Northrop/EADS Upsets Boeing

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Representative Norm Dicks (D-Wash.) said he was "shocked" by the Air Force's selection. "This decision is even more disappointing because the Air Force had previously favored the Boeing 767 tanker and we were prepared to move forward with the production of 100 tankers in 2003, before the process was halted due to the Boeing scandal," Dicks said in a statement. "I regret that it has taken so long to respond to what was—and is—an urgent need to replace these older aircraft. And even more regrettable is the decision to award the contract to Airbus, which has consistently used unfair European government subsidies to take jobs away from American aircraft workers."

Mixed Blessing for McCain

The other side, of course, praised the decision. In a statement, Alabama Governor Bob Riley was jubilant: "To say this is a great day for Alabama is a monumental understatement. This will go down in history as one of our greatest days." Ralph Crosby, EADS CEO for North America and a former Northrop executive, said the company has "committed our full resources to support this vital program for our prime contractor, Northrop Grumman, the Air Force, and the war fighters that this system will serve for decades to come. We already have begun the work necessary to expand our U.S. industrial footprint in support of this important program."

For Presidential candidate Senator John McCain (R-Ariz.) the decision is a mixed blessing. He has taken on defense contractors in the U.S. Senate, and was instrumental in ending Boeing's lock on the tanker business during investigatory hearings in 2003. "He's going to have to tout this right away as a thing he handled for the benefit of American taxpayers," says University of Virginia political science professor Larry Sabato. "The Democrats are going to jump all over this as an example of how he helped move jobs overseas."

The decision also could hurt McCain in Washington and Oregon. While neither has many electoral votes, in a close race the closely contested states could prove pivotal. McCain's unpopularity with defense contractors could grow, as well. A number have resisted donating to his campaign, or have kept their contributions low, given his aggressive record of challenging them in Congress. "It all depends on how well McCain and his staff positions the news," says Sherry Bebitch Jeffe, a professor of public policy at the University of Southern California. "If they are building the planes in Alabama and a U.S. company is behind it, that could neutralize criticism."

Not a Surprise for Everyone

The decision—a closely guarded secret even in loose-lipped Washington—was announced at 5 p.m. on a Friday evening—hardly a prime time for major news to be broken. Indeed the news even caught Senator Kay Bailey Hutchinson (R-Tex.) by surprise. Her office incorrectly circulated a press release trumpeting Boeing as the winner, calling it a victory for her home state. She campaigned with McCain recently in Texas.

Northrop's victory came as little surprise to many in the commercial airline industry, where Boeing's 767 is considered an older model widebody. US Airways (LCC), for example, is buying 26 of the Airbus A330s over the next few years and holding the number of its 767s flat at 10, while Northwest Airlines (NWA) has based its modest European expansion on the A330. In the commercial market, both the 767 and A330 seat about 250 passengers, but the A330 gets better marks for gas mileage. "It's dramatically better in terms of fuel-efficiency," says Andrew Nocella, US Airways' senior vice-president of scheduling.

Northrop's Sugar began plotting his attack after the Pentagon's initial deal to lease 100 new tankers from Boeing erupted in an ethics scandal because a top Boeing executive, Michael Sears, discussed a job for Air Force point person Darleen Druyan while negotiations were still ongoing. Druyan and Sears were convicted of corruption charges and served time in jail; the scandal led to the resignation of then-CEO Philip Condit. When the Pentagon opened a competition for the contract, Sugar found an ally in EADS, invested in new technology and hoped the new plane would be attractive to a military disillusioned by the Boeing fiasco. The Air Force's Payton said the government adhered to an "open and transparent" process that had no relation "to what has gone on in the past."

Sugar, a circumspect PhD and veteran of space contractor TRW, took the controls in 2003 from Kent Kresa, who expanded the legendary planemaker. But acquisitions in shipbuilding were slow to be absorbed and weighed on the stock price. Meanwhile Hurricane Katrina put many of Northrop's ship programs on hold when yards in the Gulf were badly damaged.

Crown is a senior correspondent for BusinessWeek and BW Chicago. Palmeri is a senior correspondent in BusinessWeek's Los Angeles bureau.
With Keith Epstein in Washington, D.C.