Why Is Boeing a Brazilian Bridesmaid?

Wedding bells are ringing in Brazil this week, but who's that over in the corner, sobbing away? It's Boeing (NYSE: BA  ) -- always a bridesmaid, never a bride.

Way back in August, we discussed how in the face of repeated disappointments with its 787 in the Dreamliner program, Boeing's defense division had been left to do the heavy lifting in profits production. One key to this effort was a Brazilian tender seeking bids to upgrade the local air force with an initial order of 36 planes worth a reported $7 billion.

And that's just for starters. Over the next 15 years, Brazil plans to purchase as many as 100 jets to upgrade its aging fleet -- promising revenues of $20 billion or more to whoever gets a foot in the door today. Judging from Boeing's victories in similar contests abroad, it seemed a front-runner with its offer of F-18 Super Hornets powered by beefy General Electric (NYSE: GE  ) engines. France's Dassault, and the "Born from jets" Swedes at Saab, looked less likely to win.

No boo-yah for Boeing
But not so fast. We forgot that defense procurement is, in large part, a politician's game -- and that French President Sarkozy plays to win. Dassault's failures in previous dogfights with Boeing and Lockheed Martin (NYSE: LMT  ) didn't figure into this latest contest. A few days of horse trading among Sarkozy and Brazilian President Luiz Inacio Lula da Silva, Dassault and Brazil's Embraer (NYSE: ERJ  ) soon turned the tide, and before Boeing knew it, Dassault had taken up position on its six.

Boeing's dreams of Brazilian billions were going up in smoke, but there was still hope. Sure, Lula preferred Dassault, but the local air force brass had not yet weighed in. Perhaps they would show some love for Boeing?

No such luck. This week we learned that the Brazilian Air Force is indeed at odds with its commander in chief -- but rather than favoring Dassault over Boeing, the local military men want ... Saab. Arguing that the Swedish Gripen jet presents "the best overall project among the three finalists," the air force's preference once again puts Boeing in second place.

Where to now?
With both Lula and the Brazilian air force preferring anybody-but-Boeing, it seems the aerospace giant will lose this battle -- but investors in one company can still win, by playing the odds. You see, like Boeing, Saab uses GE-built engines to power its next generation Gripen. So that gives us a two-chances-out-of-three likelihood of at least buying the right engine maker for this deal -- whoever gets the contract for the plane itself.

My advice: Bet on Saab or Dassault to win, and GE to place.

Fool contributor Rich Smith does not own shares of any company named above. EMBRAER is a Motley Fool Stock Advisor pick. The Fool has a disclosure policy.


Read/Post Comments (5) | Recommend This Article (2)

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 January 07, 2010, at 4:20 PM, Fool wrote:

    Deayou failed to say the key thing in this story: The Brazilian tender is not a usual bids to upgrade air forces, but a bid to purchase technology to produce aircraft. The essential stuff in this tender is full technology transfer. The government of USA haven't presented the grants for the future technological transfer in the aircraft building, radar building and all the electronic installed in Super Hornet. France, on the contrary, is offering full cooperation and partnership for building the airplanes in Brazil transferring any sensitive technology without any restriction. You must have in mind that recently Embraer was prevented from exporting mere training aircraft to Venezuelan Air Force because the Brazilian made planes employed some electronic components made in USA. The American Congress has blocked the deal and it resulted in a heavy losses to Brazil. As a result, the government of Venezuela went to China and Russia to buy the planes. The French are offering full technological transfer to Brazil with the endorsement of their government. It's a large partnership between two countries for joint projecting and building jet planes, submarines and other stuffs.

  • Report this Comment On January 07, 2010, at 4:57 PM, rainmanjp wrote:

    I'm confused - this article doesn't answer the question why the Brazilian Air Force prefers the Swedish Gripen ( lower per unit flyaway cost ) or why the Brazilian government prefers the French Rafale (technology transfer and workshare) With a relatively small purchase of 26 jets I fail to understand how this contract win would effect GE stock. All in all an extremely unsatisfying and incomplete article.

  • Report this Comment On January 07, 2010, at 4:59 PM, rainmanjp wrote:

    I'm confused - this article doesn't answer the question why the Brazilian Air Force prefers the Swedish Gripen ( lower per unit flyaway cost ) or why the Brazilian government prefers the French Rafale (technology transfer and workshare)

    With a relatively small purchase of 26 jets I fail to understand how this contract win would effect GE stock. All in all an extremely unsatisfying and incomplete article.

  • Report this Comment On January 07, 2010, at 7:40 PM, sooner11 wrote:

    You have forgotten the most obvious reason South American countries don't buy American. It is illegal for US companies to offer bribes to anyone even foreigners. Europeans on the other hand can bribe officials of foreign governments to get contracts and even write this expense off on their taxes. All Latin American government officials are corrupt. Corruption is an accepted part of their culture. We will never be able to compete as long as the euros continue to bribe their way to contracts. The fact that two different Euro companies are preferred by the air force and the government illustrates that they cleverly accepted bribes from both Saab and Dassault.

  • Report this Comment On January 08, 2010, at 11:39 AM, TMFDitty wrote:

    sooner11 -- that's a valid point, but about 13 years out of date...

    Up until 1997, US companies did indeed operate at a disadvantage under the strictures of the Foreign Corrupt Practices Act. In 1997, however, Europe leveld the playing field when the OECD Convention against bribery went into effect. It is now just as illegal for European companies to bribe foreign officials, as it is for US companies.

    TMFDitty

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