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EADS Shares Jump on Military Contract Win

EADS shares rose more than 7 percent Monday after the U.S. Air Force on Friday chose the Airbus A330 over Boeing's 767 for an airborne refueling contract worth up to $35 billion.

Airbus
Airbus

The deal was a major blow to Boeing , as analysts expected the U.S. company to prevail over the European plane maker in its home market.

"EADS is very much back in business," EADS UK CEO Robin Southwell said on CNBC Europe. "If we can beat Boeing with this sort of contract, I think it's a tribute to the work that's been done recently restructuring, in how we have gone about our business."

"History is showing that every time we compete with Boeing, in this market, we win," Southwell said.

The U.S. Air Force announced the award late on Friday after a lengthy contest between Boeing and a European-American team led by U.S. defense contractor Northrop Grumman , which offered converted passenger jets supplied by EADS unit Airbus.

The deal has sparked a controversy in the United States over potential job losses to Europe but was hailed as a sign of improved European-US relations by both France and Germany.

"Fifty-eight, nearly 60 percent of the value of this will be produced out of the United States. So nearly two thirds of it is U.S. and proudly U.S.," Southwell said.

EADS Stock Bucks Trend

EADS stock in Paris bucked a weaker market and rose as much as 11.2 percent, with a full day's average volume seen in less than an hour.

In Frankfurt, where EADS is also listed, the shares had been indicated up to 19 percent higher before the opening as traders reacted to a bounce in the fortunes of a company recently plagued by management problems, industrial delays and a weak dollar.

French brokerage Oddo Securities raised its recommendation on EADS stock to 'add' from 'reduce', citing a boost for the company's ambitions to reduce its strong dependence on cyclical civil aerospace revenues and move production to the dollar zone.

With aircraft sold in dollars but most of the costs in euros, EADS has been severely hurt by the rise of the euro, which stood close to its record high of $1.5240 on Monday.

The contract has taken some pressure off the company ahead of its annual results next week when it is expected to report a 312 million euro loss for 2007, according to Reuters Estimates.

Including follow-on orders and in-service maintenance, the aerial tanker contract could be the second costliest military aircraft purchase in coming decades, topped only by Lockheed Martin's F-35 Joint Strike Fighter.

The initial contract for the newly named KC-45 tanker, a modified Airbus A330 airliner, covers four test aircraft for $1.5 billion. With plans to buy 175 more planes, it would be worth $35 billion overall, the U.S. Air Force said.

Airbus will provide A330 passenger jets, which usually sell to airlines for $172 million each, and a refueling boom developed by EADS. The planes will be assembled in Alabama where

Northrop will also fit them with military electronics.

Washington hopes to start operating the new tankers in 2013.

German Chancellor Angela Merkel said the Pentagon award demonstrated the "good and trusting cooperation with the United States in the areas of security policy."

The Deal

EADS Chief Executive Louis Gallois said the contract had been won without low-balling the price. "No we didn't smash the price," he told Reuters.

However aerospace analyst Steve East at Credit Suisse said the deal may not generate significant profits for EADS and advised investors in a note to "sell into strength," saying the long-term challenges outweighed the positive short-term news.

Boeing can challenge the deal but said it would only decide whether to do so after a debriefing from Air Force officials.

With the U.S. economy in a slump and Boeing backers howling about job losses, the deal could also be held up in Congress where some lawmakers are angry that the purchase coincides with a major trade subsidy dispute between Boeing and Airbus.

The contract is also shaping up as an issue in this year's U.S. presidential election.

The likely Republican nominee, Sen. John McCain of Arizona, led an investigation that killed an earlier Air Force proposal to lease 100 Boeing 767 tankers after a former top Air Force official went to jail for negotiating a senior job with Boeing as she was still overseeing that deal and others.

-- Reuters contributed to this report