There were numerous media reports last week that Airbus parent-company EADS might bid alone against Boeing in the Pentagon’s pending tanker competition. It’s a tough call for EADS managers, because the company’s prospects have dimmed significantly since partner Northrop Grumman dropped out of the race and the World Trade Organization issued a final report on European subsidies branding Airbus an unfair trader. Internally, EADS is deeply split over the advisability of cobbling together a revised proposal, with many German executives arguing that prospects of success are too uncertain to justify the cost of bidding, and at least some French managers such as CEO Louis Gallois countering that EADS needs a bigger footprint in the world’s largest military market.
One French reporter suggested to me that EADS knew it couldn’t win, but hoped in mounting a hopeless bid to ingratiate itself to Pentagon policymakers. I told him that wouldn’t generate much benefit, since policymakers are in too much of a legal strait-jacket to offer anything tangible in return. But I also think that many observers are naive to believe EADS would bid again if it got no more than an extension of time to rewrite its proposal. Northrop Grumman estimated the cost of submitting a new proposal would approach $100 million, and EADS would need to make some big adjustments to reflect the fact Northrop was no longer on the team. So I suspect EADS actually is looking for three things before it gets serious about bidding:
1. An extension of the deadline to submit its proposal.
2. A change in the current selection criteria so its plane gets credit for carrying more fuel.
3. A plausible possibility that Republicans will wield more influence in Congress during the selection process.
They probably can get an extension of the deadline, but without a change in the terms of the solicitation, they would practically need to give their plane away to be price-competitive with the Boeing 767. The reason why is that the bigger Airbus A330 costs more to build, and the solicitation further burdens its price with higher life-cycle outlays for fuel and infrastructure. EADS is willing to eat some of these costs to get its bigger footprint in the U.S. military market, but when you’re selling a plane that burns a ton more fuel per flight hour across a 30-year service life, the price concession would need to be huge to bring costs into alignment with what Boeing is likely to offer. So as EADS has already signaled, it really needs some change in the selection criteria that rewards the greater range and carrying capacity of the A330.
Secretary Gates has already said that no change in the terms of the solicitation will be granted. But that’s where the possibility of a Republican Congress after the November mid-term elections comes into play. EADS executives seem to think that if Republicans could retake the House of Representatives, their bid might fare better. The reasoning there is that Republican legislators pressured the Pentagon to make it feasible for the Northrop-Airbus team to bid in the first round of competition, so they might do so again. However, it’s not so clear that Republicans would be as supportive of a purely European team now that Northrop is gone, and the really critical support the first time around came from Republicans in the Senate, not the House — Republicans who are likely to remain in the minority in the upper chamber until at least 2012.
My guess is that EADS executives such as Airbus President Thomas Enders will figure out this is not a plausible scenario, and persuade the rest of EADS to avoid wasting money on a hopeless bid. But let’s wait and see what President Obama says to French President Nicolas Sarkozy this week. Maybe the game EADS is really playing is to get relief from the WTO ruling that says it must end illegal commercial-transport subsidies. Spending $100 million on a pointless tanker proposal would be a bargain if EADS in return obtained some concession on subsidies that positioned it better for the $3 trillion global airliner market where it will make most of its money over the next 20 years.
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