The name “EADS”—for European Aeronautic Defence and Space Co.—is not exactly synonymous with “United States Air Force.” Just a few years ago, its prospects for selling to USAF many billions of dollars’ worth of tankers seemed nil.
First, Boeing seemed to have a lock on military aircraft derived from commercial types. Second, EADS’ Airbus-based tankers were built in France and Germany—two nations seemingly held in low esteem by the Bush Administration. Third, the EADS entry seemed to be technically unsuited; it didn’t even have a boom compatible with US Air Force aircraft.
Then a series of extraordinary events created an opening. The Boeing contracting scandal caused an unraveling of a plan for USAF to lease Boeing 767s and convert them to tankers. Congress wanted other options, and EADS responded aggressively. It now is competing strongly for the prize.
EADS is not alone. With big boosts in the Pentagon’s spending profile since the Sept. 11, 2001 terrorist attacks, and with budgets in Europe flat or declining, the United States has become the target market for some of Europe’s biggest defense firms.
The EADS case is instructive. To compete for the tanker contract, the company created a North American subsidiary, under senior executive Ralph D. Crosby Jr., that would allow it to bid on US contracts not otherwise open to foreign-based firms. Crosby formed plans to open new EADS facilities in a number of states and expand others, generating political support in Congress.
Then, last fall, the company announced a partnership with Northrop Grumman. The US firm became the prime contractor on a new tanker proposal designed to compete with Boeing. (See “Aerospace World: EADS, Northrop Team Up ... ” November 2005, p. 19.)
“We recognized foreign ownership was an issue,” said Crosby. “My activities since the first day have been focused on creating citizenship for us here in the US.”
Making InroadsMany are taking the same path. The US has historically been a tough market for foreign contractors to break in to, but several are making new inroads.
BAE Systems, based in England, has become the seventh-largest US defense contractor, mainly by acquiring a number of American firms, including United Defense Industries in 2005. BAE Systems is building the aft section of the F-35 Joint Strike Fighter, due to fly in production standard late this year. The BAE portfolio also includes the Army’s Bradley Fighting Vehicle and other land, naval, and electronic systems.
BAE’s plans to sell its 20 percent stake in Airbus could even produce billions in cash for further US acquisitions.
Meanwhile, AgustaWestland was a key part of a Lockheed Martin-led team that the Navy selected in 2005 to build the next model of Marine One, the Presidential helicopter. That aircraft, a variant of AgustaWestland’s EH101 multimission helicopter, will be assembled at plants in Texas and New York. The consortium also is competing to win the Air Force’s next generation combat search and rescue helicopter award, which calls for more than 140 new rotorcraft to replace worn-out HH-60s.
AgustaWestland is not American, however—it is a division of the Italian firm Finmeccanica.
EADS could become the biggest European insider. Its North American division remains a second-tier defense supplier in the United States, with a smattering of aircraft components, test systems, and software, plus a healthy commercial helicopter business.
What EADS does have is the wherewithal to grow rapidly.
The company is an industrial conglomerate headquartered in Munich and Paris and is similar in scale to Boeing.
EADS owns 80 percent of Airbus, Boeing’s commercial-aircraft rival, and is negotiating with BAE to buy the other 20 percent. Its defense business includes transport and fighter aircraft, missiles, satellites and space systems, electronics, UAVs, and many other kinds of weaponry, purchased mainly by European nations.
Overall revenue for EADS totals roughly $40 billion, compared with about $53 billion for Boeing.
Two of EADS’ biggest customers—Germany and Spain—have shrinking defense budgets, however. In the United States, the Air Force’s increasingly urgent need for replacement tankers fits neatly with EADS’ capabilities—and a deal could be worth as much as $3 billion a year for 20 years or more.
Most of the Air Force’s fleet of 500-plus refueling tankers are KC-135s derived from the Boeing 707. They were delivered to the Air Force from the mid-1950s to the mid-1960s. By the 1980s, structural corrosion began to require expensive upgrades, which ultimately led the Air Force to conclude in recent years that about 100 of the oldest tankers needed to be retired soon. The whole fleet may need to be replaced by about 2040. (See “100 Tankers,” August 2003, p. 64.)
