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EADS beats Boeing in US Air Force contract

The surprise success of EADS against Boeing in winning a 35 billion dollar US Air Force tanker contract will "encourage the company to pursue its strategy in the United States," according to CEO Louis Gallois.


WASHINGTON, Feb 29 (Reuters) - Northrop Grumman and Airbus
parent EADS won a $35 billion U.S. Air Force refueling plane
deal on Friday in a surprise blow to Boeing, until now the
Pentagon's sole supplier of aerial tankers.

Northrop Grumman Corp and EADS, "clearly provided the best
value to the government," Sue Payton, the Air Force's top
acquisition official, told reporters at a briefing.

The Air Force plans to buy 179 tanker aircraft over the
next 15 years to begin replacing its KC-135 tankers, on average
47 years old, that were built by Boeing Co.

The decision, which could still be challenged by Boeing or
its backers in Congress, caps for now a saga that included a
canceled Boeing order and the Pentagon's biggest procurement
scandal in decades -- with jail terms for an ex-Air Force
weapons buyer and Boeing's former chief financial officer.

Shares of Northrop, the Pentagon's No. 3 supplier after
Lockheed Martin Corp and Boeing, rose as much as 6.5 percent in
extended trading on Friday. Shares of Boeing, which was widely
expected to win the job, fell as much as 5 percent before
paring their losses to be down 3 percent.

"A major reversal of fortunes, and a truly surprising
outcome," said Richard Aboulafia, of the TEAL Group aerospace
consultancy, about Boeing's loss.

Boeing said it was disappointed with the outcome and would
weigh its options after a detailed Air Force briefing on the
reasons for the decision.

"We believe that we offered the Air Force the best value
and lowest risk tanker for its mission," Boeing said.

The initial contract for the newly named KC-45 tanker, a
modified Airbus A330 airliner, covers four test aircraft for
$1.5 billion. With plans to buy 175 more planes, it would be
worth $35 billion overall, the Air Force said in a statement.


Gen. Arthur J. Lichte, commander of the Air Force's Air
Mobility Command, said the Northrop plane offered many
advantages over Boeing's proposed 767-based tanker.

"More passengers, more cargo, more fuel to offload, more
patients that we can carry, more availability, more flexibility
and more dependability," he said, listing Northrop's edge.

The program marks the first stage of a multi-decade plan to
replace more than 500 KC-135 tankers used to extend the range
of fighter jets and other warplanes. The United States hopes to
start operating the new tankers in 2013.

Including follow-on orders and in-service maintenance, it
could be the second costliest military aircraft purchase in
coming decades, topped only by Lockheed Martin's F-35 Joint
Strike Fighter.

Future phases of the tanker renewal plan could bring the
costs to more than $100 billion, although the winner of this
competition is not assured of capturing the next contracts.

Parts for the Airbus A330 commercial airliner are built
mainly in France, Germany, Britain and Spain, then transported
to Toulouse in southwest France for assembly. But the new U.S.
tanker will be assembled in Mobile, Alabama, and employ 25,000
workers at 230 U.S. companies, Northrop said in a statement.

Both tanker proposals had strong backers in Congress
divided along the lines of where jobs would be created.

Key members of Alabama's delegation, for instance, wrote
that any attempt by a contractor -- by implication, Boeing --
"to wrap itself in the American flag during a competition today
is disingenuous and condescending."

Payton said the Air Force had made its decision without
regard to the number of American jobs at stake.


In one poll of industry analysts, all 10 respondents had
predicted a Boeing win.

"I am extremely surprised," said Loren Thompson of the
Lexington Institute, a prominent defense analyst. "To get this
outcome, Northrop Grumman had to convince the Air Force to
consider the aerial refueling mission in a new way. Their
analysis must have been compelling."

Northrop Grumman's win will be "very positive" for the
company's growth plan, Chief Executive Ron Sugar told Reuters.

EADS Chief Executive Louis Gallois said the contract had
been won without low-balling the price. "No we didn't smash the
price," he told Reuters.

The U.S. Air Force calls the new tanker fleet its top
acquisition priority.

In 2004, the U.S. Congress killed a $23.5 billion Air Force
plan to lease and then buy 100 modified Boeing 767 tankers amid
a Pentagon procurement scandal brought to light chiefly by Sen.
John McCain of Arizona, the all-but certain Republican nominee
for U.S. president.

The lease plan grew out of congressional concern for
Boeing, the biggest U.S. exporter, after a slump in airliner
sales sparked by the Sept. 11, 2001 attacks.

Darleen Druyun, the Air Force's one-time No. 2 arms buyer,
went to jail in 2005 for violating federal conflict of interest
laws. She negotiated a job with Boeing while overseeing Air
Force negotiations on the doomed lease deal.

The scandal also sent to jail Michael Sears, the Boeing
chief financial officer who recruited Druyun.

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