One step forward, two steps back. For the second time in just three months, Boeing (BA 1.69%) has lost its chance to ink a multibillion-dollar fighter-jet sale.
Boeing's F/A-18. How could Brazil not love this plane? Source: Wikimedia Commons.
In September, if you recall, Boeing had a chance to sell the Republic of Korea $7.7 billion worth of F-15SE Silent Eagle fighter jets. Boeing lost that contest to Lockheed Martin (LMT 0.32%) and its F-35 stealth fighter. As the Koreans explained, Boeing's jet was cheaper, but what they really wanted was the more advanced F-35. And now it seems that Boeing just can't win ...
This week, down in Brazil, Boeing just saw its F/A-18 fighter rejected despite being technologically superior to the winner ... because it cost too much. (Sheesh!)
Price is the object
If you haven't been following this story closely, let me bring you up to date. A few years back, Brazil decided to update its air force of obsolete French Mirage 2000 jets. Brazil wanted more modern fighters, and whittled is shopping list down to just three planes, built by three different defense contractors:
- France's Dassault, which offered the Rafale fighter jet.
- Sweden's Saab, tendering its newest JAS-39 Gripen.
- And Boeing, offering the F/A-18.
Brazil intended to start off the modernization process with an initial buy of three dozen attack jets, at an estimated cost of $7 billion. Further purchases would then continue over the next 15 years, totaling perhaps 100 fighter planes -- and $20 billion -- when all was said and done. This, therefore, was a prize worth fighting for.
Dirty tricks
And fight they did, with French Dassault playing especially dirty, trading favors with then-Brazilian President Luiz Inacio Lula da Silva to improve its chances of winning the contract. You can read all about the details of the insider dealing here. But basically, France agreed to buy military equipment from Brazilian defense contractor Embraer (ERJ 1.08%), and even back an Olympic Games bid for Rio de Janeiro, if Brazil would choose Dassault's planes over those of Saab and Boeing.
This tangled web of favor-trading turned France's pricey Rafale, reportedly as much as $6.2 billion, plus $4 billion for maintenance contracts over 30 years, into the front-runner to win the contract. This was despite reports that Saab was offering to sell Brazil the Gripen for just $6 billion, maintenance included. Boeing's position, lacking Dassault's political connections and charging $7.7 billion for its plane (also including maintenance), looked tenuous in the extreme.
Then Boeing suffered an even bigger setback when news of the NSA spying scandal broke in August, and Brazil took umbrage at reports that the U.S. had been spying on its electronic communications. As one local official put it, Brazil was unwilling to even "talk about the fighters with Boeing" anymore, after that kerfuffle.
Denouement
This week, the drama drew to a close, when Brazil confirmed it will pay $4.5 billion, plus the cost of long-term maintenance contracts, to buy 36 Gripens from Saab.
Whether it was Boeing's too-high price tag, or the NSA spying scandal that finally scotched Boeing's bid, we may never know for sure. Probably it was the price. At least, Brazilian daily Folha de Sao Paulo reported that price was the reason Brazil ultimately changed its mind and rejected France's Rafale.
What is clear, though, is that Boeing is rapidly running out of fighter jet contracts to lose -- and that's not good news for the company's $16 billion Military Aircraft business. With Lockheed Martin locking up the high end of the fifth-generation fighter jet market, second-tier planebuilders like Saab, Embraer, and now Textron (TXT +0.69%) sniping at the low end, Boeing's stuck in the middle, fighting for share in a shrinking market -- and more often than not, losing.
Saab's Gripen, flying away with the win. Source: Wikimedia Commons.
Invest ahead of the news
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