The Lease DealAfter the Sept. 11 terrorist attacks, an opportunity came to the fore. Orders for Boeing’s commercial aircraft fell, as air travel constricted and carriers canceled orders.
That led to a plan, encouraged by Congress, for the Air Force to lease 100 767s for conversion to tanker duty. They would replace the oldest KC-135s in the fleet.
The original price tag was about $16 billion, but various audits found the cost could end up nearly twice that. Critics, led by Republican Sen. John McCain of Arizona, complained that the Air Force had failed to consider alternatives that could have been far cheaper, including buying the airplanes outright, considering another airplane for the mission, or further upgrading the existing fleet. (See “Tanker Twilight Zone,” February 2004, p. 46.)
Then Boeing revealed that Darleen A. Druyun, a former top Air Force acquisition official it had hired, had sought a job and other favors from Boeing in exchange for steering business toward the company while she was still an Air Force employee. This included influence on the tanker program. The Defense Department canceled the deal and Druyun served time in prison.
The Air Force went back to the drawing board, among other things commissioning a formal analysis of alternatives from Rand Corp.
That study, released this spring, gave a boost to EADS’ prospects, finding that military variants of the Airbus A330 and A340 could be as capable and cost-effective as a number of Boeing aircraft. (See “Charting a Course for Tankers,” p. 64.)
EADS, meanwhile, had been developing military tankers based on the A310 and A330 airliners, with firm orders from Germany, Canada, Australia, and the United Kingdom.
The company has been busy building domestic political support for a program that would ultimately involve billions of dollars and thousands of jobs. In 2005, EADS bought a facility in Mobile, Ala., close to a port that can handle oversize cargo. The company has pledged to convert the plant into an Airbus assembly line if the Air Force buys the A330 tanker.
The aircraft components—wings, fuselage, and tail assembly—would still be built in Europe, but final assembly would take place in Alabama, providing up to 1,000 American jobs.
EADS also broke ground on an Airbus engineering center in Mobile earlier this year in a ceremony populated with politicians. That center will employ 150 engineers working on interior aircraft designs when it opens in 2007.
The company also has been recruiting talent with the technical know-how (and political connections) to get deals done in Washington. In 2004, EADS hired retired Air Force Lt. Gen. Charles H. Coolidge Jr., who had just retired as vice commander of Air Force Materiel Command at Wright-Patterson AFB, Ohio, to oversee the tanker program and other Air Force efforts.
Other retired military officers have come on board. Last year, the company elected Les Brownlee, former Senate Armed Services Committee staff director, and acting Secretary of the Army for 18 months, to the EADS North America board of directors.
Front Organization?Then came the partnership with Northrop Grumman, officially the prime contractor on the Airbus tanker program. Some critics have labeled Northrop Grumman a front organization for a foreign-based operation, as it will be Airbus providing the airplane. Plans call for Northrop to supply avionics and electronics and to integrate all the military components into the commercial airframe.
Crosby argues that in addition to hauling fuel and cargo, the Air Force’s next tanker also will serve as an intelligence-gathering platform and a communications link and perhaps even an airborne command and control post. Such sensor and networking capabilities have long been Northrop Grumman specialties, through programs such as the E-8 Joint STARS ground surveillance aircraft and the Global Hawk unmanned reconnaissance aircraft.
“They’re the premier platform integration guys,” said Crosby. “That’s why we have Northrop Grumman.”
Politics aside, the KC-30, as the Airbus tanker would be known, may have some advantages over a Boeing KC-767. Since the A330 debuted in the late 1990s, the airframe technology is more advanced than the 767, which dates to the late 1970s. The KC-30 is more efficient, and bigger, with longer range and greater capacity for fuel, cargo, and passengers. With the entire US military shifting toward rapid deployment and expeditionary capabilities, such flexibility could be a key factor.
