EADS' Loss Is Boeing's Gain

Attention, Boeing (NYSE: BA  ) shareholders! Are you tired of the interminable delays in getting the 787 Dreamliner off the ground? Frustrated with the Pentagon's seeming inability to decide whether to give the KC-X Tanker contract to Boeing or Northrop Grumman (NYSE: NOC  ) ? Well, it could be worse.

You could have invested in EADS.

Europe's flying white elephant
Several years ago, while I was living in Russia, I was amazed to see national airline Aeroflot begin a mass market advertising campaign using flying elephants as their mascot. Seemed a strange idea at the time -- I can't imagine Delta (NYSE: DAL  ) or United (Nasdaq: UAUA  ) wanting to paint themselves as "flying elephants." But lately I've been wondering if the European Aeronautic Defense and Space Company might want to license the copyright to the flying elephant concept.

If you've been following the tale of EADS' latest, greatest military offering -- the A400M military transport -- you know it's been a rough ride these past few years. First, the firm lost crucial sales to several NATO and non-NATO countries late last year, when a coalition of a dozen nations chipped in to buy two Boeing C-17 Globemaster transports immediately, rather than wait for the A400M to be ready for delivery who-knows-when.

Serial delays in producing the A400M's turboprop engines forced EADS to warn that the first planes won't be available till 2012 at the earliest. In January, Britain's Ministry of Defense called these delays "unnecessary and unacceptable," and began looking into buying C-17 Globemasters from Boeing to fill the gap in its military transport capability. Now it appears that a second key member of the A400M project could be ready to fold as well.

On Tuesday, the head of France's Defense Procurement and Export Agency "DGA" announced that delays in the A400M's arrival may force France to lease or purchase alternative air transport capability -- and to "reduce" its previous commitment to buy 50 A400Ms for its military.

France says it will not be buying Lockheed Martin's (NYSE: LMT  ) C-130 Hercules transport because it is too small to suit French needs. Lockheed does build a much bigger plane -- the C-5 Galaxy transport -- but even the U.S. isn't buying these anymore. (Rather, Congress is considering upgrading and modernizing its existing C-5s.) No, the more likely beneficiary of French disgust with the A400M is Boeing -- and its C-17 Globemaster -- along with C-17 parts suppliers such as Honeywell (NYSE: HON  ) and United Technologies (NYSE: UTX  ) .

A critical flaw
Mind if I revisit the flying elephant analogy for a moment? OK, so I once read that "a camel is a horse designed by a committee, and an elephant is a mouse built to military specifications." Leaving aside the evolutionary merits of the theory, it does ring true with respect to the A400M. For while the plane (if it ever gets off the ground) may serve admirably in the function of a flying troop carrier, it contains one critical design flaw in its make-up ...

Thanks, but no tanks
Not to put too fine a point on it: The A400M cannot carry tanks. With a lift capacity maxing out at 37 tons of payload, the A400M isn't a big enough bird to carry even the smallest of the main battle tanks in Europe's arsenal -- Italy's 52-ton Ariete, for example, or France's own 56-ton Leclerc.

Fact is, only a small handful of military transport aircraft have any chance of getting a main battle tank off the ground -- and EADS' A400M isn't one of 'em. If you absolutely, positively have to get your British Challenger, German Leopard, or American Abrams to the battlefield overnight, you probably need a Lockheed C-5 or a Boeing C-17 to do it.

The battlefield of the future may place more emphasis on lighter, more mobile vehicles. However, tanks still are a valuable battlefield resource; the lack of this key capability strikes this Fool as an elephant-sized gap from which Boeing stands to benefit.

What's it mean to investors?
Between the rumblings coming first out of London and now Paris, EADS risks alienating two of its key backers if it doesn't get the A400M back on track tout de suite. So far, however, I'm hearing nothing that would suggest that EADS will succeed.

Add in the risk that the U.S. Congress will bow to political pressure and direct the Pentagon to buy Boeing's KC-767AT tanker over Northrop's KC-30 -- a modified EADS/Airbus A330 bird, I might add -- and all indications suggest that Boeing's set to score a double-birdie ... and that EADS is going to get its wings clipped.

