Boeing Vs. Airbus: Battle For "Mother" Of All Defense Contracts
This is a big week for defense earnings, with Lockheed Martin and Northrop Grumman today both topping street estimatesand Lockheed's CFO saying he sees "no huge risks" to big defense projects no matter who becomes president.
But the big news will be in the NEXT earnings reports. That's because the mother of all defense contracts is just around the corner, one that looks a lot like competition in the commercial world, because it pits aircraft giant Boeing against arch-Euro-enemy Airbus. Forget the 787 versus the A380. These two companies are fighting for a much bigger prize--the Air Force's new air refueling tanker contract. The Air Force says replacing its aging tanker fleet is priority number one.
This is a program Boeing ruled for decades, and would still rule but for an ethics scandal which put the program on hold. When bidding reopened, the Air Force decided it was going to buy new tankers, instead of leasing them, and the price tag could be worth up to $100 billion! Well, THAT got noticed on the other side of the Atlantic.
Airbus maker EADS decided now was the time to break into the U.S. defense market. So it has teamed up with Northrop Grumman to pitch a version of the A330 as a tanker, while Boeing is pitching a version of the 767.
Sometime in the next few weeks, one of them is going to be awarded this big, fat contract. Or, the Air Force could split the deal to try to make everyone happy and avoid a protest that might further delay production (though Boeing might even protest a split deal).
There are long arguments for and against each aircraft, but here are the basics: Boeing says it has tanker experience, that its tanker, the KC-767, will be more fuel efficient and can land in more places. Northrop and EADS say their tanker, the KC-30, is already flying and about to do air-to-air refueling tests, so they can ramp up production more quickly. They also claim that even though the KC-30 is bigger, that also means the Air Force won't have to buy as many or fly as much. We don't know which aircraft will be cheaper.
Then there is the argument over which tanker is more "American." Boeing is touting the KC-767 as "Made in America," but Northrop and EADS have committed to creating tens of thousands of U.S. jobs, mostly in Alabama, if they win. Just last week, EADS said it would even build a commercial freighter version of the aircraft in Alabama in addition to the tanker...if it wins.
The war of words between both sides is particularly heated despite the heavy emphasis on defense-speak ("bring the most value added to the warfighter"). Northrop's Paul Meyer told the media last week that Boeing hadn't actually built and delivered a tanker in decades: "The balance of their message is 'We're more experienced"...Experience from what? 1966?" This as Boeing has hinted Alabama may not have the expertise to build tankers, also calling EADS' push for a split buy a "sign of desperation."
So, when are we finally going to get a winner? The Air Force was supposed to make a decision last October. It got pushed back until December. Then it was supposed to be a week from today. Now the Air Force tells me probably the end of February. I said, "February, 2008, right?" I don't think they thought that was very funny.
But whenever the announcement comes down, it will be big. Both sides have invested so much, and have so much to lose, that the winner will be popping champagne and the "loser" will file a protest faster than you can say "war fighter."
FYI: Video clip is of Ronald Sugar--CEO of Northrop Grumman--discussing Northrop's earnings.
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