Although cuts in the defense budgets look almost inevitable, the U.S Air Force seems to have other plans in mind. It is taking off with Boeing (NYSE: BA). And for Boeing, the sole supplier of aerial refueling tankers to the Air Force since 1948, it was a bolt out of the blue. This week, the Pentagon awarded Boeing with a contract worth more than $30 billion to produce the next generation of airborne refueling tankers.
Just when Boeing's cause appeared lost, the company beat its longtime rival European Aeronautic Defence and Space Co. in this decadelong competition to win the contract. Naturally, the news was as shocking to EADS. Leaked reports from the competition had long shown Airbus to be in the lead. In recent weeks, Boeing had appeared to give up on its chances of victory before the Pentagon's shocking decision. In delivering the announcement, the Pentagon also made it quite clear it wasn't interested in hearing protests regarding its decision. As a result, EADS showed no intention to protest the decision.
A gloomy Gulf Coast
But EADS was not the only one to feel let down with the decision. Local and state leaders seem equally dissatisfied, if not more. EADS had planned to build its tanker at Brookley Field in Mobile, Ala. The governors of Alabama, Mississippi, and Louisiana sent a letter to President Barack Obama in support of the bid by EADS prior to the announcement. Rep. Jo Bonner, a Republican representing Mobile, demanded a justification for EADS losing the bid.
Boost to the U.S economy
Boeing will receive $3.5 billion to deliver the first 18 of the 179 planes by 2017. But if the Air Force decides to buy more, the whole deal can eventually grow to $100 billion, if not surpass it. It is expected to create 48,000 jobs nationwide as Boeing is expected to build 14 planes a year at plants in Washington state and Kansas. This should provide a boost to the recovering U.S economy, which is still coping with high unemployment.
This deal will also boost the morale of other major U.S defense companies that are subcontracting with Boeing. For example, United Technologies (NYSE: UTX) unit Pratt & Whitney will supply the engines for Boeing's tanker. Other smaller subcontractors stand to benefit from what's becoming an increasing rarity: a large-scale defense project that scales well into the future and has high consistent revenues.
The Foolish bottom line
As a side benefit, Boeing might also see a lift to its passenger jets thanks to the Air Force's decision. If EADS had won, the company would have gained a manufacturing foothold in the United States that analysts predicted would help other stateside sales, especially for its freighter models.
In the end, Boeing's shares seem poised to pull a fast one following the announcement of the victory. If I were you, I'd seriously consider getting on board Boeing before it takes off.
