May 17, 2010 / 9:09 PM / 10 years ago

Boeing says it will bid for US tanker deal, despite concerns

* Boeing concerned that EADS can accept more risk

By Andrea Shalal-Esa

WASHINGTON, May 17 (Reuters) - Boeing Co (BA.N) on Monday said it intends to bid in a multibillion-dollar U.S. Air Force refueling plane competition although it remains concerned that rival bidder EADS EAD.PA could have an advantage in the competition because it receives government subsidies.

Defense News on Monday quoted an unnamed senior Boeing executive as saying that Boeing was considering not bidding for the contract, valued at up to $50 billion, given concerns about whether the company could win the deal or make a profit.

The two companies must submit bids by July 9 to build 179 new aerial refueling planes for the Air Force — the U.S. military’s third attempt in nine years to begin replacing its aging fleet of KC-135 tankers.

Defense analyst Loren Thompson said Boeing’s top defense executive Dennis Muilenburg raised the possibility of pulling out of the competition with company insiders last week, apparently convinced that the Pentagon was “trying to rewrite the selection criteria to favor a team led by EADS.”

In a blog posted by the Lexington Institute, Thompson said he doubted Boeing would truly withdraw from the competition, and its executives were probably being “paranoid,” since the Air Force’s framework still seemed to favor the smaller, cheaper Boeing 767-based airplane over EADS’ larger A330.

Boeing spokesman Dan Beck said the company planned to submit a low-cost bid that met all of the Air Force’s requirements, but the company regretted that its concerns about subsidies to EADS, the parent of Airbus, would not be reflected in the Pentagon’s evaluation of competing bids.

Boeing executives “are deeply concerned about the ability of a heavily and illegally subsidized Airbus/EADS to accept levels of financial risk that we cannot in a way that distorts the competition,” Beck said.

One source following the issue said Boeing was keeping its options open, particularly if the Air Force made changes to the final request for proposals before the July 9 deadline that appeared to favor EADS.

But it was difficult to imagine Boeing withdrawing from a competition worth tens of billions of dollars at a time when overall defense spending is expected to flatten out or even decline, said the source, who was not authorized to speak on the record.

“I think that Boeing is playing with enormous fire here,” said analyst Scott Hamilton of Leeham Co, adding that Boeing risked angering the Air Force and Defense Secretary Robert Gates by politicizing the tanker competition.

Gates canceled the last tanker deal, which Boeing had lost to EADS and Northrop Grumman Corp (NOC.N) after government auditors partially upheld Boeing’s protest and lawmakers became deeply involved in debating the procurement.

Boeing-backed legislation that would add the cost of any subsidy deemed illegal by the World Trade Organization to major weapons contracts could also backfire, he said, noting that the trade body was due to rule next month on a European countersuit alleging that Boeing benefited from illegal tax subsidies.

The WTO ruled earlier this year that Airbus benefited from billions of dollars of European government subsidies to develop its A330 wide-body aircraft, among other commercial planes.

The Defense Department says it cannot factor the ruling into its procurement, given that it could still be appealed.

EADS declined comment on the Air Force’s tanker procurement process, but said reports of a possible Boeing withdrawal were “another attempt to distract attention from the fact that EADS North America has a more capable tanker that is flying today, while Boeing can only offer an untested conceptual design.”

One defense official said the Pentagon was keenly aware of the importance of the tanker competition and was at pains to ensure a flawless process this time around — and that meant strictly limiting any conversations with the rival bidders.

“We know we have to get this right this time,” said the official, who was not authorized to speak on the record. (Reporting by Andrea Shalal-Esa; editing by Carol Bishopric)

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