Tanker Deal Fuels U.S. Outcry
Draws Political Heat;
Boeing Seeks Answers
March 4, 2008 5:01 p.m.
The U.S. Air Force's decision to buy a fleet of aerial fuel tankers from a U.S.-European consortium is the biggest example yet of a trend toward trans-Atlantic cooperation in defense procurement. Now, U.S. Defense Department officials are scrambling to make sure it isn't the last.
Politicians and labor unions around the U.S. are attacking the Pentagon's selection last week of planes from a team led by Northrop Grumman Corp. and Airbus parent European Aeronautic Defence & Space Co. The contract to supply 179 tanker aircraft, valued at an estimated $40 billion, was widely expected to go to Boeing Co., which had previously been the sole supplier of big tankers for the Pentagon.
The idea of having a U.S. company put sensitive military equipment onto a European civilian jetliner is just the sort of teaming that defense planners and arms contractors discussed in the waning years of U.S. President Bill Clinton's administration. Then, politicians and policy makers saw such deals as a way to promote competition -- precisely as occurred with the tanker deal.
But with the tanker contract weighing in as one of the biggest prizes awarded by the Pentagon, the decision to cut out Boeing in favor of a product developed by its archrival has create a crescendo of criticism that could potentially escalate into legislative attempts to sidetrack the deal. The powerful House Appropriations Subcommittee on Defense is scheduled to meet Wednesday to grill top air force acquisitions officials on their choice.
"I can't think of a worse time for a worse decision," said Sen. Patty Murray said in the Senate Tuesday. "We've got to start over," said Rep. Norm Dicks, in an interview. "It should've been done by an American company." Both are Democrats from Washington state, where Boeing's tankers would have been built.
All three of the leading presidential candidates have weighed in as well, with Democratic Sens. Hillary Clinton and Barack Obama expressing their dismay while Republican Sen. John McCain, whose opposition helped scuttle an earlier deal to give Boeing $23 billion to build tankers, said he wants to know whether the air force "fairly applied its own rules" in reaching the decision. "I have always insisted that the air force buy major weapons through fair and open competition," he said.
Executives from the winning consortium say they will create thousands of jobs in the U.S. and that the airplane they deliver to the air force will have 59% U.S. content, based on dollar value. Northrop will be responsible for outfitting the airplane with its electronics and other military equipment. The engines, valued at an estimated $5 billion, will be supplied by General Electric Co.
While the decision to buy European planes has proved politically unpopular among many, it follows a growing steam of such deals. Trans-Atlantic teams are developing fighter jets, missile-defense systems, radar equipment and even helicopters for the U.S. president. Pentagon officials had planned to brief Boeing around March 12 about why it lost, but the Chicago aerospace company Tuesday requested an immediate explanation. "Given that we are already seeing press reports containing detailed competitive information, we feel that our request is more than fair and reasonable," said Mark McGraw, Boeing's vice president for 767 tanker programs, in a statement.
John Young, the Pentagon's top weapons buyer, has said the government strove to make sure the decision was based on strict technical data. "Nothing in the law allows the process to give weight to political issues or other issues," he said in a statement.
In Europe, officials have hailed the decision as both a victory and a sign of strong ties among Western allies. French President Nicolas Sarkozy said the choice was possible because France and Germany are loyal friends of the U.S. EADS Chief Executive Louis Gallois said the win marked "a breakthrough" for the Franco-German company.
In the past, defense industry officials in Europe had worried that a technology gap with the U.S. would widen. Europeans thought that by aligning more closely with U.S. partners, they could jump-start European innovation, in part because Washington has long spent more on defense procurement and military research and development.
An early example of the cooperation was Euro Hawk, a version of Northrop Grumman's Global Hawk unmanned aerial vehicle, modified with equipment from EADS. The Northrop official who championed the program as a model of trans-Atlantic cooperation was Ralph Crosby Jr., who soon after left Northrop to run EADS's North American operations. Mr. Crosby was a key architect of the recent tanker win for EADS and Northrop. But Euro Hawk was palatable to the U.S. defense industry because it was based on a U.S. product.
U.S. officials touted the Lockheed Martin Corp.-led F-35 Joint Strike Fighter, which is now under development, as another model of cooperation. To help fund its development, the U.S. signed up partners in the mid-1990s from around the world, including Britain, the Netherlands, Italy and Denmark. The partners, rather than simply buying planes, would invest their own money to develop components of the plane. In return, they will get a proportional share of revenue from all fighter sales.
Other deals tested new models. Defense-electronics and missiles giant Raytheon Co. in 2001 established a ground-breaking joint venture with French counterpart Thales SA. The duo agreed to team up in third countries, but each would take the lead in its home country to avoid political problems and meet national-security requirements in the U.S. and France.
Some European defense contractors also linked to the U.S. market by acquiring U.S. companies. British companies in particular leveraged the U.K.'s close security relationship with the U.S. to make acquisitions. BAE Systems PLC, formerly British Aerospace, is now one of the Pentagon's largest suppliers following a string of U.S. acquisitions. Rolls-Royce PLC, an icon of British industry, supplies engines to many U.S. military planes and ships after its acquisition of a company in Indianapolis.
Perhaps the biggest breakthrough came in January 2005 when the U.S. Navy selected a European-designed helicopter to serve as the next Marine One for the U.S. president. Lockheed Martin led the bid, which was based on a helicopter built by Italy's Finmeccanica SpA. United Technologies Corp.'s Sikorsky helicopter, which supplied the previous Marine One choppers, challenged the selection, but it was ultimately upheld. The deal also drew political flak -- mainly from Connecticut officials -- but the more than $6.1 billion contract's relatively small size meant it didn't become the lightning rod for politicians that the tanker deal has become.
Write to Daniel Michaels at daniel.michaels@wsj.com and August Cole at august.cole@dowjones.com
Source: http://online.wsj.com/article/SB120465701297010817.html?mod=googlenews_wsj
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