April 20, 2010 / 3:45 PM / in 9 years

EADS enters $50 billion U.S. tanker battle

WASHINGTON/PARIS (Reuters) - Airbus parent EADS EAD.PA said it will compete head to head with Boeing Co (BA.N) for a U.S. military refueling plane contract worth up to $50 billion, entering what analysts say will be an uphill battle.

“This is a hell of an opportunity,” Ralph Crosby, chairman of EADS North America, said on Tuesday in announcing the decision.

Crosby led EADS’ last tanker bid with then-partner Northrop Grumman Corp (NOC.N), which has now dropped out, complaining the latest contest terms favor Boeing’s smaller aircraft.

EADS felt “almost compelled” to enter the competition given its view that its A330-based tanker is superior to Boeing’s 767-based tanker, he said.

An EADS tanker built for Australia — already flying and to be delivered by year’s end — would be virtually identical to the company’s U.S. tanker offering, Crosby said.

“When you’ve got the best, you’ve got to offer it,” he told reporters at a news conference in Washington D.C., where he was joined by executives from over a dozen EADS suppliers, including General Electric (GE.N), Honeywell International (HON.N) and Goodrich (GDP.N).

Northrop and EADS had won the last U.S. tanker competition in 2008, but the Pentagon canceled the projected $35 billion deal after government auditors upheld a Boeing protest.

EADS North America Chief Executive Sean O’Keefe told reporters the company was confident that its A330-based tanker would meet all 372 of the Air Force’s latest requirements.

“We intend to win. We’re not bidding just for the benefit of producing more paper. We think we’ve got a superior product,” he said, when asked if EADS’ primary motive was securing the goodwill of the Pentagon for other programs.

PENTAGON PROMISES FAIR CONTEST

Pentagon spokesman Bryan Whitman welcomed the news from EADS and said the U.S. Defense Department was committed to conducting a “fair, open and transparent” process.

U.S. defense officials privately say they are pleased the Air Force’s third attempt to replace its aging KC-135 tankers will be a real competition, rather than another sole-source deal with Boeing. An initial lease-buy tanker deal with Boeing collapsed amid a huge procurement scandal.

Boeing said it remained deeply concerned that a “heavily subsidized” EADS would be able to take on more financial risk than Boeing could as a commercial company.

It said its 767-based tanker would meet all Air Force requirements and offered “low-risk” production, given existing Boeing facilities in Washington and Kansas. Boeing said the 767 tanker would also cost up to 20 percent less to maintain than the A330 tanker and was 24 percent more fuel efficient.

Lawmakers from Alabama, where the EADS tanker would be assembled, welcomed EADS announcement, but said they remained concerned that the competition favored Boeing.

Boeing supporters in Congress blasted the Pentagon for extending the tanker bid deadline, even after the World Trade Organization recently concluded that EADS benefited from government subsidies for its airplanes.

“It means we are bending over backwards to include a company that has broken the rules of fair play,” said Senator Patty Murray, a Democrat from Washington state, where Boeing would build its 767 airplanes before modifying them in Kansas.

EADS UNDERSCORES COMMITMENT TO ALABAMA

Crosby underscored EADS’ commitment to building the planes in the United States, and said the A330 tanker would create tens of thousands of jobs across the country if it won. He also reiterated the company’s pledge to build A330 commercial freighters in Alabama if it wins the U.S. Air Force contract.

EADS officials said they were confident they could offer a competitive price for the A330, and were already working with suppliers to lower maintenance costs for the aircraft. They also said development of the EADS tanker was nearly complete, which would make its offer less risky than Boeing’s.

But analysts said EADS also faced an uphill political and financial slog given that its A330-based tanker is larger and more expensive to operate.

“I think there is next to no chance that EADS can win the tanker competition as it stands today,” said Macquarie Securities analyst Rob Stallard.

“The request for proposals (RFP) clearly favors the 767, and Boeing has put significant political capital into securing this win. What EADS can get out of the competition is the good will of the Department of Defense” he added.

The Pentagon is now expected to extend the deadline for tanker bids by 60 days until July 9. It offered the extension after European governments accused Washington of engaging in protectionism with the revised tanker competition rules that prompted Northrop to quit the contest.

EADS said its bid included over 200 suppliers, but it could add others to the team before it submits its bid.

O’Keefe said U.S. authorities had cleared EADS to perform classified work required on the tanker, which accounts for about 30 of the 372 requirements, insisting that EADS did not need another large U.S. partner to proceed.

Reporting by Andrea Shalal-Esa in Washington and Tim Hepher in Paris; additional reporting by Matthias Blamont; Editing by David Cowell, Gunna Dickson and Tim Dobbyn

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