There has been a lot of loose talk recently about the possibility that Airbus parent EADS might bid in the latest round of tanker competition even without former partner Northrop Grumman in order to establish a bigger “footprint” in the U.S. military market or make a favorable impression on Pentagon policymakers. No doubt about it, EADS wants more of the U.S. military market and winning the support of policymakers would certainly help achieve that goal. However, even a sprawling aerospace conglomerate like EADS has to watch its money carefully, given the need to bail out its faltering A380 civil transport and A400M military transport while developing an alternative to Boeing’s Dreamliner. Some simple arithmetic suggests there’s no way EADS can afford to bid on the tanker unless it is expecting a sizable infusion of money — meaning a subsidy — from European governments.
The revised tanker solicitation basically consists of two parts: 372 mandatory performance requirements that offerors must satisfy, and an adjusted price that combines the acquisition cost with service-life expenditures such as fuel outlays and military construction costs. The problem EADS faces is that the A330 transport it planned to bid is much bigger than the 767 transport that Boeing will propose, and the selection criteria give the Airbus plane no extra credit for carrying more fuel or being able to fly further than the specified performance requirements. The reason that Northrop Grumman dropped out of the competition is that it didn’t see any way the bigger Airbus plane could be price competitive once both teams had satisfied all the performance metrics. So how likely is it that EADS can achieve pricing parity without Northrop Grumman as a partner? Not likely at all, unless it gets subsidies.
The current list price of the Boeing 767 ranges from $127 million to $173 million, depending on which variant you buy. Boeing hasn’t disclosed which version it will use in its tanker proposal but it has said it intends to offer a simple design, so let’s assume that the cost of the Boeing aircraft before modifications is in the middle part of the pricing range, at about $150 million. The much bigger A330 (40 feet more wingspan than a 767) has a current list price of between $191 million and $212 million, once again depending on the variant. Assuming the tanker version is in the middle of that range, it appears that each Airbus plane would cost $50 million more than a 767 before modifications. That’s a pretty hefty difference — almost $9 billion when you multiply the $50 million per plane by the 179 planes the Air Force proposes to buy in the first installment of the tanker replacement program.
But wait, we’re not done. Even if you assume that it costs no more to modify the bigger Airbus plane for the tanking mission than it would to modify the Boeing plane, the price of the EADS planes still has to be adjusted to reflect their higher service-life costs. Not only does the A330 burn a ton more fuel per flight hour than the 767, but it doesn’t fit as readily into existing hangers and runway space, so the price of the EADS plane is further burdened in the competition by projected fuel and construction costs. Add those to the EADS bid and the price difference between buying the smaller Boeing plane and the bigger Airbus plane zooms well above $10 billion — enough money to buy a Ford-class aircraft carrier plus its escorts.
So how can EADS possibly win? European labor and material costs are at least as high as those that Boeing incurs, and overhead costs at EADS are probably higher given the politicized way in which production shares are apportioned. That means the only way the bigger, more expensive Airbus tanker could possibly achieve pricing parity with the Boeing tanker is through massive government subsidies. EADS has some flexibility in that regard because it never revealed to its Northrop Grumman partner the real cost of building an A330, and subsidies it receives for commercial work could ease the financial challenge of funding the tanker proposal. But $10 billion is a huge gap to close, and the politics of doing so in the aftermath of a World Trade Organization finding that Airbus has engaged in a pattern of illegal subsidization might prove lethal to any European tanker proposal.
The bottom line is that EADS can’t bid successfully unless European taxpayers are willing to be socked with a huge bill to make their planes price-competitive. Even if the Europeans are willing to pay that bill, it isn’t so clear that the U.S. Congress would allow such transparently unfair tactics to be used in winning a major weapons contract.
Find Archived Articles: