Did Boeing Just Lose the Tanker Contract?

One year ago -- almost to the day! -- I penned a short piece here posing the puzzler: "Did Boeing Just Win the Tanker Contract?" Sadly, today I regret to say I'm being forced to ask the opposite.

Nearly a decade into its epic struggle with Northrop Grumman (NYSE: NOC  ) , Boeing (NYSE: BA  ) stood on the brink of victory in the contest to build the Pentagon's KC-X aerial refueling vehicle. Archrival Northrop had just cried "Uncle!," demanding that the government rewrite requirements to build America's next-generation flying gas station -- or Northrop would refuse to bid.

And as it turned out, that's just what happened. The Pentagon stood firm. Northrop bowed out. Boeing's win looked like a lock -- until Northrop's partner on the KC-X bid, EADS, kicked over the gaming board. Calling a mulligan on the contest (pardon the mixed metaphors), EADS announced it would go it alone on KC-X. With everything stacked against it -- unfavorable exchange rates, a lack of local partners, a Capitol Hill full of obstreperous senators -- it seemed a fool's errand (small "f"), but EADS gritted its teeth, pulled together a bid, and submitted it.

And now, it seems they've won.

Boeing's bad news day
As you may have heard, the KC-X contract contest ran into another in its series of snafus last month, when a Pentagon clerk mistakenly sent to Boeing a package of documents intended for EADS, and to EADS a packet destined for Boeing. Speculation up until now has centered on whether the mix-up might give EADS grounds for appeal of a seemingly certain award to Boeing. But according to multiple press reports Tuesday, litigating against a poor loser might be the least of Boeing's worries. The more urgent concern: It appears Boeing will lose KC-X.

What are the odds?
Within the documents revealed to Boeing is the astonishing revelation that Boeing's version of KC-X -- the one Boeing and team members Spirit AeroSystems (NYSE: SPR  ) , Rockwell Collins (NYSE: COL  ) , United Technologies (NYSE: UTX  ) , and Honeywell (NYSE: HON  ) have ballyhooed as superior to EADS' A330-based craft in so many newspaper advertisements -- may not in fact be as good a plane as the A330 at all. Based on its examination of both planes' specs, the Pentagon appears to have concluded that EADS's plane beats Boeing on "mission effectiveness." That could be good news for General Electric (NYSE: GE  ) , which had been tapped to build the engines for last-known iteration of EADS' plane -- but it's clearly bad news for Boeing.

Granted, it's also only one of the three criteria on which the Pentagon is grading both parties' planes. Problem is, on the other two criteria:

  • Boeing's pretty sure the Pentagon is underestimating the cost of retrofitting airbases to accommodate EADS's larger A330-based tanker ...
  • ... even as it also underestimates the cost of keeping the A330-based tanker filled up with jet fuel in future years.

Strike one, strike two, and now strike three
Result: Already operating at a price-disadvantage due to the relative Euro weakness/dollar strength we're seeing in currency markets lately, Boeing was already pretty sure EADS would underprice on its offering. Now, based on what it read in the mis-mailed documents, Boeing believes it's losing the quality argument as well.

What's it mean to you?
As I say, sources tell us that this is how Boeing is reading this news -- but what's it mean to you, the investor? You'll no doubt be shocked to hear this, but I think it means surprisingly little. The price of the planes, their relative quality -- all of this is actually irrelevant to what happens next, because at its heart, the KC-X award has become an international political football.

Consider this: Say the Pentagon rumors are correct. EADS has the better plane and the cheaper plane. I still think a combination of the struggling U.S. economy, overwhelming Congressional support for Boeing's bid, and national security concerns over farming out our tanker fleet to foreign subcontractors gives Boeing the win here.

But raise your hand if you think EADS will take that decision lying down.

I mean, yes, Boeing has extended an olive branch and bowed to Pentagon pressure to stop challenging defense contract awards. It declined to challenge the award of a contract to service Boeing-built KC-10 tankers when Northrop won it last year. But EADS has given no indication it has any such compunctions. How much you want to bet they'll balk at delaying the provision of refueling tankers to America's Air Force -- tankers we've been waiting a decade for already -- when $35 billion worth of revenues are at stake?