Boeing, of course, believes its model is the better alternative. The KC-767 would be similar to the KC-135s being retired and would fit smoothly into the Air Force’s concept of operations, with minimal change required. The KC-30, by contrast, would require longer runways and more ramp space than most current tankers, which could be a crucial limitation in a war with scarce air bases in theater. Boeing also points out that it is currently building a fifth generation boom, whereas EADS has had to develop an Air Force-compatible boom from scratch, because European aircraft use a different mechanism to refuel.
The Rand analysis also named Boeing’s newer 777 and 787 models as tanker options.
Politics, of course, will become a major factor in any decision. EADS has generated support not just from the Congressional delegation in Alabama, but also in Mississippi, Texas, and other states where the company builds and services helicopters and other types of aircraft.
Boeing retains formidable support among influential members of Congress, such as Republican Rep. Duncan Hunter (Calif.), chairman of the House Armed Services Committee, and Democratic Rep. Norman D. Dicks (Wash.), who sits on the House Committee on Appropriations. And Boeing claims that a KC-767 tanker would generate up to 20,000 US jobs, 20 times what EADS is promising.
“A European Product”While the Airbus aircraft could be Americanized somewhat—by, for example, adding General Electric engines—the Airbus A330 “is largely a European product supporting European jobs,” said Steve East, an equity analyst with Credit Suisse who covers European defense contractors out of London. “The core of the 767 is made and assembled in the US.”
EADS is not gambling its entire North American future on a tanker deal. Instead, like BAE, the company is pursuing a number of different avenues toward becoming an indigenous US contractor deeply embedded in the Pentagon’s supply chain.
For starters, the company hopes to leverage its successful Eurocopter franchise, which has sold 1,500 helicopters in the United States to the Coast Guard, law enforcement agencies, and commercial outfits, to a contract for a new light utility helicopter for the Army. In conjunction with Sikorsky, EADS is competing against Bell Helicopter, among other companies, for a contract that could call for more than 300 helicopters, valued at about $1.2 billion, to replace Vietnam-era UH-1s and OH-58s performing logistical and transport duties at US military bases.
If the EADS team wins, the company plans to deliver the first few military versions of its EC-145 helicopter from an assembly line in Germany to satisfy the Army’s demand for quick delivery, then transfer assembly to a US plant in Mississippi.
The Army is expected to publish requirements this spring, with the first delivery by 2008.
EADS executives also believe they have a good shot at winning another program, the Army-Air Force Joint Cargo Aircraft. The JCA will be a tactical transport smaller than a C-130, but with more capacity than the CH-47 Chinook helicopter that Army officials say is being overtaxed in Iraq. The airlifter will replace worn-out Army C-23 Sherpas and will represent a new capability for the Air Force.
Early plans call for the Army to purchase roughly 75 JCAs, with the Air Force adding about 70 more. Because of the need for efficient intratheater lift in Iraq and Afghanistan, there is strong incentive to seek a commercial airplane that quickly can be militarized.
EADS, teamed with Raytheon, has two offerings in the $1.3 billion competition: The CN-235, already purchased by the Coast Guard as a maritime patrol aircraft, and the similar but longer C-295. Both are built in Spain, but EADS says it will do final assembly in Mobile if it wins the deal.
The JCA competition includes the C-27J, built in Italy by the Italian company Alenia, in conjunction with Lockheed Martin, which is supplying avionics and other components similar to those on the most modern J version of the C-130. The Defense Department should pick a winner later this year.
Still possible for EADS are mergers and acquisitions, such as those that helped BAE grow into a sizable American contractor. Crosby said that EADS North America is interested in purchasing midsize defense companies valued in the range of $300 million to $400 million. For the time being, however, a strengthening dollar and the less-than-spectacular debut of the forthcoming Airbus A380 have crimped the cash flow at EADS in Europe.
The French-German company also may face barriers that Britain-based BAE does not. After several years of consolidation, there are fewer defense firms available for purchase in the US. Despite a huge Pentagon budget, spending on weapons procurement is expected to decline in coming years, and there may be a long-lasting impulse in Washington to check EADS’ growth.
“The problem is the political links at the top,” one analyst pointed out. “The US and the UK fight together. You can’t really say that about Germany and France.” That may make EADS the ultimate test of whether commerce brings nations together.
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