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EADS Takes Ball, Goes Home

By Rich Smith – Updated Apr 5, 2017 at 10:48AM

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And now the ball's in Lockheed's court.

How do you say "No fair!" in German? How about in French?

On Friday, Teutonic-Gallic defense concern EADS, and its Eurofighter consortium, pulled out of the bidding to provide fighter jets to the air forces of Norway and Denmark, alleging favoritism in the process of awarding contracts worth at least $10.7 billion to the eventual victor. Strangely, though, the Nordic nations are said to be biased against their neighbor's Eurofighter offering, and in favor of U.S. defense contractor Lockheed Martin's (NYSE:LMT) consortium -- which includes Northrop Grumman (NYSE:NOC), BAE Systems, United Technologies (NYSE:UTX), and General Electric (NYSE:GE) -- and its soon-to-be-releasedF-35 Joint Strike Fighter.

According to news reports, EADS hasn't made public the specifics of its objections to the bidding process. It has made only vague references to "changes in the timing and structure of the bidding process." But I have to wonder whether EADS' objections stem from another source entirely -- price. We already know, after all, that EADS' civilian subsidiary Airbus is having trouble competing with U.S. Boeing (NYSE:BA) for airliner sales -- so much so that Airbus plans to ship some of its research-and-development and manufacturing work to cheaper locales outside Europe. Seems to me that what holds true for civilian aircraft could just as well be hobbling Europe's ability to compete on price in fighter jets.

Foolish takeaway
The significance of Friday's news to investors is, first, that it suggests we're seeing a trend of dollar devaluation taking its toll on European manufacturers' ability to compete with their U.S. rivals.

Secondly, and specific to Lockheed investors in particular, we see this trend reducing its competition for the Norway and Denmark contracts by half. There's still Sweden's Gripen International (owned by Saab AB) to contend with. But EADS is out. That greatly increases Lockheed's chances of making the sale. It also helps its F-35 gain traction in the international arms market, and it creates economies of scale for Lockheed.

This situation will help Lockheed lower prices further. EADS' Eurofighter, in turn, will relatively and progressively become more expensive, and so it goes, ad infinitum.

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Fool contributor Rich Smith does not own shares of any company named above. Get your free refresher course in The Motley Fool's disclosure policy right here.

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