Granted, there's always the chance EADS will win, and Boeing's commitment to fair play and the finality of contract awards will be put to the test once more. Even then, I think it's a toss-up whether we get our tankers any time soon. The temptation to litigate a $35 billion contract in an environment of declining defense spending may be too great for even Boeing to resist.

Foolish takeaway
Long story short: Absent a political compromise between Europe and the U.S., between Boeing and EADS, I see this contract as dead in the water. The merits of the actual planes just aren't relevant anymore.

Now it's time for you to tell us what you think about the KC-X controversy. Should EADS be allowed to win this one in the interests of getting planes in the air? Do we dare allow a foreign planemaker to have a stranglehold over the fuel that keeps America's strategic bombers aloft? Scroll down and sound off!

Fool contributor Rich Smith does not own shares of, nor is he short, any company named above. Check out his latest stock recommendations on Motley Fool CAPS. Spirit AeroSystems Holdings is a Motley Fool Hidden Gems selection. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (28) | Recommend This Article (18)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 08, 2010, at 7:41 PM, unknown732 wrote:

    Funny how the government claims to want to help the economy, but considers spending Billions in Europe, rather than the US on defense no less. How can we trust the French?

  • Report this Comment On December 08, 2010, at 7:47 PM, ronkirk8019 wrote:

    Questioning between EAD and Boeing should be a no brainer. Come on, its our US Airforce and our boys on the ground. Building a forgien tanker is out of the question. One example is parts? When a plane is down for possible repairs do we wait to see if the forgieners send them to us and what price do we pay. Wake up America and stop giving ourselves away. God Bless America.

  • Report this Comment On December 08, 2010, at 7:58 PM, bilyjo wrote:

    "No Way" should the U.S. ever give a contract for Essential Defensive Military Hardware to any foreign company --- and especially not to the French! It was absolutely ridiculous for our procurement agency to even ask EADS to bid the requirement. What has happened to our leadership? Is this a sign that we are being sold down the river?

  • Report this Comment On December 08, 2010, at 8:15 PM, busterbuddy wrote:

    So first let me state the obvious. It is a embarrassment to the country and to the Air Force that a Tanker contract can't be executed. And it reflects poorly on the Air Force and Boeing, in my opinion. But here are the facts. One the Northrop Grumman win last year was a solid win. And over 60% of the Tanker would have been built by American's and American workers. Political pressure was place on the Defense Department and when Gates went to Congress to testified I thought he was going to cry.

    So all this talk about EADS and foreign money is just clueless people talking. A GM cars for example has fewer American workers involved that the EADS Airbus plane.

    The Boeing 787 is primarily build overseas by Italy and Japan. You can go to the Boeing site and it tells you where and by whom.

    Finally the Tanker deal for Boeing means little to the return of the Company. One plane a month. Three 787 sells and you make as much profit as you do on the tanker contract.

    The issue was Boeing management got embarrassed by the lose. The entire tanker contract has been a decade or cheating and stealing. The real problem the tanker contract shows is how hosed up the Defense Department contracting bid process is. The real answer is to write up spec and let whomever build a place and then fly the suckers to see which performs the best. But the Air Force needs to just stop the whole effort and rethink the new Carbon fiber technology. Provide Research and Development money and do a Fly off.

    Wonder if Al Qada has these problems? Do you feel safer? From an investment stand point the tanker contract is neutral at best. But for those working on the 767 line its not.

  • Report this Comment On December 08, 2010, at 8:19 PM, busterbuddy wrote:

    Oh and one more point. National Security issues with so called foreign companies.

    You'd be shocked if you knew where millions of parts for computer processor on defense department system come from. It ain't American partner. One of the largest Defense contractors in America today is BAE. Don't think they are an American company. And hundreds of middle size Defense contractors are now owned by Foreign companies.

  • Report this Comment On December 08, 2010, at 9:55 PM, TMFDitty wrote:

    @busterbuddy: You are correct that BAE is a UK company. Its BAE North America subsidiary, however, holds itself out as an American business, that just happens to have a foreign corporate parent.

    TMFDitty

  • Report this Comment On December 09, 2010, at 1:08 AM, jcbenten wrote:

    This whole process has been pitiful. Boeing has based their bid on a 20 year old plane. Of course they are going to lose. On the other hand, has EADS even flown one their new tankers for Europe?

