Victory for Boeing…and Protectionism

Interpreting Mr. Morin’s statements are not as evident as might seem: were they truly an appeal for fair competition or an effective marking of boundaries of respective commercial interests? Moreover, should France let questionable American procurement practices for the air-refueling tankers quietly pass, is the message to the Americans that they should allow France unhindered access to Brazil for sale of the Rafale fighter in lieu of Boeing’s F-18?

The original call for bids on the tanker project began in 2002 with the US Department of Defense seeking to lease tanker aircraft based on Boeings 767. The proposal was met with hostility by Republicans, most notably John McCain who considered the lack of competition as “corporate welfare” for Boeing.(2) Following fraudulent practices by Boeing officials, the Congressional budget Office dropped the lease deal in 2004. With a new competition opened in 2006, Northrop-Grumman/EADS upset Boeing by winning bid to provide the tankers based in the model of the Airbus A-330 civilian airliner.

Boeing’s proposed design, based on its 767 passenger jet, is significantly smaller than the A-330 and has been outperformed by the latter in five tanker competitions around the world.(3) Despite the longer range and greater refueling capacity of the A-330, Representative Norm Dicks, Democrat of Washington State, insisted that the Pentagon consider how much the smaller Boeing plane would save the government over 40 years of service.(4) Such pragmatic, economically based considerations must also be seen in the light of Representative Dicks’s constituency, Washington, where Boeing assembles many of its parts.

Immediately following the successful Northrop-Grumman/EADS bid in 2008, Boeing protested to the Government Accountability Offices (GAO), stating that the contract was awarded only on the basis of the A-330’s larger size and not its price per unit. The GAO questioned the United States Air Force’s procurement process which led to the subsequent cancellation of the negotiation process and contract signing.

The case for Northrop-Grumman/EADS became more difficult in May 2008 with amendments to the 2009 Defense Authorization Bill. Representative Duncan Hunter, a California Republican, introduced a measure that would require tankers under contract with Northrop-Grumman/EADS to contain 85% American-origin components; a new difficulty for the A-330 which was expected to include only 60% American content.(5) This amendment presented a sizeable increase from current Pentagon acquisition laws which require only 50% American content. To address this difficulty Northrop-Grumman/EADS introduced plans to bring in more American-based suppliers over the course of the contract, including the opening of a factory in Mobile, Alabama.

Once again, the issue at stake, especially in times of economic recession, is protecting domestic jobs. In spite of plans for the Alabama factory, and the jobs they would create, Republican Senator Richard Shelby of Alabama made no efforts to support the action.(6) Although EADS aimed to create around 48,000 jobs in the United States through production of the air-refueling tanker, a study undertaken by Sonecon LLC, a private consultancy headed by Robert Shapiro, United States undersecretary of commerce for economic affairs from 1997 to 2001, found great fault with such estimations. The study, paid for by Boeing, estimated the creation of up to 70,706 new jobs should Boeing be awarded the contract, as opposed to only 7,080 in the case of an Northrop-Grumman/EADS victory.(7) Such enormous disparities are in and of themselves questionable, not to mention the study’s seeming hostility to such economic practices such as outsourcing, multinational organization, and efficiency.(8)

After review of the Northrop-Grumman/EADS bid, new specifications were put in place. Louis Gallois, president of EADS, lamented that these new requirements necessitate “a plane smaller than the Airbus A330 without taking into account its superior capacities. This is regrettable as we have the better airplane which won all the bid competitions, notably in Great Britain and Australia, against Boeing.(9)” A statement from Northrop-Grumman expresses regret for the new specifications which seem tailor-made to favor Boeing’s bid, yet the company will not protest, despite seeing substantial grounds to do so, nor will there be a new attempt to win the contract.(10)

At the current time, Boeing enjoys the position as the only competitor in the contest for the tanker bid, worrying for Pentagon officials due to the risk that the company may attempt to push up unit price for its tankers. This risk taken into account, the contract will however allow Boeing to remain in the defense sector where it previously risked dropping out due to cancellations of government contracts for weapons systems. Boeing’s remaining in the military arena is all the more important for the United States Air Force to prevent a Lockheed Martin aeronautics monopoly.

‘We can’t say this would have an immediate financial impact for us. It is roughly 15 planes a year and we produce 500 annually, so this is not something that will disrupt the balance at EADS,(11) ‘ , stated Louis Gallois. While the financial gain from the tanker contract may not have been crucial for EADS, what is lost is the potential to gain access to the American market through factories on American soil and the possible future economic opportunities that would go along with them.

Boeing’s long, and perhaps questionably, sought contract for air-refueling tankers will create jobs in the United States and preserve competition for aeronautics equipment among American suppliers. On the other hand, the loss for Northrop-Grumman/EADS represents another roadblock to the establishment of a trans-Atlantic defense market, less performing refueling tankers for the United States Air Force, and lost opportunities for European firms to gain a foothold in the United States through factory construction. This is especially unfortunate given current budgetary constraints where transparent competition with clear rules would create more optimal economic conditions.

On another note, on March 11, 2010, President Barack Obama named Boeing Co president and chief executive Jim McNerney to lead the President’s Export Council.(12)

1) See: Kleuser, George. “Gates-Morin Meeting : Behind the Iran/Afghanistan Rhetoric.” 22 February 2010. Available: http://www.affaires-strategiques.info/spip.php?article2876
2) Accusations fly: Did protectionism force EADS to scrap a $35 billion bid to supply the American air force?’ The Economist . 9 March 2010. Accessed : 11 March 2010. Available : http://www.economist.com/business-finance/displaystory.cfm?story_id=15656639&source=hptextfeature
3) Statement From Northrop Grumman on U.S. Air Force Aerial Refueling Tanker Program. Accessed: 11 March 2010. Available: http://www.irconnect.com/noc/press/pages/news_releases.html?d=186116
(4) Tiron, Roxana. “Measures target Northrop tanker contract.” May 21, 2008.
(5) “Avions ravitailleurs de l’US Air Force : Hervé Morin s’en mêle” 8 février 2010.
(6) Reuters: “UPDATE 1-Boeing study says its tanker to create more US jobs.” March 10, 2010.
(7) See : Shapiro, Robert J. and Aparna Mathur. ‘The Employment Effects of Awarding Major U.S. Defense Contracts To U.S.-Based Firms, Compared to Foreign-Based Multinational
(8) Firms: An Economic Case Study of the Competition To Produce the KC-X Refueling Tanker.’ Sonecon . March 2010
(9) Louis Gallois : « L’appel d’offres est clairement en faveur de Boeing. » Le Figaro . 10 mars 2010, p. 21.
(10) Statement From Northrop Grumman on U.S. Air Force Aerial Refueling Tanker Program. Accessed: 11 March 2010.
(11) “EADS sees no financial hit from U.S. tanker loss.” Reuters. March 10, 2010.
(12) ‘ Obama taps Boeing, Xerox chiefs to lead export body.” Reuters. March 11, 2010.