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EADS stuns Boeing with $35bn USAF contract

By Demetri Sevastopulo in Washington, Hal Weitzman in Chicago and Peggy Hollinger in Paris

Published: February 29 2008 23:36 | Last updated: February 29 2008 23:36

EADS, the European defence company, scored a stunning victory in its campaign to penetrate the US defence market on Friday by winning a $35bn to supply the US Air Force with refuelling tankers.

EADS and Northrop Grumman, its US partner, beat Boeing in a competition that could ultimately be worth more than $100bn. The winning team will initially supply 179 air-to-air refuelling tankers using a modified version of the Airbus A330 passenger jet. But the Air Force may select the same aircraft to replace its entire fleet of about 600 tankers over the coming decades.

Louis Gallois, EADS chief executive, said on Friday night the contract was a ”breakthrough for EADS” in the biggest defence market in the world. ”To win against Boeing is just great,” he told the FT.

As recently as Friday afternoon the EADS team had been convinced that Boeing would take the contract. Mr Gallois, about to leave Paris for a mountain holiday, said he had simply not believed his ears when informed at 10.25pm local time last night. ”I think it is the best contract I have won in my life.”

The decision is a huge blow to Boeing. The Chicago-based company won the original contract to provide tankers, but Congress cancelled the deal in 2003 following a procurement scandal that sent a Boeing executive and Air Force procurement official to prison.

Many analysts had expected Boeing to win, given that it has supplied the Air Force for decades. EADS will manufacture the aircraft in France, and assemble it in Alabama.

”Obviously we are very disappointed,” Boeing said in a statement. “Once we have reviewed the details behind the award, we will make a decision concerning our possible options, keeping in mind at all times the impact to the warfighter and our nation.” Shares in Boeing fell 3.7 per cent in after-hours trade, while shares in Northrop rose 5.6 per cent.

Even before the announcement, however, officials raised concerns about a protest by the losing bidder, a new trend for Air Force contracts. This week, General Michael Moseley, Air Force chief of staff, warned that a protest would be a “big deal”, forcing the Air Force to continue using 44-year old planes.

General Arthur Lichte, commander of the US Air Mobility Command, which oversees the US tanker fleet, said “Anything that slows down the process has an impact on the warfighter. From the warfighters point of view we need to get on with this.”

“This is a major win for EADS, and a breakthrough for their crucial US defence market strategy,” said Richard Aboulafia of the Teal Group, an aerospace consultancy. “Northrop also gets a badly needed programme victory.”

Loren Thompson, a defence analyst at the Lexington Institute, said the Air Force had concluded that the winning team beat Boeing in four out of five criteria used to pick the aircraft, including superior fuel and cargo-carrying capacity.

The Air Force has gone to great lengths to dispel any suggestions of impropriety or bias this time around. Sue Payton, the head Air Force acquisitions, has stressed that her office provided regular feedback to the rivals before they submitted their final bids in January.

Ms Payton said the Northrop/EADS bid “clearly provided the best value to the government” and stressed that there was “absolutely no bias in this award”.

Copyright The Financial Times Limited 2008