Tanker Wars: Pentagon Must Have A Policy On Illegal Subsidies

The Pentagon’s revised strategy for selecting a next-generation tanker looks likely to become a price shootout. The performance features of the competing planes will be compared using a series of yes-no mandatory requirements in which thresholds are either met or not met, and there will be no evaluation of contractor past performance (see my November 2 issue brief). That approach puts great pressure on the competing teams to offer an attractive price, but since the price is fixed and covers an 18-year period, there is a danger that contractor cost assumptions will be too optimistic and the winning bidder ends up losing money on the program. Both the Boeing and the Northrop Grumman teams are perplexed as to how to go about formulating a competitive price.

But that doesn’t mean the two teams face the same pricing challenge. The Boeing team is concerned subsidies from European governments will enable Northrop to price its modified Airbus A330 so low that it undercuts the Boeing bid even though the Airbus plane costs more to build and operate. Airbus almost always underbids Boeing in airliner competitions, which is why Boeing is so angry about the subsidies Airbus has gotten for each one of its commercial transports, including the A330. It has a valid point: Airbus wouldn’t exist without massive infusions of government aid on each new plane it develops, and the cumulative effect of that aid has been to make Airbus the leading global producer of airliners.

Northrop Grumman doesn’t operate in the commercial aviation business, so it thinks that Boeing’s constant complaints about Airbus subsidies are just a tactic aimed at gaining competitive advantage in the tanker competition. Pentagon acquisition regulations make little mention of how to deal with government subsidies because governments are the only customers buying weapons, and that’s the world Northrop Grumman knows. It shares the Airbus view that both commercial transport producers get government subsidies, which has some truth but ignores the huge scale of Airbus benefits and their distorting effects on markets.

The Department of Defense is trying real hard to avoid getting involved in the subsidies controversy, and it might have succeeded if earlier efforts to award a tanker contract had proved successful. But the World Trade Organization has now ruled the European governments that created Airbus are guilty of massive, multi-decade violations of free trade rules. The provision of billion-dollar subsidies for each new Airbus airliner has caused huge harm to Airbus competitors, and almost certainly will enable the Northrop-Airbus team to price its plane more favorably than would have been feasible in the absence of subsidies. If Pentagon policymakers don’t address the issue then Congress will, and the end result will be yet another delay in replacing Eisenhower-era tankers.