One of the longest and strangest contests in Pentagon history ended Friday when EADS said it would not contest the $30 billion contract Boeing Co. won last month to supply the Pentagon with aerial tankers.
Chicago-based Boeing won in a price shoot-out, underbidding the European defense contractor by $2 billion, EADS North America Chairman Ralph Crosby said Friday. Now comes the hard part: developing and building the aerial gas stations on a fixed-price contract with little leeway for cost overruns, analysts said.
Taxpayers saved money as Boeing and EADS, parent of its rival Airbus S.A.S., battled to win the rights to build the first 179 tankers. EADS calculated that Boeing’s winning bid was nearly $16 billion lower than Boeing’s original lease offer to the U.S. Air Force in 2002, which was overturned amid an ethics scandal that landed two Boeing executives in jail.
Boeing scored a key strategic victory at a time when defense spending on both sides of the Atlantic is under pressure, analysts said. Boeing also denied EADS the large foothold it had sought in the U.S. defense market.
“EADS needed to win this more than Boeing did,” said Richard Aboulafia, aerospace analyst with Teal Group.
But Boeing likely faces lower margins on its initial $3.5 billion contract to engineer and manufacture the first 18 tankers through 2017, analysts said, complicating a difficult task of developing the aircraft on a tight schedule.
“There’s a reason why this industry considers fixed-price contracts for development programs to be radioactive,” Aboulafia added. “They (Boeing) haven’t had a good recent track record of gauging the costs and risks of developing their equipment.”
While Boeing has made headlines with the development problems plaguing its 787 Dreamliner and 747-8 jumbo jetliners, the aerospace manufacturer also has taken more than a billion dollars in accounting charges as it failed to deliver complicated new military aircraft on time and under budget.
Since 2006, Boeing has recorded $1.29 billion in pre-tax charges as it missed delivery deadlines for Airborne Early Warning & Control jets bound for Australia and Turkey, Security and Exchange Commission filings show. The modified Boeing 737 jets bristle with advanced radar equipment that make them airborne control towers.
Boeing also racked up losses as it struggled to get a handful of 767 aircraft modified as tankers to Japan and Italy, running years behind schedule. As its costs mounted, Boeing recorded charges increasing the reach-forward losses in its international tanker program by $53 million, $78 million and $85 million in 2010, 2009 and 2008, respectively, SEC filings show
But those trials will likely help Boeing work out kinks as it prepares its Everett, Wash., assembly line for the KC-46A, the new U.S. Air Force tanker, said military analyst Loren Thompson.
“Boeing understands the 767 better than it had before,” Thompson said. “There are development risks.
“In putting together this proposal, Boeing had to make assumptions about how hard it would be to overcome the development challenge,” he added
Because Boeing’s plane was clearly cheaper than EADS A330-based offer, the European side had little grounds with which to challenge the award, Thompson noted. Successful protests typically revolve around claims government evaluators misapplied selection criteria.
“It’s clear that there is no foundation for protest,” Crosby told reporters Friday, adding that while EADS still had misgivings about the way the Air Force had structured the competition this time, the service had followed the new ground rules scrupulously.
In the end, Crosby said EADS decided that it could not have undercut what he described as an “extremely lowball bid” submitted by Boeing to keep Airbus from establishing a U.S. plant to build mid-size to large airliners.
“When you’re in a fixed-price game and the other guy decides he’s going to win at any cost, there’s probably not a lot more that could be done,” Crosby told reporters.
EADS officials said Boeing’s bid was riskier than theirs, given that EADS is building very similar tankers for Australia and other foreign countries, and said EADS would be ready if Boeing’s performance faltered.
EADS said the Air Force’s total evaluated price of the Boeing bid was $20.6 billion, a figure arrived at after subtracting an estimated $800 million from Boeing’s bid for an estimated fuel usage advantage and $300 million for military construction.
EADS said its evaluated price was $22.6 billion, noting that the $800 million advantage earned by the company on a complicated fuel effectiveness model was effectively canceled out by Boeing’s advantage for fuel usage and construction.
“We are proud to have been selected to produce the most advanced, capable, and efficient next generation aerial refueling tanker for the Air Force at the best value for the taxpayers,” said Boeing spokesman William Barksdale in a prepared statement. “We understand the importance of this effort to our customer and the country and stand ready, along with our nationwide team of suppliers, to go to work on the new KC-46A program.”
Reuters contributed to this article.
jjohnsson@tribune.com
