Beat This! The Lowball Price Airbus Offered On Its Tanker Was No Bargain
Although Northrop Grumman employees are deeply disappointed that they could not build a convincing business case for bidding in the Air Force's pending tanker procurement, there is one big advantage to pulling out now. When the World Trade Organization releases its final report on Airbus subsidies next week, Northrop won't have to defend its former partner's predatory business model. The WTO will find that the A330 Northrop and Airbus wanted to bid in the tanker competition probably never would have been developed without $5 billion in "launch aid" now prohibited by trade treaties. Northrop Grumman thus has escaped being on the wrong side of a bitter political controversy.
It isn't so clear that even now Northrop Grumman leaders understand how deep-seated resentment is in Congress over the way Airbus has leveraged unfair advantages to deprive America of hundreds of billions of dollars in export sales. In a parting shot, the company cited the $184 million price-tag it offered each of its tankers for in the previous, flawed tanker competition, and asserted Boeing's plane should cost no more because, after all, it is smaller. If that argument sounds reasonable to you, then you need to read the study I put out this week on why Airbus always manages to underbid Boeing in commercial competitions. The reason is that European countries have been breaking trade rules for many years to give Airbus a pricing advantage no commercial competitor could match. Here are a few details Northrop left out of its parting comments on tanker pricing.
1. Northrop Grumman's strategy for winning the tanker order was always based on being able to tap subsidies from European governments to bid a very aggressive price -- just as Airbus does in airliner competitions. What it didn't anticipate when it got into the tanker business was that the WTO would rule those subsidies were unacceptable under current trade rules, and that the Air Force would adjust the bid price to reflect the high cost of operating the much bigger Airbus plane over its service life.
2. Despite years of working with Airbus on tanker bids, Northrop never knew what it actually cost the European company to build an A330. The reason why is that Airbus is more interested in revenue growth and market share than profits, since the availability of government subsidies insulates it from financial losses. It therefore will price its planes at whatever level is necessary to beat Boeing, regardless of production costs. This pricing dynamic is documented in reports filed with the WTO by the U.S. Trade Representative.
3. Even if Airbus production costs were rigorously captured, they represent only a fraction of what it would cost to operate the A330 as a tanker over its 30-40 year service life. Eventually, the cost of fueling, maintaining and housing an aircraft dwarf the initial price-tag. The A330 has 40 feet more wingspan than the rival Boeing 767 and burns a ton more fuel per flight hour, so it eventually would have cost much more to own -- unless the Air Force completely redesigned the refueling mission to match the characteristics of the Airbus plane.
4. Unlike the older 767, the Airbus A330 is still getting a lot of commercial orders that theoretically could enable Airbus to achieve economies of scale in building tankers. However, the new Boeing 787 Dreamliner is about to do to the A330 line what Airbus planes did to the 767 line -- destroy its commercial customer base. Thus, the cost of building each A330-based tanker probably would have risen in the future, notwithstanding the quasi-socialist pricing methodology employed by Airbus to win competitions today.
The good news for Northrop Grumman is that it no longer has to be associated with a European company that has spent decades trying to destroy America's lead in the global aviation business by leveraging prohibited subsidies. Northrop and Airbus did a good job of concealing from public view the tensions within their tanker team, but those tensions were nothing compared with the uproar Airbus will be facing in North America once Congress grasps what the WTO is saying about the company's past business practices.