtue of being concentrated in one market, is more efficient than European spending, which is diffused across multiple countries and interests," he said.

"There is simply no substitute for real expenditures on tangible programs if European industry health is to be improved and if further transatlantic cooperation is to be advanced," Stevens said.

(Reporting by Jim Wolf)