Global Economics

EADS Takes Aim at U.S. Defense Business


Confident of eventual success in the reopened tanker bidding, the Airbus maker plans to fight for more Pentagon contracts

European Aeronautic Defence & Space executives this weekend expressed confidence that the Pentagon's promised speedy review of new bids for a $35 billion Air Force refueling-tanker contract will work in their favor—and vowed that no matter the outcome of the contest, EADS (EAD.PA) is poised to become a heavyweight in the U.S. defense business.

Briefing journalists before the July 14 opening of the Farnborough air show near London, John Young, the chief operating officer of EADS North America, said the Pentagon's plan to wrap up the review by December puts Boeing (BA) at a big disadvantage to EADS and its U.S. partner, Northrop Grumman (NOC). Pentagon officials have said they'll give extra credit in the bidding process for a larger plane (BusinessWeek.com, 7/9/08).

That benefits EADS, whose planned tanker based on the Airbus A330 is considerably bigger than Boeing's, which is based on its 767 passenger jet. Young said the planned six-month review wouldn't give Boeing enough time to develop a new proposal based on a bigger aircraft, such as its 777 or 787 models. "They don't have a design," he said. "We have planes on the tarmac, ready for the contract to be awarded."

Grounds for a Future Appeal?

Many analysts think the six-month timetable is unrealistic, and the losing company could file an appeal—as Boeing did after the first round, when it contended that the Air Force failed to provide it with information it could have used to strengthen its bid. The arrival of a new Administration in Washington next year clouds the picture even further.

Young admitted that the timetable was "challenging." However, he said, "Even if it slips into January, February, or March, I don't think much would change. If they can hold to a reasonably expedited schedule, it is in our best interest."

Contacted by BusinessWeek about Young's remarks, a Boeing spokesman said: "The Defense Dept. has set the time frame, and we will work with the customer to ensure we comply with all requirements. We look forward to working with the new acquisition team as it reopens the competition, but we will also take time to understand the updated solicitation to determine the right path forward for the company."

EADS has said that if it wins the tanker deal, it would also produce Airbus A330 civilian freighters on the assembly line in Mobile, Ala., where the tanker planes would be built—a further boon to the local economy. Asked whether the company might build civilian planes in Alabama even if it loses the Air Force deal, Airbus Chief Executive Thomas Enders appeared to rule out that possibility. "There is not really a convincing business case," he said.

U.S. Defense Drive

Regardless of the outcome of the tanker contest, EADS leaders signaled they are preparing an aggressive push into the U.S. defense business. The company is sitting on a $13 billion cash pile—largely the result of record-high Airbus commercial jet deliveries in recent months. EADS marketing and strategy chief Marwan Lahoud said he expected the company would make a "midsized" U.S. defense acquisition worth at least $1 billion within the next year.

EADS also is angling to propose its new A400M military transport plane (BusinessWeek.com, 6/27/08), scheduled to enter service in 2010, as a replacement for the aging U.S. fleet of C-130 transporters. That would place the A400M in competition with Boeing's C-17 aircraft.

For the moment, though, EADS has plenty of urgent problems to address, including a downdraft in the airline business that could lead to delays or cancellations of some of the more than 3,700 planes now in its order book (BusinessWeek.com, 7/11/08). Chief Financial Officer Hans Peter Ring says the company has created a "watch list" of customers that are losing money and burning cash. He declined to say how many or which airlines were on the list.

Another key concern is the weak dollar. EADS has already undertaken a major cost-cutting program, known as Power 8, to improve the competitiveness of Airbus' European operations (BusinessWeek.com, 5/7/08). But Chief Executive Louis Gallois said those cost savings still would not be enough to offset the dollar's slide. The only solution, he said, is to move more of the company's operations outside the euro zone. "It doesn't mean we are leaving Europe, but we have to expand our footprint to balance our costs," Gallois said.

That's all the more reason for EADS and Airbus to keep looking for opportunities in the U.S.

Matlack is BusinessWeek's Paris bureau chief.

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