Archive for July, 2010

Amid Annoncing Orders Boeing and EADS Snipe About KC-X

The two civil airliner giants both attended the Farnborough Air Show with Boeing (BA) conducting the first overseas flight of the new 787 and EADS (EADS:P) sending an A380. Both companies announced substantial orders from a variety of airlines and leasing agents while also taking the time to criticize their opposition’s bids for the KC-X new Air Force aerial tanker.

Boeing received an order for sixty 737 aircraft from Mr. Udvar-Hazy’s new leasing company as well as Emirates Airlines needing thirty 777 wide body aircraft. GE’s leasing company also bought forty 737 aircraft and Avalon twelve. Royal Jordanian airline purchased three of the new 787.

EADS got an order from Russia’s Aeroflot for eleven A330. That carrier already operates sixty-four A320 and 10 A330. Hong Kong Air followed with a plan to buy fifteen of the new A350 XWB, the equivalent of the composite 787, and ten A330. The Chilean carrier LAN also bought fifty A320.

All-in-all both companies felt very good about their orders and the future of the airline industry. There are hopes that the world economy is recovering and this will lead to more sales and greater investment in new equipment.

At the same time the two companies sniped at each other about the ongoing U.S. Air Force KC-X aerial tanker contract. Boeing submitted a bid to use their new 767 variant, NewGen Tanker, to replace the aging KC-135 fleet. EADS has based their proposal around the A330 like they did with their last proposal.

Boeing is making clear that they will offered a very competitive price based on their reducing production costs by leaning out their line. Boeing believes that in the end the contest will be decided on price and they plan on having the best price including lifetime operating costs.

EADS agrees that price is important but at the Air Show the CEO, Mr. Gallois, made clear that there won’t be a sacrifice of profit to just win the contract. Due to problems with the A380 and the A400M transport aircraft EADS has some financial issues to face and while it might be attractive to win the contract the company may not really be able to afford to not have some money made on it. The size of the recent commercial orders indicate that the military contract while it would open the European company up to a new market is not critical to their future.

The European Union (EU) has appealed the recent WTO ruling that their aid to EADS amounted to an illegal subsidy. The company and leaders in Europe have also decried the decision by the trade body to delay their ruling on the similar Boeing case. Boeing’s allies in the U.S. have used the WTO decision to say that EADS has an unfair advantage in the KC-X competition as it received the subsidies. EADS and the EU is countering by saying that the U.S. military contracts over the last fifty years to Boeing are the same thing.

The Pentagon has made it quite clear that despite the desires of some in Congress they cannot take the WTO decision into account in their source selection.

It will be a long hot summer at this rate, and when the decision is announced in November the chance of a protest by one of the losers is very high. The contract is a key military one in the next few decades no matter what each company says about it. Winning the contract will give them a leg up on their competitors for the future orders for tankers and aid them in getting more and better commercial contracts.

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Alabama Remains Supportive of EADS North America

Governor Bob Riley (R-AL) made a speech yesterday to the Economic Development Association of Alabama at which he discussed upcoming industries moving to Alabama. He stressed his administration’s continuing efforts to move large manufacturing facilities to the state. Riley will leave office this year due to term limits.

He is hoping that EADS North America will win the KC-X contract before he does go as one of the key industrial developments for the state. Now Riley is always going to be positive about this effort right up to the time a winner is announced but it does illustrate how well EADS has built relations with leadership in Southern states that have benefited from their investment.

Riley has seen some successes with the building of a Hyundai assembly plant in the state and the ongoing construction of a steel mill by ThyssenKrupp which will open in the near future.

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Can U.S. Aerospace and Antonov Win?

The KC-X new aerial tanker program Request for Proposals (RFP) attracted a third bid this time around. U.S. Aerospace submitted one based on the Ukrainian made Antonov transport. The question that immediately comes to mind is can this team win, or will it be Boeing (BA) or EADS (EADS:P)?

Realistically the chances of this bid being selected are low. The companies had asked for a sixty day extension to work on their proposal. The Air Force already slipping the contract deadline one month to accommodate EADS refused the further two month slip. This would have pushed award into 2011 with the current planned date of mid-November this year already late enough. The U.S. has been trying to get a replacement tanker for the aging KC-135 since 2001.

U.S. Aerospace and its partner obviously felt their proposal could be improved with the extra two months but did go ahead an turn one in that they feel meets all of the Air Force requirements. At the same time in a recent filing with the Securities and Exchange Commission (SEC) U.S. Aerospace makes clear that the Air Force could easily reject them.

