Boeing Source: We May Not Bid For KC-X
By VAGO MURADIAN and JOHN REED
Published: 14 May 2010 17:57
Boeing is considering not bidding for the U.S. Air Force's KC-X tanker contract, a company source said May 14.
Boeing CEO Jim McNerney and other executives are privately debating whether their company can even win, much less make a profit, on the fixed-price contract, an executive told Defense News. (Boeing)
That would leave Europe's EADS - which earlier this year had threatened its own pullout - as the sole bidder for the multibillion-dollar prize.
CEO Jim McNerney and other executives are privately debating whether their company can even win, much less make a profit, on the fixed-price contract, one senior Boeing executive said.
"Is it conceivable that we wouldn't bid?" the executive said. "We are proud of the fleet and want it to win the contract so the Air Force keeps flying our planes. Your heart says you have to be part of it, but a CEO's job is to make sure that the heart doesn't make a decision the head can't live with."
Boeing spokesman Damien Mills insisted May 13 that the firm will bid.
But Boeing supporters have long complained that illegal subsidies would lower EADS' bid price, and company officials have said for several weeks that the Pentagon appears to have shifted requirements to favor the European firm.
Earlier this year, DoD officials - eager to avoid a sole-source award to Boeing in the wake of Northrop Grumman's withdrawal - delayed the bidding deadline 60 days to allow EADS to bid. DoD also allowed the European firm to enter the contest without a U.S. firm as a partner.
Pentagon officials say they have changed neither the requirements nor the way the bids will be evaluated.
"Jim doesn't want to be in a position that we are going to bid a losing bid," the Boeing executive said. "It gets difficult when you're dealing with a competitor who has flat-out said on several occasions that they're going to underbid us. How can they do that if the list price of their plane is higher than the list on our plane? Because they are subsidized and we're a for-profit company, so the question we're asking is: How do we compete against four governments?"
The average cost of a Boeing 767-200ER is $133 million, of an Airbus A330-200F, $194.8 million, according to Teal Group aviation analyst Richard Aboulafia.
The executive said Boeing has not arrived at a decision. He said raising the prospect of sitting out was not a negotiating tactic.
On May 13, Pentagon officials said that they have heard nothing from Boeing about leaving the competition.
Boeing executives and its supporters say Airbus, which has garnered more than half of the commercial jet market in recent years, has been powered by tens of billions of dollars in subsidies over four decades. The World Trade Organization last year concluded that subsidies have helped Airbus to create products that have more effectively competed against Boeing on world markets. Europe has countersued, claiming Boeing benefits from research and development tax credits.
On May 13, two Republican lawmakers from Kansas, Sen. Sam Brownback and Rep. Todd Tiahrt, introduced legislation in the U.S. House and Senate that would order the Pentagon officials who will weigh the KC-X bids to factor in the startup subsidies EADS received for its A330. Tiahrt said he estimates the subsidies to be worth about $5 million per airplane.
The Pentagon says it will not take the WTO ruling into account because EADS plans to appeal, and waiting for the outcome could add yet more years of delay to the tanker effort.
Dubbing the proposed legislation "The Boeing Bill," EADS spokesman Guy Hicks called it "one more attempt to avoid competing on the merits of the tanker."
A financial analyst said a prudent Boeing would consider all options.
"If Boeing can't make a fair return for their investment, then they shouldn't do it," said Ron Epstein of Banc of America. "Shareholders would rather see Boeing cover its cost of capital than win an unprofitable contract. If EADS is going to bid below their cost of capital to subsidize our military, great, they should do it."
But Aboulafia is skeptical: "It would be a very bold move if true - possibly too bold."
Analyst David Berteau of the Center for Strategic and International Studies said he doubts that Congress will be able to write effective legislation in time to affect the competition.
He also said Boeing's threat is unlikely to sway Pentagon officials who have said that they "prefer a competition, but they'll move forward with only one" bidder.
My best guess is that Boeing will get the contract for the tankers. Politics will play a major factor, and awarding Airbus the contract over Boeing will not sit well with congress. With the unemployment rate at 10% it don't make sense to give a foreign company a contract over an American company.
If US wants to play more politics, Europe is ready to cancel deals. EADs contains the heavyweights of Europe, France, Germany, Italy, UK, Spain. US sells far more weapons to us than we sell to them. Two can play the protectionist game and we have more in our favour to cost US defence companies.