    I am shocked that Boeing did not bid with the 777 and/or 787 variant but the profit margin for a tanker is not anywhere near a commercial plane.

  • Report this Comment On December 09, 2010, at 1:40 AM, TrackGoldmanSach wrote:

    @jcbenten: Agreed on the "pitiful" comment. And to answer your question, yes, EADS's A330 MRTT ran its maiden flight for the RAF last month.

    On the question of profit margins ... I may not be understanding you correctly, but this does not sound right. Boeing routinely posts 10% operating profit margins on its defense business. The commercial side of the company only rarely gets as high as 10%. Unless tankers score markedly lower profit margins than does Boeing's other military hardware, I'd say it's a pretty good business for Boeing.

    TMFDitty

  • Report this Comment On December 09, 2010, at 5:10 AM, MoJocvh wrote:

    Some pithy, but quite inaccurate comments, but that is to be expected.

    The real "losers" in this sorry tale is the USAF who have been denied modern tankers for HOW LONG? after the last (or was it last, last?) boeing inspired charade??

    So once again the barriers go up.

    It should be realised however, that EADS/Airbus don't actually NEED this contract as they have plenty of orders anyway and after all,

    IT'S ONLY GOING TO BE US WORKERS,

    who end up not being employed.

    But it's not about fair competition and providing the USAF with an outstanding and far superior product to any that have gone before it.

  • Report this Comment On December 09, 2010, at 8:19 AM, saintsman wrote:

    Firstly, EADS is not a French company. Its European (as in the name).

    Secondly, Airbuses are assembled in France and not made in France. For this contract, the aircraft will be assembled in Mobile which means jobs for US workers.

    Thirdly, the Boeing tanker does not work (ask the Italians). If the US wants the best equipped Air Force, buy the best equipment. The Airbus solution is proven and in service.

    These days, just about everything major is sourced from all over the world so don't believe Boeing's tale about jobs being taken away. 'Hypocrites' comes to mind. Boeing know that they are going to lose and they are trying every low down trick that they can think of to prevent EADS from winning. I doubt that is good for the US Airforce.

  • Report this Comment On December 09, 2010, at 8:35 AM, F14TCT wrote:

    So, let me understand things here:

    1) It's OK for Europe to procure US-made military equipment (even when it has its own industry), but it is not OK for the US to buy European equipment? For each dollar the US spends on European military hardware, Europe spend FOUR on US-built one. See where I'm going here? Do you really want each faction to only buy what its own stuff?

    2) EADS didn't force invite itself in this competition. It was brought in after Boeing got caught its pants down bribing government employees.

  • Report this Comment On December 09, 2010, at 10:26 AM, DandHJohn wrote:

    If you think that EADS will build planes in the US, you are sadly mistaken. They are commited to keeping facilities in Europe open regardless as to economic conditions due to laws in European countries. They would be under no such restriction here and would close whatever plants they build as soon as it is economically feasible to do so. So much for employing Americans.............

  • Report this Comment On December 09, 2010, at 10:48 AM, telepole wrote:

    It would be insane to give a foreign company this contract. They could damage our readiness anytime they wanted by making parts unavaiable.

    This is a national security issue. Airbus in the past has promised to build in the US. Where is that happening? They are going to build a realtively non existent ploane, in a non existent plant by non existent workers. Now that is a BS story.

  • Report this Comment On December 09, 2010, at 11:43 AM, oldwisepig wrote:

    Oh come on! Speaking as a US Born UK living individual so much of this is pure baloney.

    First - Europe is our NATO ALLY- WHY would they EVER NOT supply spare parts? They know they would never get any business or respect here again.

    Second - Europe has done and still does purchase BUCKETLOADS of Made in the USA Military hardware - from Fighter Jets to Transport Galaxy Jets etc etc - In pure balance of the military purchases the USA is the winner here.

    Third - FRANCE always gets sha$ted by the US media - Well if it hadn't been for France's naval blockade during the whole 4th of July Nastiness - we would probably still be British. Not only that but guess who gave us the Statue of Liberty?

    Get off your patriotic backsides and let the Military decide for themselves what they need.

