Pentagon Contract a “Massive Breakthrough” for European Companies     Print Email
Thursday, 06 March 2008

The surprise selection of a European corporation for a major U.S. military contract - to build $35 billion worth of in-flight refueling tankers - has sent shock waves through the world of defense contractors.

There were strong reactions both in the U.S. and Europe as officials and executives grappled with the political implications of the choice of the EADS/Northrop Grumman consortium over Boeing, which had been heavily favored to replace the existing fleet of Boeing-built tankers with a new model. But Pentagon officials said the tanker model proposed by EADS with its junior U.S. partner clearly came out ahead in four of the five categories that were the basis for the contract. The common-sense assumption in Washington is that the Northrop/EADS offer must have been far superior for the Bush administration to risk alienating domestic interests in an election year by choosing an airplane perceived by many in Congress as being largely built by a “French” company.

Aware of the sensitivity of fielding an offer from a European company, the Northrop/EADS team has repeatedly stressed that 58 percent of the value of each aircraft will be made in the U.S. This exceeds the threshold set out under the Buy American Act, which mandates preference for domestically-produced goods in direct procurements by the U.S. government. In any event, though, as NPR reported today, France, Germany and other European allies (including all the countries that have stakes in EADS) enjoy a special exemption voted by Congress concerning the Buy American Act: Under this law, these European allies are “basically considered a part of the American industrial base.”

The Financial Times reported that EADS has also used the promise of investment to develop powerful political connections in the U.S. - particularly in job-hungry southern states. Like Boeing and other American defense-contractors, the European group has sought to widen its political influence in the U.S. by spreading investments among different states. But it is in Alabama that EADS has made its biggest commitment and won some of its staunchest advocates and it is in Alabama that the new tanker-planes will be assembled after being largely manufactured in France at EADS plants near Toulouse. In addition to the planned tanker-assembly plant, EADS will set a research-and-development center in the Alabama, where it already has its regional headquarters. ssemble them in Alabama.

The new tankers to be built for the U.S. Air Force will be based on the A330 jet developed by Airbus, the civilian subsidiary of the European Aeronautic Defence & Space Co. (EADS), a European multinational company owned by investors (including governments) in France, Germany and Spain. Until now, the sole supplier of U.S. refueling tankers had been Boeing, which built the Air Force’s current fleet of tankers nearly 50 years ago on a platform based on its 707 jetliner: This time around, Boeing had proposed an updated tanker based on its 767 model. (Without the Pentagon contract, Boeing has said it may have to close its 767 assembly line in Kansas).

It is the first major military success for EADS in the U.S. market, where Boeing and Airbus are in toe-to-toe competition in the civilian market for large airliners.

The choice has prompted indignant reactions from some U.S. lawmakers who see it as a major snub for the American company, which employs more than 160,000 workers. Senator Patty Murray, a Democrat from Washington State, home to nearly 75,000 of Boeing’s workers, has been one of the deal’s harshest critics. “With this Air Force contract, Airbus is not creating American jobs, it’s killing them,” she told the Senate on March 5. In an email message to reporters, Murray’s office signaled its intention to attempt to discredit Airbus, referring vaguely to the company’s “checkered history” and “shady dealings.” Congressional representatives from Kansas, where Boeing is the largest private employer, also expressed outrage at the choice. “I cannot believe we would create French jobs in place of Kansas jobs,” said Republican congressman Todd Tiahrt. Not all American politicians were dismayed by the deal, however; Republican Sen. Richard Shelby, of Alabama, where the new tankers will be assembled, called the decision “the right decision for our military.” Backers of the Northrop/EADS proposal claim that the deal will create 25,000 new American jobs; Murray says that Boeing would have created 44,000 U.S. jobs.

In stark contrast, leaders in Europe have applauded the choice. French President Nicolas Sarkozy said the deal represents a major success for Europe. “It also marks an important advance in strengthening relations between the United States and Europe which, spurred on by the president, owe a lot to the re-establishment of a confident dialogue between Paris and Washington,” according to Sarkozy. “I pay tribute to the fairness of the U.S. administration,” he told France’s TF1 television network. Germany’s government coordinator for aerospace, Peter Hintze, also lauded the deal as “a massive breakthrough for the European aerospace industry.”

See Also:

Northrop-EADS beats Boeing to build U.S. tanker (Reuters, 1 Mar 2008)

Airbus scoops £20bn deal with US Air Force (Chester Chronicle (UK), 3 Mar 2008)

Boeing supporter steps up anti-Airbus campaign (Reuters, 5 Mar 2008)

EADS deal shows better U.S.-Europe ties-Sarkozy (Reuters, 1 Mar 2008)

U.S. Lawmakers Blast Boeing Defense Contract Snub (Defense News, 1 Mar 2008)

Don't Expect the WTO to Resolve the Boeing-Airbus Dispute  (European Affairs, Summer 2006)

Air Force Deal with Airbus Enrages Congress (NPR, Morning Edition, 6 Mar 2008)