EADS Returns To The Tanker Race — With Pentagon Help

Author(s): Loren B. Thompson, Ph.D.
Posted in: Defense

Issue Brief

The European Aeronautic, Defense & Space Company (EADS) is back in the race to supply the Air Force with a next-generation aerial refueling tanker, announcing on April 20 that it would once again bid a modified version of its Airbus A330 commercial transport against the smaller 767 jet being proposed by Boeing. The contract for 179 tankers will be worth $35-40 billion, but since it is only the first of three awards required to replace all 400 aging tankers in the U.S. fleet, the ultimate value of the program could top $100 billion. Bids are due not later than July 9 — just in time for Bastille Day.

The business case supporting the European bid is hard to fathom. Both teams must satisfy a series of mandatory performance requirements, but once they do the selection of a winner will be based mainly on price. The A330 has a list price about $50 million higher per plane than the 767, and the A330 price will be further burdened by its higher fuel consumption and construction outlays required so that it can use Air Force bases. To achieve pricing parity with the Boeing plane, EADS must come up with savings or subsidies of over $10 billion (roughly $60 million per plane times 179 planes). Why would the European company want to spend so much money to play in a competition for a mere 15 planes per year when it already is facing huge bills for its faltering A400M military transport and delayed A380 jumbo jet?

One reason may be that Pentagon policymakers have been actively encouraging EADS to re-enter the fray. First, they gave the company a 60-day extension to rework its proposal — a necessary step, since former EADS partner Northrop Grumman had withdrawn from the competition. But the Pentagon did more. It agreed to waive any import duties on items needed to assemble the EADS tanker domestically, which is a significant boost to a plane containing more foreign content than the Boeing offering. It also determined that no handling of classified information would be needed for EADS to deliver its tanker, a significant change from the requirement in the original request for proposals that the winning contractor perform laboratory and flight testing of sensitive communications gear. Such testing typically requires access to secret encryption keys, and there is an acquisition regulation stating that contracts cannot be awarded to foreign companies if they entail access to “proscribed information,” meaning classified material.

The government says the latter two changes were already being planned as part of efforts to reform export rules and rework acquisition regulations, but the timing here seems a little too convenient. It appears that policymakers had offline conversations with EADS executives to determine what adjustments might be needed to lure them back into the tanker competition. Giving the European company a 60-day extension on bidding is reasonable enough, but changing a requirement in the request for proposals is precisely what the government said it would not do to accommodate EADS. So what else does it intend to do to keep EADS happy, and at what point will Boeing decide to lodge a formal protest? Boeing agreed to a series of such adjustments in the previous round of competition that ultimately led to it losing the tanker award.

Fortunately for Boeing, the Air Force fouled up the selection process so badly that the competition had to be redone. The acquisition approach this time is more straightforward, but that will inevitably raise questions as to how EADS thinks it can win with such a pricey plane. Beyond that, it’s hard to grasp how letting EADS bid is good for broader U.S. interests. The World Trade Organization found that the A330 never would have been built without subsidies today deemed illegal, and buying European tankers would widen the U.S. trade deficit — which already exceeds a billion dollars per day.