Boeing a favorite for tanker contract
WASHINGTON – The Air Force is likely days away from handing out one of the biggest Pentagon contracts in years – a deal valued at up to $40 billion to replace 179 planes in its fleet of aerial refueling tankers.
For the three companies bidding, there is more at stake than just the monetary award: jobs and reputation.
Boeing Co. has supplied the Air Force with refueling tankers for nearly 50 years and doesn’t want to let go of that. The incumbent is considered the favorite to win – an assumption already reflected in its stock price.
But European Aeronautic Defence and Space Co. and its U.S. partner, Northrop Grumman Corp., want to be in on the game. For France-based EADS, the parent of Boeing rival Airbus, the contract is an entree into the massive American military market just as overseas spending cools. And for Northrop Grumman, it would tap into a major new military revenue stream at a time when Pentagon spending may be leveling off.
Analysts say the tanker award could be announced any time after Pentagon officials meet Monday to sign off on the Air Force’s tanker purchase plan.
The contract – worth $30 billion to $40 billion over 10 to 15 years – is the first of three deals to replace the Air Force’s entire fleet of nearly 600 tankers, which allow aircraft to refuel without landing.
For Wall Street, the award’s potential really takes off with the follow-on contracts likely going to the winner. As much as $100 billion over the next 30 years is at stake, says Loren Thompson, a defense industry analyst with Lexington Institute, a policy think tank.
Thompson said the Air Force will eventually buy more than 400 new tankers to modernize its full fleet in “the biggest new aircraft contract anywhere in the world.” The Air Force currently flies 531 Eisenhower-era tankers and another 59 tankers built in the 1980s by McDonnell Douglas, now part of Boeing.
“This is one of the biggest defense contracts to come along in decades and will be for future decades,” said Scott Hamilton, an aviation industry consultant based outside of Seattle. “You have to take the plums when they come along.”
Because Northrop Grumman is considered an underdog, its shares likely will jump if it wins, but may not take a drubbing if the contract goes to Boeing. Yet Boeing’s stock would almost certainly take a hit if the company loses, but only rise moderately if the award comes through since a win is already factored into the share price.
Chicago-based Boeing would perform much of the tanker work in Everett, Wash., and Wichita, Kan., and use Pratt & Whitney engines built in Connecticut. The company says a win would support 44,000 new and existing jobs at Boeing and more than 300 suppliers in more than 40 states.
The EADS-Northrop Grumman team would perform its final assembly work in Mobile, Ala., although the underlying plane would mostly be built in Europe. And it would use General Electric engines built in North Carolina and Ohio. Northrop Grumman, which is based in Los Angeles, estimates a Northrop-EADS win would produce 2,000 new jobs in Mobile and support 25,000 jobs at suppliers nationwide.
Wall Street expects Boeing to win the new award because of its well-established relationship with the Air Force and prior contract wins.
“For Boeing, this is a pride issue,” Hamilton said.
It’s become an issue of not just corporate, but national pride. Boeing has managed to paint the competition as a fight between an American company and its European rival. Although parts of both tankers would be made overseas, Boeing has raised pointed questions about why the Air Force would award such an important contract to a foreign company.