Analyst: Subsidies aid EADS' tanker bid

EADS likely will be the winner of a tumultuous refueling tanker competition because subsidies give it the ability to underbid Boeing on price, a defense analyst said this week.

"Underbidding Boeing was always at the heart of the Airbus strategy for winning the Air Force tanker competition," Lexington Institute defense analyst Loren Thompson wrote in a report.

Airbus has accepted "massive, illegal infusions" of subsidies throughout its history, Thompson wrote. It then leveraged those subsidies to "submit a lowball bid the same way it often does in commercial transport operations."

Boeing and European Aeronautic Defence and Space Co., the parent company of Airbus, are locked in a competition for a $35 billion contract to supply the U.S. Air Force with 179 aerial refueling tankers to replace its aging fleet.

EADS is offering the Airbus A330-based tanker; Boeing is using the Boeing 767 jetliner.

The process is heading into a new political controversy, Thompson said.

On Monday, a World Trade Organization ruling found Boeing guilty of receiving illegal subsidies of at least $5 billion. But the total amount was a fraction of that reported in a similar WTO ruling last year against Airbus, which said Airbus received $15 billion to fund the development phase of all Airbus jet programs, plus $5 billion in other subsidies.

Boeing's tanker team met Monday with Air Force officials to discuss Boeing's interim evaluation.

It was the last opportunity to get feedback on its proposal before the end of the tanker competition, Boeing tanker spokesman Bill Barksdale wrote on a blog.

Based on the feedback, Boeing is making adjustments to its bid and will submit the final bid on Feb. 11.

An award is expected soon, an Air Force spokesman said.

Each bidder must meet 372 mandatory performance requirements for the tanker.

"Thus the key discriminator in who wins becomes price — which is why the pending rulings by the World Trade Organization could prove so troublesome," Thompson said.

To win, EADS must bid no more than what Boeing is bidding, even though the Airbus tanker weighs 28 percent more and has 40 feet more wingspan than Boeing's, he wrote.

"It appears that is exactly what the European company plans to do, raising the obvious question of how such a bid is possible," Thompson wrote.

Teal Group analyst Richard Aboulafia agreed that Boeing will have to be aggressive on price.

But subsidies aren't really the main issue, he said.

Instead, American investors are more demanding about their return on investments than investors in Europe, Aboulafia said.

That puts less pressure on EADS to make a profit.

EADS' profits are "at best mediocre and at worst nonexistent," he said. "They have a very different investor structure with very different investor expectations."

American investors must get a return, because they need it for health care, retirement and other needs, he said. In Europe, health care is covered by the government.

"EADS isn't getting rich from heavy discounts or from subsidies," Aboulafia said. But "they've got a real advantage."

For example, the Airbus A380 double-decker jetliner returned only 5 percent more market share and cost $25 billion to do.

"Over here, you'd have to be out of your mind" to make that kind of investment, he said. "You'd get a call the next day from all the Wall Street analysts, and they'd say 'What are you thinking?' "

EADS is a large defense manufacturer facing a European defense market that's collapsing, he said.

"That military market is heading down fast," Aboulafia said. That puts additional pressure on the company to win the tanker contract.

An award to EADS would put the Air Force and the Obama Administration in a difficult position, he said.

In his State of the Union speech, President Obama called waning U.S. competitiveness has brought the country to a new "Sputnik moment."

That means Obama will be asked to award the biggest military hardware contract ever to a foreign company — mainly because Airbus was able to benefit from the subsidies.

"That should provoke quite a political storm on Capitol Hill," he said.

This is the third time the Air Force has tried to get a contract to replace its aging fleet of aerial refueling tankers.

In 2003, Boeing won a bid to lease tankers to the Air Force, but the contest was marred by corruption, which sent an Air Force procurement official and a Boeing official to jail.

In 2008, EADS, in a partnership with Northrop Grumman, won the bid, but it was overturned after the Government Accountability Office upheld Boeing's objections that the process was flawed.

This time, EADS is competing by itself for the contract.