Stay tuned for the outcome. Meanwhile, keep the Fool on your radar for all things investing in general, and defense investing in particular:

Fool contributor Rich Smith owns shares of Boeing. The Motley Fool has a disclosure policy.


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  • Report this Comment On March 18, 2009, at 3:02 PM, cloud0 wrote:

    Sorry Rich, the A400M is a completely seperate program. Does it have major issues, sure. But Boeings Italian tankers have had too. Then there is this:

    Rep. John Murtha, D-Pa., chairman of the House Appropriations defense subcommittee, told a conference in Washington on March 12 that he is in talks with House and Senate Appropriations panel leaders to increase supplemental defense funding to finally end the decade-long KC-135 replacement effort.

    His idea, floated during a conference at the National Press Club sponsored by Aviation Week and McAleese & Associates, is to inflate the $67 billion supplemental request the Obama administration will send to Congress in coming weeks with funds tagged for the competition and "development work" on each team's planes. By putting the funds in the second 2009 supplemental, the Air Force would "get the planes sooner" than if appropriators waited to put the monies in the 2010 defense budget, due to Congress late in April.

    Murtha's plan, if included in the final version of the supplemental, would add a new twist to the tanker saga by requiring the Air Force to buy some number of both planes. Boeing and Northrop-EADS still would compete under the Murtha plan, but not for the entire 179-plane, $35 billion contract. Whichever team the service deems "put forward the best proposal would get more" of the 179-plane pie, he said, and the other team would get a lesser number. That differs from talk of a "split buy," under which the Air Force would buy an equal number from each team.

    Senior Air Force and Pentagon officials, including Defense Secretary Robert Gates, oppose buying both planes under the KC-135 replacement program because they say sustainment and maintenance costs would be too high.

    Asked by Defense News whether a mixed buy would keep the team awarded fewer KC-X tankers from protesting the decision, a move that could again delay the program by years, Murtha said lawmakers were still working through details of his plan. "We hope we can work it out," Murtha said.

    Asked whether a mixed or split buy would satisfy Boeing brass, Murtha grinned and replied: "Boeing will do what we ask them to do. They will be happy to get a tanker. ... Boeing has put a lot of money into this."

    His comments came almost 24 hours after Rep. Neil Abercrombie, D-Hawaii, House Armed Services air and land subcommittee chairman, told the same conference he supports splitting the contract between Boeing and Northrop-EADS. Abercrombie told reporters that because the Boeing and Northrop-EADS planes have different attributes, the Air Force could simply operate them in different regions of the globe.

    Murtha and Abercrombie shot down a March 10 CQ Politics article that the White House Office of Management and Budget had ordered the Pentagon to delay the KC-X competition by five years to cut costs as part of the soon-to-conclude 2010 defense budget deliberations. "That is just not true," a stern-sounding Murtha told the conference.

    I don't mind stock boosting, but research a little first.

  • Report this Comment On March 18, 2009, at 3:06 PM, cloud0 wrote:

    BTW, research the C 141, C5, C17 and every other aircraft introduction, there are always problems, caused by both sides I might add.

    Which tanker is best? The one that is around with fuel when you need it.

  • Report this Comment On March 26, 2009, at 11:00 PM, A6EIntruder wrote:

    To amplify on cloud0's comment:

    Tanking assets are immeasurable. Just like MF stock picks, we need to focus on the un-glamorous jobs. Sure, fighter jocks make movies, but it's the strike assets and the logistical trains that win wars. Tankers give a force legs and loiter time. They enable deployments. It's all about tankers.

    It doesn't say much for the acquisition bobbleheads in the Pentagon that we are STILL searching for the KC-135's replacement.

    If I recall correctly, the teething problems for the C-5 (in particular) were severe: wing spars and engines, yes? We are still seeing this in major acquisition plans.

    Large complex platforms require large complex engineering and tuning efforts. Getting these assets dialed in takes time and patience. My concern is that we are spending way too much time worrying about in Congressional constituencies as opposed to what are the capable platforms demanded by the mission and the warfighter.

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