  • Report this Comment On December 09, 2010, at 12:00 PM, BubbaWhitley wrote:

    There is so little actually "produced" in America. As a previous post stated, most of the components for a Boeing plane are created in another country.

    EADS North America is a US corporation. A win for EADS would create new jobs in an area of the country that can use them.

    Boeing employees are terrified they might lose Union benefits if EADS North America wins this bid. The politicians that rely on the union bucks are also against an EADS win.

    For those spouting "Made in America", you are a bunch of hypocrites. What car are you driving, TV are you watching or computer are you using to read this message? I'll guarantee that most of the parts (if not the whole item) was made somewhere other than the US.

    I feel the troops deserve the best product, period. If it's Boeing that produces it, great. If it is EADS, well, so be it. Let's not make the safety and welfare of our troops a political discussion.

  • Report this Comment On December 09, 2010, at 12:04 PM, calito wrote:

    This is a prime example of people in our government doing what is not in our best interest and national security. In any future conflict that the french decides to be against us, they can choke us, meaning they do not have to support those tankers with spare parts, field service support, technical support, etc. France is not an allied of the United States. Our government is supposed to be creating jobs here, not in Europe.

  • Report this Comment On December 09, 2010, at 12:41 PM, oldwisepig wrote:

    Umm Calito - could I make a point or two?

    One - FRANCE IS AN ALLY! France is a member of NATO and EADS is NOT JUST French - in fact EADS North America is AMERICAN.

    Two - do you SERIOUSLY think that whatever we couldn't get we couldn't reverse engineer?

    Three - 15-20% of a BOEING 767 is MADE FROM FOREIGN PARTS! - SHOCK!!!!

    Four - These Aircraft - Boeing OR EADS WILL be built in the US of A and WILL employ Americans!

    Five - EVERY AMERICAN MILITARY AIRCRAFT HAS FOREIGN PARTS!

  • Report this Comment On December 09, 2010, at 7:17 PM, jonashad wrote:

    Shame is spread liberally in this fiasco. Boeing could have had the first fifty planes already in service - but they got caught bribing a government procurement dude, who now sits in jail.

    The Air Force could have had a nifty toy in the hangar, but they screwed up the bidding process so absurdly, they looked like The Stooges. Still do.

    What now to do? Hand the contract to the Europeans, but with a firm schedule for delivery that permits the contract to be voided if the planes are not delivered on time, on budget, and up to snuff.

    Flip a bird to Boeing, and make them realize that if they want government business, they need to get their act together. Firing the currrent over-paid bozo that runs the company would make a good start, followed quickly out the door by the sychophantic board of directors, whose oversight of management to protect shareholders' interests has been pathetic.

    Proceed with the WTO case on unfair subsudues to EADS by all means - and make sure that Boeing is not being sabotaged by Foreign government support of competitors - e.g., the Chinese and their spiffy new C919, built with government money and technology stolen from Boeing and Airbus.

    It's a cruel world out there - and we need to ensure our companies have every legal advantage to compete. But they do not have a "right" to our business if they supply inferior merchandise at inflated prices with dirty hands.

  • Report this Comment On December 10, 2010, at 2:31 PM, samgb wrote:

    I think it looks like EADS will win. EADS seems to have a better plane, and a lot of the jobs will be in the United States. If I was forced to bet on who get's the contract, I would choose EADS. I think the politics is on the side of EADS at this point.

  • Report this Comment On December 10, 2010, at 4:36 PM, KENOFVA wrote:

    nonsense. whatever the AF acquisition community decides, they decide (unless Congress disagrees and they withhold funding) -- and it won't necessarily make sense. It is not necessarily going to be what the acutal warfighters want. And don't expect to understand the grading process, either. Voting on American Idol will be less controversial and make more sense.

  • Report this Comment On December 10, 2010, at 9:19 PM, TMFDitty wrote:

    @all: Okay, folks. Politics aside, it's time to handicap the investment potential. Whoever "wins" the contract, does anyone out there believe the winner will be allowed to build the plane. (And if so, why?)

    My hunch is there's either an appeal of the award that hangs up the process again. But what's the thinking out there in Fool-dom?