The company writes “For any or all of these reasons, the Air Force may not select our bid, may disqualify our bid, or may refuse to consider it on the merits, or at all,” based on myriad factors. These include not meeting requirements, not having qualified sub-contractors, not having necessary facilities or capabilities and even missing the deadline. They didn’t do that turning one in on time.

Of course all of this could be standard “Forward Looking Statements” meant to make clear to anyone investing in their stock that they are being conservative in their estimates. The stock was trading at 18 cents at the close on Friday.

Certainly they have offered a cost effective approach. The Air Force must consider if it meets their requirements and they have the ability to produce the systems to the necessary schedule. Certainly stranger things have happened in defense contracting.

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Boeing and Antonov Follow EADS and Submit KC-X Proposals

Boeing (BA) submitted their proposal for the KC-X aerial tanker program a day after rival EADS (EADS:P) did. Today was the day it was formally due, EADS coming in a little early. The Boeing proposal stresses their cost and size benefits over competing EADS with their larger A330 based aircraft. Boeing is basing their bid on a modified 767 airliner with advanced avionics from the yet to enter service 787.

Also U.S. Aerospace and Antonov submitted their competing proposal after losing a bid to delay things sixty days. There total cost is under thirty billion for a contract the Air Force has estimated at $37.5 billion based on an aircraft cost of only $150 million each.

The Air Force plan is to award the contract in four months. The three bids may make the competition’s source selection last longer and may also raise the chance of a protest.

If the U.S. Aerospace / Antonov team wins it might get very interesting.

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EADS North America Turns in Proposal Today

EADS North America, the American subsidiary of EADS (EADS:P), turned in their proposal for the KC-X aerial tanker today to the U.S. Air Force. This represents their second attempt to win the program and the Air Force’s third try.

EADS North America will base their program on a modified Airbus A330 transport aircraft. As with the previous attempt in 2008 they will assemble the aircraft at a facility in Mobile, AL. Then they will receive the necessary modifications to meet the U.S. requirements. Airbus will also assemble all of their A330 transports at this new facility if EADS does win the contract when it is awarded in November.

Boeing (BA) will also turn in their proposal by tomorrow. A third contended, U.S. Aerospace, has committed to submit a proposal by Friday if the Air Force does not grant their extension request.

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Antonov Team Request Delay in Proposal Deadline

As reported last week U.S. Aerospace and Antonov intend to submit a proposal to the Air Force for the KC-X aerial tanker. Because the actual proposals are due this week supposedly the new team will ask for a sixty day delay to accommodate them. The deadline has already been moved once from June to July to allow EADS (EADS:P) and its team to bid.

The current schedule is for a contract award in November and this new extension would probably push that into 2011 due to the time it will take to evaluate a third bid. U.S. Aerospace did say that they will submit this week if no extension is granted.

A third proposal will make the contest more interesting especially as the Antonov will be very price competitive.

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Russians to Bid for KC-X? US Aerospace Says Yes

Update — Antonov is now a Ukrainian company, but in the days of the Former Soviet Union it made transports and utility aircraft for the “Russian” military, civil air companies and Warsaw Pact nations. My bad for being old school.

It came out today that there will be a third bidder for the Air Force’s new KC-X aerial tanker program. US Aerospace will propose a system based on Antonov platforms from Russia. There had been earlier rumors that the company would team with Ilyushin to offer a variant of the IL-86 airliner for this, but that had seemed to go nowhere.

Antonov makes large transport aircraft such as the AN-124 used to move outsize cargo across the world. According to US Aerospace they may offer a version of the AN-124 or an aircraft called the “AN-112”. The 112 is supposed to be based on earlier turboprop transport heavily used by the Soviet Union and its allies.

The submission of a third bid will change the competition quite a bit. A Russian based aircraft may certainly be cheap putting pressure on both Boeing (BA) and EADS (EADS:P) to review the cost of their proposals.

US Aerospace, similar to EADS, will assemble the aircraft in the U.S. and add the military specific equipment themselves. This will also include the flight refueling equipment.

They only have about two weeks to get a proposal together so if they do end up bidding it will be very interesting.

What less then a year ago seemed to be a program with only one company bidding, Boeing, now looks to have a chance to have three.

This program seems only to get more complicated.

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Defense Procurement News Post on WTO Report

Here is an article I wrote at our sister site, Defense Procurement News, about the WTO subsidies report and the KC-X contract.

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