Defence contract

EADS: A tanking tankers deal?

Thursday 19 June 2008

A US auditor's recommendation to reopen bidding for a $35 billion refueling tanker contract could not come at a more inopportune moment for Airbus's parent company, EADS. The European group faces having to refight a battle it thought it had won.

Talk about raining on your parade.

 

Louis Gallois, the chief executive of the European Aeronautic Defence and Space Company (EADS), was at a big company bash in Paris when the word came down from Washington that Congress may have put the kibosh on his blockbuster US tanker contract.

 

Ever since beating out arch-rival Boeing for the $35 billion aerial refueling contract, EADS has hailed the deal as a pivotal breakthrough into the world’s largest defence market.

 

The fact the European group had successfully teamed up with US-based Northrup Grumman to clinch the deal added to its international luster.

 

But the contract was more than just a matter of global ‘street cred’ for EADS.

 

The hope was that it would provide impetus to Gallois’s stated ambition to shift more of the group’s production to dollar zones as a way of offsetting the costs of a weakening US currency. Airbus planes are priced in dollars, but many of the production costs are in euros. (As part of the tanker contract, which called for outfitting the US Air Force with a new fleet of 179 aerial refueling planes, EADS had agreed to invest 600 million dollars in an assembly plant in Mobile, Alabama.)

 

In this respect, the US auditors' recommendation to re-open bidding marks a stunning setback for EADS – and one that couldn’t have come at a more inopportune moment.

 

Airbus is already struggling to make headway on a long-planned restructuring, known as Power 8. The overhaul calls for cutting some 10,000 jobs and shaving over 2 billion euros in costs by 2010. EADS is yet to find outside buyers for several Airbus plants in France and Germany. On Wednesday, Gallois said he expects that completion of the first stage of the restructuring will miss a deadline initially set for the end of June.

 

Add to that ongoing legal woes tied to allegations of insider trading by past and present executives of EADS and Airbus. Two of those executives are already under formal investigation, and there’s a looming pair of lawsuits filed by disgruntled investors in the United States as well.

 

That said, Wednesday’s call for new bids is not expected to result in immediate action.

The Air Force has 60 days to study the 69-page report from the US auditor before it has to face Congress with a decision on how it intends to proceed. (The auditors’ verdict is legally non-binding, but the Air Force - still tainted by a corruption scandal in the previous awarding of a big contract that was subsequently cancelled – is likely to make every effort to give the auditor’s recommendations serious consideration.)

 

As for the main players in the contract process, there's speculation that Northrup Grumman could end up splitting away from EADS and trying to strike a two-way deal with Boeing. Pundits are calling this the nightmare scenario for the Europeans.

 

Another possibility - the three companies could end up getting together and splitting the contract in a three-way deal.

 

But all of this conjecturing is a bit premature. The fact is, no big breakthroughs are expected until after the US presidential election in November. Things are simply too politically charged at the moment. Everyone is going to want to step back and take a breather, while assessing the new landscape.