ANALYSIS-EADS nearing decision to bid for US tanker work

* Pentagon expected to grant EADS extension

* Decision may come next week

* EADS sees tanker as strategic priority

WASHINGTON/PARIS, March 26 (Reuters) - European aerospace giant EADS EAD.PA is nearing a decision to compete directly with Boeing Co BA.N for a contract to build billions of dollars of aerial tankers for the U.S. Air Force.

What’s more, there is much to suggest that EADS will follow through with a bid, now that it has been granted prime contractor status by the Pentagon and is on the verge -- according to several sources -- of receiving a 90-day extension that would give it time to examine classified documents critical to a tender.

Northrop Grumman Corp NOC.N and EADS beat out Boeing to win the last competition just over two years ago, but Defense Secretary Robert Gates canceled the projected $35 billion deal after government auditors upheld a Boeing protest.

Northrop decided earlier in March that the rules for the latest tender were skewed in favor of Boeing and dropped out of the bidding.

Airbus parent EADS, eager to expand its foothold in the lucrative U.S. market, had a different assessment of the risks than Northrop from the start, but its officials were unable to convince Wes Bush, Northrop’s new chief executive, to sink another $100 million in a second bid for the deal.

Northrop’s decision to withdraw prompted angry statements from European leaders concerned that Washington’s rewritten rules for the competition amounted to a protectionist plot to lock out Airbus, Boeing’s arch rival.

The prospect of a sole-source award to Boeing has also been worrying to some lawmakers and top Pentagon officials, given that an earlier sole-source deal with Boeing collapsed in the biggest Pentagon procurement scandal since the 1980s.

Against that backdrop, U.S. defense officials offered EADS, coveted “prime contractor” status, or permission to lead a bid. This is not only more lucrative but puts the European company in an inner circle of strategic defense players on a top priority acquisition. EADS has so far only led projects for U.S. Army and Coast Guard helicopters.

The Pentagon also said it would consider EADS’ request for three extra months to allow it to examine classified materials previously only available to Northrop and mount a solo bid.

The Pentagon has not given a timetable for its decision, but several sources who are closely following the issue said they expected a 90-day extension to be announced as early as next week, followed by an EADS statement on its plans.

Talk of extending the bid deadline has drawn the ire of Boeing’s supporters in Congress, who are doubly incensed by the Pentagon’s statements that this week’s ruling by World Trade Organization panel will not figure into the tanker contest.

The panel concluded that Airbus had benefited from illegal government subsidies, including aid to develop the A330 wide-body it would pit against Boeing’s 767.


Given all that, sources on both sides of the Atlantic say the French-German group may feel compelled to mount a bid, even if the competition promises to be a massive uphill battle.

Top EADS officials are gravitating toward mounting a solo bid but have not yet finalized their decision.

“They are not there yet,” said one source who was not authorized to speak on the record. Scott Hamilton, aerospace analyst with Leeham Co, said no final decision had been made but he expected EADS to bid.

“I get the real sense that they’re leaning in that direction, notwithstanding the reservations that they have over the way the (request for proposals) is crafted,” he said.

“I believe that EADS sees a path where they could submit a bid with a reasonable chance of winning that Northrop did not see and for different reasons,” he said, noting that EADS had less reservations about fixed-price contracts than Northrop, given its experience with commercial airliner deals.

The company has also delivered its UH-72 light utility helicopters to the U.S. Army on cost and schedule, he said.

One European source suggested that a decision by EADS not to bid after all could burn the company’s bridges with the Pentagon at a time when EADS is actively eyeing other weapons deals, including a new armed helicopter based on the UH-72.

The tanker deal is a core strategic issue for EADS, not only because it is dominated by Airbus revenues but because it still striving to be taken seriously as a world defense player

-- the D in its name -- after pooling French, German and -- the D in its name -- after pooling French, German and Spanish aerospace interests 10 years ago. EADS also wants to keep its options open in case Congress or the Pentagon ultimately decide to buy tankers from both teams.


“If there is something on the table especially as prime contractor then EADS must be involved,” said one source who favors a bid but was not authorized to speak on the record.

Sources familiar with the matter said Airbus Chief Executive Tom Enders remained skeptical about the merits of a bid, not wanting to embark on another “adventure” without knowing the risk, after a cost debacle on the A400M transporter.

EADS’s North America Chairman Ralph Crosby, a former Northrop executive, also was also initially wary until the Pentagon offered EADS prime status, a move which took many people on the European side by surprise.

Work on the tanker would also give EADS a large production facility in the United States, helping it to hedge against dollar-euro exchange rate fluctuations, said Hamilton.

He said the prospect of Airbus commercial production in the United States was Boeing’s biggest concern in the long saga: “Boeing wanted to move heaven and earth to prevent that.”

EADS officials are still waiting to see some classified documents in the Air Force’s request for proposals that it had not been able to view as a subcontractor to Northrop, documents that help chart out how many fighters the Pentagon would plan to deploy overseas in the event of another war.

Company officials also need training by the Air Force on how to use the complex computer models used to calculate the effective fuel use of the rival tankers, which are dispatched in groups to refuel fighter jets and other planes in mid-air.

Another source familiar with the issue said EADS could still decide to skip bidding if it concluded that the larger A330-based tanker would not be competitive in what analysts say will essentially be a price shootout with Boeing’s smaller 767. “They’ve said all along that there are other factors besides just the timetable for submitting bids,” said the source.

But those pushing for an EADS bid argue that Boeing may not be able to price its 767 as cheaply as some may think, since it is offering an upgraded version of its 767 tanker.

That could bring the prices of the A330 and 767 tankers closer than expected, possibly within the 1 percent range that would allow the Pentagon to assess the A330’s greater capabilities, said Hamilton, predicting EADS would then win. Hamilton cautioned, though, against overstating the risk involved in Boeing’s plan to modify its 767 for this round, and said talk about Boeing’s “Frankentanker” last time was “devilishly clever and effective, but unfair.”

He said Boeing had long years of experience building new models of current planes by adding new wings or making other adjustments, even on the P-8 surveillance plane it is building for the Navy: “Boeing has been doing this for decades.”

(Reporting by Andrea Shalal-Esa, Tim Hepher and Jim Wolf; Editing by Steve Orlofsky)

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