Northrop/EADS Upsets Boeing

Northrop Grumman and Airbus' parent teamed up to beat out the odds-on favorite for a $40 billion contract to supply refueling tankers to the U.S. Air Force

The Northrop-EADS refueling tanker is based on the same frame as the commercial Airbus A330. Northrop Grumman

by Judith Crown and Christopher Palmeri

An alliance of Northrop Grumman (NOC), the No. 3 defense contractor and European Aeronautic Defence & Space (EADS), pulled off a major upset on Feb. 29, besting Boeing (BA) to win a $40 billion U.S. Air Force contract for refueling tankers. The decision represents a major coup for a European aviation behemoth—and a major blow for Boeing, considering that the business was firmly in its grasp four years ago but slipped away in a scandal that led to the departure of the company's chief executive.

The Air Force tanker award is considered the largest defense contract since the Joint Strike Fighter (JSF) program of a decade ago. That competition between Boeing and Lockheed Martin (LMT) was ultimately nabbed by Lockheed. The tanker deal comes at a critical time as the Bush Administration defense buildup tapers off over the next several years. The Air Force contract calls for the supply of 179 new refueling tankers to be delivered at a rate of about 15 a year. With the lives of tankers stretching to half a century, maintenance and upgrades could make the value of the contract as much as $100 billion, says Paul Nesbit, a defense industry analyst with JSA Research. "Everyone told us we were crazy, that we had no chance," Northrop CEO Ron Sugar said in an interview. "But we took a big swing and in this case, we hit a home run."

Air Force officials said Friday that the alliance of Northrop and EADS, the parent of Boeing archrival Airbus, won high marks for its capability, past performance, and competitive price. Sue Payton, the Air Force assistant secretary in charge of acquisition, made it clear that the possibility of creating U.S. jobs wasn't a factor. "The key decision was the amount of fuel the bigger plane could carry," UBS (UBS) analyst David Strauss said in an interview. "In the armed services, you can never have too much gas in the air."

Tankers to be Made in Mobile

Still, Northrop and EADS recognized the importance of jobs and pledged to build the Airbus A330-based tankers in Mobile, Ala., by expanding EADS engineering facilities there. The companies say the project will create 1,500 to 2,000 jobs and support 25,000 others and include 60% domestically produced parts. Sugar says the alliance will assemble the first four planes at Airbus' main factory in Toulouse, France, but then will shift production to Mobile by 2010 or 2011. EADS has said it plans to expand its own commercial production in the U.S., a move that makes sense in light of the weak dollar. General Arthur Lichte, head of the Air Force's Air Mobility Command, said the service hopes to test the first planes by 2010 and be flying them three years later.

Boeing now finds itself in the unhappy position of possibly challenging the award, as competitors Sikorsky and Lockheed successfully did when Boeing won a $10 billion contract to supply a new search-and-rescue helicopter for the Pentagon two years ago. Boeing had been favored in the highly publicized tanker competition because of the number of U.S. jobs at stake: It boasted 44,000 new positions at 300 suppliers in 40 states. The Chicago company said in a statement it will consider its options following a debriefing from Air Force officials. Both bidders had ample opportunity to state their cases and "make sure we weren't talking past each other," Payton said. Lichte added: "It's important to get on with this."

Nevertheless, there was outrage in Washington State, where Boeing's commercial jetliner operations are based. "We are shocked that the Air Force tapped a European company and its foreign workers to provide a tanker to our American military," Senator Patty Murray (D-Wash.) said in a statement. "At a time when our economy is hurting, this decision to outsource our tankers is a blow to the American aerospace industry, American workers and America's military."