    TMFDitty

  • Report this Comment On December 11, 2010, at 10:04 PM, Skygod69 wrote:

    jonashad--I see you are really keeping up with the latest news...NOT!!!! Darleen Druyen (the dude you are referring too, and a woman I might add) has been out of "jail" for at least FIVE years. She served her 9-month sentence and was released in September 2005. Mike Sears, the Boeing CFO that hired Druyun, was sentence to four months for aiding and abetting an illegal employment negotiation. he was also released in 2005. Othere than that, you are fairly spot-on with your assessment of the situation. Point for everyone to consider--where the Airbus offering seems to have an advantage is in an area that the contract doesn't have a specific requirement--extra fuel at a greater range. Why is this not a specific in the contract? BECAUSE THE USAF ALREADY HAS A PLANE THAT DOES THIS (with better efficiency than the Airbus, to boot!!!)--THE KC-10A EXTENDER!!! The KC-767 is the perfect replacement for the KC-135, and this is what the tanker replacement program has been about the whole time. KC-767 ALL THE WAY!!!! The best plane for the job, Skygod has spoken!!!!

  • Report this Comment On December 14, 2010, at 9:38 AM, vanyah wrote:

    I'm a former Boeing employee who now owns Put contracts on Boeing stock.

    The jobs that will be created when EADS finally wins this contract will be located in my hometown of Mobile Alabama.

    In my experience (20 years) as a Systems Analyst for the Defense/Aerospace industry I've had the opportunity to work with a lot of mismanaged companies. Think "Office Space." If Boeing wins they will develop the tankers with the same level of efficiency they've demonstrated in the development of the 787. The country can't afford to wait that long to replace the KC 135.

    This contract was awarded to EADS two years ago and Boeing protested, further delaying the contract award and increasing the costs and risks associated with the contract. If Boeing wins those risks, schedule delays and costs will skyrocket.

    Yes, I have an interest in the outcome, but you do too if you pay taxes and are concerned about the deficit and runaway federal spending.

  • Report this Comment On December 14, 2010, at 12:41 PM, oldwisepig wrote:

    Hi Guys,

    Just to add some in depth info on DOD procurement....

    http://www.nationaldefensemagazine.org/archive/2011/January/...

    This sums it up for me.....

    " The KC-X award is for 179 airplanes at the low production rate of 15 per year. It will take 12 years to fulfill this contract, which would amount to less than 3 percent of annual deliveries by Boeing and Airbus, the commercial subsidiary of EADS. Spread out over 12 years, the $35 billion KC-X procurement is $2.9 billion per year. In defense terms, this is a gnat on an elephant’s ample rear end. The political rhubarb ignores that France, Germany, Spain and England are NATO allies and U.S. law treats these countries’ firms as if they were American suppliers."

  • Report this Comment On December 17, 2010, at 12:25 PM, mrwonderfull9 wrote:

    If Boeing loses this it will be a shame and we should all be ashamed. It is time we keep as much production and assembly work on-shore. Not only for this but everything we manufacture.

    Is it protectionism. You bet so. Someone should start looking out for Uncle Sam. Its time.

    As far as boeing developing a 767 version tanker. Its done and flying in Italy and Japan already. Using less fuel and not requiring massive facility upgrades to accomodate a much larger plane.

    The way the military works add anouther $1 Billion around the world to fix all the bases to handle the large plane.

  • Report this Comment On February 05, 2011, at 6:07 PM, tawillager wrote:

    As a Contract Engineer I can work for Boeing or EADS,

    providing the aircraft is built in the USA.

    This would include all Systems in the Tanker.

    At the end of the day, it’s JOBS for America.

    EADS can build a factory here in America and keep the work here and still make lots of money over time.

    The current fleet of tankers are so old and patched up to keep them flying there will come a time the Politicians and the Pentagon must put Americas Aerospace industry first and get on with it.

  • Report this Comment On February 24, 2011, at 4:00 PM, GCshipbuilder wrote:

    I didn't even read the rest of this because the first couple proved how ignorant about this issue some people are. The planes will be built in the US with US parts and by US people. Only the parent company is european. Do some homework before you reply to these things people.

  • Report this Comment On February 24, 2011, at 8:06 PM, olasek wrote:

    This is simply not true. The tanker (as a "green" aircraft) would still be built in Europe, only the final tanker "fittings" would be performed in the US. Only in the very long term EADS would plan to build complete tanker aircraft on the US soil.

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