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Originally published April 20, 2010 at 11:20 AM | Page modified April 23, 2010 at 12:22 PM

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Corrected version

Analysts skeptical EADS can beat Boeing on tanker price

EADS said it expects to undercut Boeing in bidding for the Air Force refueling tanker, but the European company will have to overcome some major hurdles in a price war.

Seattle Times aerospace reporter

Roaring back into the Air Force tanker competition, executives at Airbus parent company EADS said Tuesday they plan to offer the U.S. a bigger, more capable refueling tanker. And they claim they'll do that for a cheaper price than Boeing.

The renewed competition will increase pressure on Boeing to lower the proposed price for its forthcoming bid on the estimated $40 billion contract, which could mean thousands of jobs here.

But EADS would have to overcome some extraordinary hurdles to undercut Boeing, which plans to offer a tanker based on the 767 jet built on its existing assembly line in Everett.

If it wins, EADS would ship large A330 airplane sections across the Atlantic, then assemble and convert them into refueling tankers at a not-yet-built airplane production center in Mobile, Ala.

In addition, the larger Airbus airplane will have higher fuel costs, and additional construction costs to provide larger hangars and more airfield space at military bases. The Air Force will factor those into its cost assessment.

Still, Ralph Crosby, chairman of EADS North America, insisted at a Washington, D.C., news conference that "we intend to win" even though the difference between the bids "boils down to one of price."

Because Boeing proposes a new, advanced version of the 767 that will differ substantially from the 767 tankers already built for the air forces of Italy and Japan, Crosby denigrated it as "an aircraft that exists only on paper."

In contrast, he said, EADS will offer a tanker very similar to the one in test flights for the Australian Air Force, greatly lowering the risk and the cost of its candidate.

"Our aircraft exists. It's flying," Crosby said. "Our risk is small because our development is advanced."

The lower risk will allow European Aeronautic Defence & Space to price its planes below Boeing's bid, he said.

Analysts were skeptical.

"Boeing's advantages are a mature industrial site in Everett, with a tremendously experienced work force. And they have the smaller airplane with lower operating costs," said Scott Hamilton, an Issaquah-based aviation analyst with Leeham.net. "I don't know how EADS overcomes that."

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Industry analyst Richard Aboulafia, with the Teal Group, concurred that EADS' tanker bid "is still a pretty longshot."

"There are a lot of costs in this tanker bid that EADS cannot control," Aboulafia said. "They won't be able to reduce the A330's operating costs. And moving production to the U.S. is also fundamentally high cost."

With its decision to compete, EADS now takes on the mantle of prime contractor from its former tanker partner Northrop Grumman, which pulled out last month.

The Air Force contract is worth about $40 billion initially, with more potential contracts to follow. Bids are due by July 9 and a contract decision is expected in September.

The tanker saga stretches back to an initial Boeing contract award in 2001, canceled in 2004 after a procurement scandal. In 2008 EADS won a new tanker competition, only to see it canceled that same year after a Boeing protest over unfair selection rules.

If EADS wins the 2010 rematch, it will build a large airplane-assembly facility in Mobile, where it will produce not only military tankers but also commercial A330 freighter aircraft.

The assembly factory and tanker-conversion plant would create about 1,500 direct jobs in Mobile, with 5,000 or so supplier jobs expected to follow.

"We're making a long-term investment in our economy and in the aerospace infrastructure of the United States," Crosby said.

EADS plans to ramp up to production of about 44 wide-body jets a year there, both tankers and freighters.

That's well short of the 109 wide-body jets Boeing built last year in Everett. But starting from zero, it would be a strong foothold for Airbus in the U.S.

"This is a hell of an opportunity for a company that is in the big-airplane business," Crosby said.

After the Pentagon said last month it would extend the bid process to allow EADS time to put together a fresh bid without Northrop, the European company scrambled to find another big U.S. partner to help it integrate about 30 U.S. military subsystems that require classified clearance.

U.S. Rep. Norm Dicks, D-Bremerton, the chairman of the House subcommittee on defense appropriations, vocally opposed a renewed EADS bid and advised U.S. defense contractors not to partner with the European company.

But on Tuesday, Crosby and Sean O'Keefe, former NASA administrator and now chief executive of EADS North America, said EADS is ready, if necessary, to be the prime contractor without an additional partner. They said it has all the needed clearances and can work with smaller partners if required.

In a strategy that might prove easier to accomplish politically, Crosby said EADS could even add partners after winning the contract.

O'Keefe said that because the Pentagon has laid out a fixed-price contract, both contenders will have to factor into their bids the risk of mounting costs.

He said Boeing will face greater unknowns in the development process, compared with EADS, which is offering a known quantity.

"A fixed-price development contract is a really sporty proposition if you don't have something in place," he said.

How low might EADS go in price?

"Loss leaders do happen. That could be part of Airbus' strategy," Hamilton said.

Aboulafia said heavy EADS discounting is conceivable. But he said that's a high-risk strategy that could backfire, as it did with the company's A400M military-cargo-plane program in Europe.

Faced with ballooning A400M costs, EADS threatened to cancel the whole program until the European governments recently approved more funding of almost $5 billion.

"They bid a seriously lowball price (on the A400M), but they knew they'd be bailed out," Aboulafia said. "Here (in the U.S.), they have no illusions. They know there's no way they'd be bailed out."

A low-cost bid would also draw political scrutiny.

In an interview, Dicks said he will press the Pentagon for "real hard cost analysis ... to make sure that somebody isn't just lowballing it."

He said EADS might be capable of a low bid "because of the illegal subsidies they receive from the European governments."

Boeing on Tuesday also complained about "the ability of a heavily subsidized Airbus/EADS to accept levels of financial risk."

But Hamilton said the state's politicians and Boeing should turn away from that issue, since it won't be considered by the Air Force, and instead should focus on why the 767 should win.

He described the EADS plan to build airplanes at a brand-new site in Alabama as its "Achilles' heel."

Boeing, he said, needs to emphasize in contrast its experienced work force and its mature production site in Everett.

Dominic Gates: 206-464-2963 or dgates@seattletimes.com

This story was originally published April 20, 2010, and updated April 22, 2010. The original EADS press release provided as a PDF had an incorrect url for the EADS tanker website.

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