WHAT THE ANALYSTS ARE SAYING
Merrill Lynch: Boeing win not in the bag. The Merrill report says that while "this opens the door for a Boeing victory...the selection criteria could change to favor Northrop. By no means is a Boeing win in the bag."
Merrill does not expect a split buy. And the report says there is more at stake here than just the tanker. "A Northrop victory would allow Airbus to set up a wide body jet final assembly line in a dollar-zone region, providing much needed exposure to U.S. dollar based costs. For Boeing, the tanker allows the 767 line to stay afloat, enables the commercial 767 line to share the costs of the line with the military aircraft and also offers an offset to C-17 and F-18 sales, that are set to decline early next decade."
Oppenheimer: Northrop still may have an edge. "Comments by Gates and Young indicated that they don't see the Air Force's acquisition process as 'fatally flawed'," the Oppenheimer report says. "Instead, they'd like to leverage as much work done thus far as possible and given the Air Force selected NOC in the first go-around, we continue to view them as the favorite, though we'd be surprised to see any fully resolved contract award before late spring of 2009."
The report says when the public sees the new "rules for procurement" (RFP)--basically the specs the Air Force provides on a new tanker--Oppenheimer wouldn't be surprised if one of the bidders protests the new rules. Analysts also wouldn't be surprised if there was yet another challenge to the eventual winner. "At present, there exists little downside for either NOC or BA to protest an unfavorable outcome, which could bring us into late-spring/early summer 2009 for any final decision on the program."
Finally, Oppenheimer believes the program is worth $3-$4 a share for Boeing, $5-$6 for Northrop Grumman. "However, for BA, the win (or absence of an NOC win) is important for the potential cash-flows from the tanker but also the ability to impede any Airbus manufacturing inroads in the U.S."
Bank of America: The Bottom Line is Price.BofA analysts expect both bidders to fight to present the most affordable plane. "The upshot of this recompete is that the contractors will have to become more aggressive on the pricing of their bids: since the two offerings were similarly priced in absolute dollar terms, despite the NOC/EADS KC-30 aircraft being larger, we think that this may particularly apply to Boeing." The report adds this could help. "With the full backing of senior management, the defense bid team may now see reduced friction with the commercial business in this regard."
BofA doesn't expect Boeing to change from offering a 767 to a 777. "Given the customer desire to conclude this contest, switching horses at this late hour would be technically risky and could potentially be seen as a delaying tactic, which might not favor Boeing in the long-run."
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