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Friday, 25 February 2011

Boeing beat Airbus in battle for tanker plane: surprising? Not really

Over the last twenty years there have been only two dominant airplane factories in the world for the civil widebody market: Boeing and Airbus. Therefore it was logical that these two factories would also be the main competitors for the Pentagons’ $30 billion contract for aerial refueling tankers. 

Dark horse in the process was Northrop Grumman that also made a bid for the contract. However, the company finally withdrew in 2010 after the terms for the contract had been altered by the Pentagon, according to Northrop and EADS “in favor of the Boeing bid”.

These tanker planes are used for refueling jetfighters and bombers in full air during missions all over the world. Therefore they need to have a considerable size and fuel load capacity in combination with very efficient and strong jet engines to be effective. The most economical way to design such a airplane is taking a modern widebody passenger plane and restyle it for the military purposes it has to serve. 

This is exactly what both Airbus and Boeing did. Airbus took the A330 passenger plane, while Boeing took their Boeing 767 plane. Now the decision has been made by the Pentagon after a long and hard-fought battle: Boeing is the company that is designated to deliver the tanker plane for the US Air Force.

Somehow this doesn’t come for me as a surprise.

The Wall Street Journal wrote the very interesting article Boeing bid beats Europe for tanker about this subject. Here are the following pertinent snips:

The Pentagon awarded Boeing Co. a contract worth more than $30 billion for aerial refueling tankers, closing a chapter in a tortured bidding contest, but potentially launching a fresh trans-Atlantic political controversy.
The award preserves Boeing's decades-long position as supplier of refueling aircraft to the Air Force, and shores up its standing as a U.S. national champion. The Pentagon's move is also likely to feed perceptions in European capitals that the U.S. defense market—the biggest in the world—remains largely closed to European defense suppliers. The losing bidder was EADS North America, a unit of European Aeronautic Defence & Space Co.
Past efforts by the Air Force to replace its tankers have been upended by scandal, and industry observers said a protest could stall delivery of the aircraft. Ahead of the announcement, the governors of Alabama, Mississippi and Louisiana sent a letter to President Barack Obama in support of the bid by EADS, which proposed building its tanker at a new facility in Mobile, Ala.
In a written statement after the news broke, Sen. Richard Shelby (R., Ala.), said he was "disappointed but not surprised," blaming "Chicago politics" for tipping the scales in favor of Boeing, which is headquartered in the Windy City
EADS North America Chairman Ralph Crosby called the news "certainly a disappointing turn of events, and we look forward to discussing with the Air Force how it arrived at this conclusion." Pentagon officials said that both firms would have to wait for a formal debriefing before any protest could be filed with the Government Accountability Office.
Thousands of U.S. manufacturing jobs are at stake. Boeing proposed to build its tanker at existing facilities in Washington and Kansas, and said the program would support around 50,000 total U.S. jobs and hundreds of suppliers around the country. EADS said its tanker would keep 48,000 Americans employed, and bring jobs to the depressed Gulf Coast region.
The Air Force subsequently launched a competitive procurement process, awarding a contract in 2008 to a Northrop Grumman Corp. and EADS team. Boeing appealed to the GAO, which overturned the award, citing "significant errors" in the management of the acquisition.
After the Pentagon restarted the bidding, Northrop and EADS complained the guidelines favored Boeing's smaller aircraft. Northrop ultimately withdrew last year.
Curious readers read the whole article, as it is a good read.

The problem with defense contracts is that the nature of the beast doesn’t encourage objective and open bid processes:

-     Defense is about defending your own country against your future enemies.
o    This makes defense de facto a nationalistic matter
o    This also rules out in most cases the defense hardware that is produced by your (former) enemies, even if it is better than your own. Hence the Kalashnikov AK-47 assault rifle that is (in close battles and in a sandy or damp environment) a much better and more reliable weapon than the in itself more accurate M-16.
o    It is sometimes also a matter of espionage or strategic advantages: you don’t want your (possible) enemies to be able to manipulate your defense systems, making them fail at the most dire moments
o     Defense hardware and materials like ammo are extremely complicated and dangerous (depleted uranium bullets). You don’t want them to fall in the wrong hands and the only factories you can control are your own factories.

-     Defense is one of the few economic areas where money almost doesn’t matter.
o     It is not the best product for the best price, but the best product… period. And that is always the product that gives you the competitive edge.
o     In the US this is even more important than in the rest of the world, as the US always wants to be the strongest country on every battle field.

-     Defense is about jobs, more than any other industries:
o     Public opinion of your electorate wouldn’t accept it when jobs in your own country or state(!) are lost to foreign companies.
o     Mobile Ala., although so close, is yet much farther from Washington than Chicago: at least in the mindset of Barack Obama. And Paris, France is metaphorically a zillion miles away.
o     Countries also look at compensation orders: if I order with you, then you have to order with me for the same amount of money in compensation orders.

These factors make a defense bid a giant mine field for foreign bidders. EADS can go to the Pentagon and can ask for a motivation on the Boeing bid. But nothing will change in the end.

So if I was EADS Airbus, I would cry for a day and go on with my life.


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