Boeing's Trouble with Tankers

The Air Force's decision to buy new refueling tankers from Europe's EADS is not the first time the U.S. defense heavyweight has lost procurement bids

by Carol Matlack

When Britain announced plans to replace its aging fleet of military refueling aircraft, BAe Systems (BAES.L), the country's biggest defense contractor, wanted to be sure of getting a piece of the action. So it teamed up with Boeing (BA), the dominant global supplier of aerial-refueling tankers. Together, they looked like a shoo-in for the $26 billion deal.

But the two defense heavyweights were shocked in 2004 when Britain chose the European Aeronautics Defence & Space Co. (EAD.PA), which had never before built tankers, to furnish a plane based on the Airbus A330 passenger jet.

"There was some arrogance," recalls Paul Beaver, a London consultant who advised the British Parliament on the contract. Boeing, he says, "thought the deal must come to the Boeing and BAe consortium almost as a right, [but] from an operational standpoint, the Airbus model was far superior."

One Skirmish in a Long Battle

Shortly before the decision was announced, Boeing's then-chief executive officer, Phil Condit, flew to London to make a last-minute plea to the British Cabinet along with BAe's then-chairman, Richard Evans—to no avail.

Boeing suffered an even more stunning setback on Feb. 29 when the U.S. Air Force awarded a refueling tanker contract (BusinessWeek.com, 2/29/08) worth more than $35 billion to EADS and its U.S. partner Northrop Grumman.

In fact, the U.S. decision—which Boeing says it will appeal (BusinessWeek.com, 3/10/08)—is only the latest skirmish in a long-running battle that in some ways parallels the better-known Boeing-Airbus rivalry in commercial jets. Just as the European aviation company has grown over the past decade from a distant also-ran to a neck-and-neck contender in passenger planes, its parent, EADS, has steadily chipped away at the U.S. contractor's dominance in the military tanker business.

Up Against the Hungry Newcomer

Since 2001, Boeing and EADS have competed for tanker contracts in six countries outside the U.S. EADS has won four of those competitions—in Britain, Australia, Saudi Arabia, and the United Arab Emirates—for a total of 25 planes. Boeing has won in Japan and Italy, where it had deep political support thanks to key local contractors, for a total of eight.

Although each of these deals had unique elements, taken together they foreshadowed some of the difficulties Boeing now faces in the U.S. As a hungry newcomer, EADS was more willing to make concessions to win customers. For example, in Britain it agreed to assume much of the financial risk in building the planes, and then lease them to the government.

Boeing, accustomed to traditional procurement contracts, never offered such an arrangement, consultant Beaver says. The U.S. aerospace giant had worked on other British military programs, notably the C-17 transport plane, "which was handled by a different part of Boeing and has been very successful because they understood the culture," Beaver says. But "the tanker people appeared not to understand the British market."

Footing the Research Bill

In geographically isolated Australia, which ordered five Airbus-based tankers, EADS marketers played up the plane's larger capacity. The Airbus plane can carry more fuel and fly longer distances than the Boeing model, while carrying cargo in its hold and fuel stored in the wings. The U.S. Air Force has said those factors figured in its decision as well—prompting complaints from Boeing (BusinessWeek.com, 3/7/08) that it easily could have developed a bigger tanker based on its 777 passenger jet, if it had known the Air Force wanted that.