Congratulations, Fools. You were right: Boeing won. Twice.
Early last month, as Boeing
You were right. Two weeks after we ran that poll, the Air Force made its decision and handed Boeing a multibillion-dollar contract to build its next aerial refueling tanker, now dubbed the KC-46A. Boeing won the contest hands-down. As Deputy Defense Secretary William Lynn put it, Boeing's plane was the "clear winner" on both "price" and "war-fighting capabilities."
But the question remained: Would EADS appeal the Air Force's decision? I asked Fools to vote on that question a couple of weeks ago and you got it right again! By a vote of 193-70, Fools agreed that EADS would concede.
And so it did.
No sore losers ...
On Friday, EADS announced that it will not challenge the Air Force's award of KC-X to Boeing. According to EADS North America Chairman Ralph Crosby, there's just no point. Boeing was "very, very, very aggressive" in its bid, offering to build the first 179 planes for a fixed price of $31.5 billion, or 10% cheaper than EADS' bid. While that's a price "much lower than [EADS] would have gone," it was definitely the better bid -- a win for Boeing, fair and square.
... but millions of winners
It's also apparently an incredible win for U.S. taxpayers. Analyzing the figures EADS provided, The Seattle Times concluded Friday that despite 10 years of wrangling, the end result of the KC-X saga is that "the taxpayer will get a better bargain."
Here's how the numbers work: Boeing offered to build its tanker for 10% less than EADS' price, but that's just the start. Boeing's $31.5 billion bid also came in $7 billion below the then-winning bid EADS submitted in conjunction with Northrop Grumman
Of course, Boeing now has to get in gear and actually build the planes (the first batch of 18 tankers is due in 2017). This is where things start to get tricky.
You see, in dropping its bid price so much lower than EADS would have gone, Boeing also cut its profit margin to the bone. That's a sacrifice the company was willing to make, though, and Boeing got support from all the necessary players to make it happen. Everyone from Boeing's machinists union and engineers, all the way up to its board of directors reportedly weighed in on the question of how expensive the plane would be to build, where costs could be cut, and how much profit was necessary to make it worth bidding at all.
Profit margins and "dividends"
The end result is a profit margin for Boeing that defense analysts call "relatively thin." That doesn't bode particularly well for Boeing, and suggests the tanker win could be something less than a blowout victory for its subcontractors as well -- Spirit AeroSystems
- Preserved a monopoly in U.S. tanker production and secured a revenue stream that could approach $100 billion over the life of the program.
- Guaranteed it the kind of production scale that will help the company bid for other tanker projects with other air forces around the globe.
As an added bonus, Boeing just might have boosted its commercial planes division as well. No sooner had Boeing won its Air Force contract, you see, than rumors began circulating about a Boeing plan to build cargo transports for FedEx
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. The Motley Fool has a disclosure policy. Spirit AeroSystems Holdings is a Motley Fool Hidden Gems recommendation. FedEx is a Motley Fool Stock Advisor pick. The Fool owns shares of FedEx and Northrop Grumman.
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