Is This War Profiteer a Sore Loser?

Picture this: You're sitting in a foxhole in Afghanistan, pinned down by Taliban mortar fire. Fifteen minutes ago, you called for air support, but insurgent infantry is approaching. They're creeping up on your position, and there's not a thing you can do about it. Any minute now, you'll be overrun.

Suddenly -- bang! -- a pair of Embraer (NYSE: ERJ  ) Super Tucano fighter aircraft roar overhead, strafing the mortars and suppressing their fire. The infantry retreat, and the day has been saved, courtesy of the U.S. Air Force. (Huzzahs all around.)

But what if the air support is late? What if it arrives months after you called for it? That's the dilemma facing our troops in Afghanistan today -- and corporate infighting bears the blame.

Earlier this month, Embraer won a Pentagon contract to build prop-driven fighter planes for the Air Force. At $1 billion in potential value, it's a big deal for Embraer, and its first major sale to the U.S. military. Problem is, $1 billion is also a big deal to the company that Embraer was competing with -- Goldman Sachs (NYSE: GS  ) subsidiary Hawker Beechcraft. In cooperation with partners United Technologies (NYSE: UTX  ) , L-3 Communications (NYSE: LLL  ) , and Lockheed Martin (NYSE: LMT  ) , Hawker sank more than $100 million into developing its own offering for the contract.

The Air Force nixed the Hawker team's bid, however, putting these companies' investment at risk. And when Hawker protested the award to the Government Accountability Office, the GAO also found no reason to overturn the award to Embraer. Now, charging that the Air Force decision will cost "U.S. jobs," Hawker is suing the Air Force and demanding it choose Hawker's AT-6 over Embraer's Super Tucano. (Never mind that Embraer is building the ST in Florida, and says it will create 1,200 jobs there.)

As a direct result of Hawker's suit, the Air Force has had to issue a stop-work order on the Super Tucano. What this means is that the plane, which was expected to arrive in-theater and begin supporting U.S. ground troops as early as next year, will now be delayed indefinitely. That air support you were waiting for may never arrive. But hey, at least Hawker Beechcraft, its subcontractors, and its owners at Goldman Sachs -- twice rejected by the Pentagon -- get one more bite at the apple. So it's all good, right?

Fool contributor Rich Smith owns shares of Embraer, and as you may guess, is not pleased at Hawker stalling the contract. The Motley Fool owns shares of L-3 Communications Holdings and Lockheed Martin. Motley Fool newsletter services have recommended buying shares of Goldman Sachs, Embraer, and L-3 Communications Holdings. Try any of our Foolish newsletter services free for 30 days. 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 (4) | Recommend This Article (7)

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  • Report this Comment On January 19, 2012, at 5:17 PM, Mikey925 wrote:

    The author doesn't appear to have all of the facts about this aircraft competition. He makes it sound as though the Embraer Super Tucano is some sort of heavy duty attack plane used for support of ground trips during serious conflict. This is not true. The Super Tucano is a turbo-prop that is designed for LIGHT air attack, counter insurgency, and aerial reconn missions.

    He is also quite mistaken as to the reason behind the Hawker team's protest of the contract. It's not really about jobs in the US. It's about transparency and the complete lack of procedure that was followed in how this award was given out.

    The GAO had declined the Hawker groups request to review the Air Forces decision to exclude the Beechcraft AT-6 from the Light Air Support competition. Hawker was not given any concrete reasons for the exclusion on two separate occasions.

    The Hawker consortium was looking for the GAO to conduct an investigation so as to provide TRANSPARENCY into what has been a highly inconsistent, irregular, and constantly changing spec ... competition.

    Fanning "conspiracy" flames was the fact that the DoD did not publicly announce the award, per federal regulations. The un-announced award was apparently made on Dec. 22nd.

    The LACK of TRANSPARENCY is at issue here. Not American jobs, as the author of this Motley Fool article suggests!

  • Report this Comment On January 19, 2012, at 7:55 PM, TMFDitty wrote:

    Two responses, Mikey: First, Hawker is the one playing the American jobs card. (But I agree with you that it's a red herring.)

    Second, the argument that the Pentagon would "conspire" to give away contracts to foreign firms, in preference to U.S. firms with better products is ... quite simply absurd. It's nearly as absurd as the concept that sellers should be able to cross-examine buyers over their preference for another seller's product.

    It's crazy defense acquisitions processes like these that kept the Air Force waiting 10 years to buy its new tanker.

    TMFDitty

  • Report this Comment On January 20, 2012, at 2:32 PM, Mikey925 wrote:

    TMFDitty,

    I agree 100% about the Pentagon's procurement process, it is highly flawed and the Tanker Contract is a great example of this. Other examples can be found in the absurd testing and procurement process of MRAPS during the Iraq/Afghanistan wars.

    But since the Super Tucano would be built in Florida, there really is NO JOBS issue here. The "conspiracy" isn't about Embraer being a foreign corporation. The "conspiracy" could be about where the jobs will be created LOCATED here in the States.

    Hawker resides in Kansas, and L-3's aviation modification center is in Texas.

  • Report this Comment On January 20, 2012, at 5:29 PM, TMFDitty wrote:

    Okay. I think I see where you are coming from now. So you are saying someone in Congress, presumably someone from Florida, pressured the Pentagon to give the contract to Embraer rather than L-3?

    I don't know that that's true, but it is at least plausible.

    TMFDitty

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