February 25, 2011 / 5:32 PM / in 7 years

Analysis: EADS unlikely to protest tanker defeat

PARIS/WASHINGTON (Reuters) - Europe’s EADS is unlikely to drag out a battle for a huge U.S. Air Force tanker deal because what counts now is keeping a foothold inside the world’s largest arms market as it tries to be a global player.

<p>EADS North America COO David Oliver addresses the crowd during a news conference at the Arthur R. Outlaw Convention Center in Mobile, Alabama February 24, 2011. REUTERS/Lyle W. Ratliff</p>

Newly admitted to the club of companies allowed to bid for such classified U.S. work, EADS officials see a glimmer of hope in defeat as they cling to an ambitious goal of generating $10 billion in U.S. sales beyond core Airbus jetliner orders.

Analysts say the defeat will increase pressure on the cash-rich company to make good on a pledge to boost its U.S. presence through acquisitions.

Boeing (BA.N) won the $30 billion-plus contract on Thursday.

EADS EAD.PA declined to say whether it would use its right to protest ahead of a briefing with U.S. officials on Monday. But officials gave the strongest possible indication EADS would turn the page, without fully closing any options.

Chief Executive Louis Gallois told employees in an internal memo on Friday that EADS had helped to keep the price down for U.S. taxpayers by getting a cheaper price from Boeing:

“This role will certainly be recognized in the future, and will definitely reinforce the chance of EADS and all its activities to strengthen its position as a strong partner of the U.S. armed forces and a real U.S. industry player.”

And in exclusive comments to Reuters, Airbus Chief Executive Tom Enders looked beyond tankers to stress future business.

“We have given our competitor a tough fight and forced them to offer a very low price. For Boeing, losing this would have been a disaster, for us it is only a lost business opportunity,” Enders said in an interview by email.

”The Pentagon has learned to appreciate the high professionalism of our work and our offering,“ Enders said. That’s not a bad basis for future programs in the United States, for which we will compete again with superior products.”

Boeing said it had offered an aggressive price, while still protecting shareholder value.

Having earned a seat at the top table with the world’s largest contractors as a U.S. prime contractor, EADS wants to stay and protesting could hinder the perceived benefits of co-operating with the Pentagon.

One senior executive at a U.S. defense company said EADS, still trying to get a foothold in the U.S. market, faced a different set of conditions in pondering a protest than U.S. companies that had more established ties with the Pentagon.

“They’ve got to be very careful, especially given the Pentagon’s comments about the competition being open and fair and not even close” said the executive, who was not authorized to speak publicly.

A few analysts still expect Congress to weigh in and split the orders between Boeing and EADS, particularly if output problems arise.

But the loss of the contract is a strategic blow to the company which, according to industry analysts, is left paying little more than lip service to a goal of doubling the proportion of non-jetliner revenues to 50 percent by 2020.

EADS is also far short of its revenue goal, with just $1.2 billion in non-airplane sales in the United States in 2009 and a more frugal Pentagon providing less opportunity.

“The problem is not whether or not they have a seat at the table or the technology, which they do, it is the rapidly diminishing pool of new programs to bid on,” said Teal Group analyst Richard Aboulafia.

The risk in such a downturn is that marginal players get locked into nice-to-have programs that are easy to cut or fail to sell their most advanced technology because budgets only leave room for less ambitious solutions, Aboulafia said.


Within the next two weeks, attention may return to EADS’ cash pile, which is likely to be significantly above 10 billion euros when it reports annual results as resurgent demand for passenger jets generates more down payments from airlines.

In gross terms, it is estimated EADS’ cash would replace one quarter of the cash of the entire global arms sector.

That, noted Gallois in January, is a “rich man’s problem.”

But EADS’ failure to win the U.S. tanker contract for a second time also serves as a reminder that it has not yet made good on its stated interest in mid-sized U.S. acquisitions.

The lack of progress has begun to stir a debate -- still faint at this stage -- on whether EADS should pursue its goal to be a global integrated group or settle for ‘Airbus-plus’: a mainly commercial aerospace firm with other defense interests.

“It puts more pressure on the need for timely acquisitions,” said one senior industry source closely watching the developments, who was not authorized to speak publicly.

Without acquisitions, there are slim pickings in the U.S. defense market, where budget deficits are dampening new programs.

EADS continues to get good reviews for its on-time, on-budget deliveries of light utility helicopters to the U.S. Army, but there are few new other projects on the horizon.

The company is investing heavily in development of an armed version of the Army’s Light Utility Helicopter, but it could be years before that program fully materializes.

EADS also had hoped to compete for a new Air Force program to replace the UH-1 helicopters, a program known as common vertical lift support platform.

But Air Force officials have already signaled that they may award a sole-source contract to Sikorsky Aircraft, a unit of United Technologies Corp (UTX.N), rather than risk further protests by going through a full blown competition.

Reporting by Tim Hepher and Andrea Shalal-Esa; Additional reporting by Cyril Altmeyer; Editing by Tim Dobbyn

Our Standards:The Thomson Reuters Trust Principles.
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