Reports Final Proposals Due Next Week for KC-X

Both Boeing (BA) and EADS NA (EADS:P) have met with the U.S. Air Force reportedly to discuss final changes to the KC-X RFP. The companies have until 11 February to submit their final revisions to their proposed solutions to the new aerial tanking requirement.

Boeing has said that they will update their proposal although EADS NA has said they may not. Swirling around all of this final burst of activity is the concerns by some in Congress, the media and at the bidders about the accidental release of information by the U.S. Air Force to each team as well as the two World Trade Organizations (WTO) rulings on both companies receiving illegal subsidies.

Some Boeing supporters in Congress are now saying that the data release gives EADS an advantage and that there should be deeper investigations. The Air Force “reassigned” two personnel as punishment and Congress did have hearings last week about the matter. Washington state, Illinois and Kansas legislators all from states that stand to gain work if Boeing wins sent a letter to the DOD IG asking them to look to see if the data released skewed the contest in EADS’ favor.

All of these conditions make it seem inevitable that there will be a protest to the contract award no matter who wins it. There will also be political pressure from supporters of both companies to review the contract and make sure that there favored winner was not treated unfairly.

All this adds up to further delays in replacing the KC-135 systems made during the Cold War. Once again this problem has been created by the disappearance from the U.S. industrial base of multiple suppliers of large aircraft. Currently only Boeing and EADS make aircraft acceptable to the Air Force to meet this requirement. If there is to be even a modicum of competition the two have to be involved which leads us to the current ugly situation of charges and counter charges of favoritism, jingoism and bias.

This will probably be the biggest contract awarded for the next decade by the Defense Department and is critical to both companies maintaining a foothold in the large military aircraft business worldwide which is leading us to the current situation which does not seem like it will end well.

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WTO Report States Boeing Received Illegal Aid Effect on KC-X Undetermined

In the latest round of the back-and-forth at the World Trade Organization (WTO) between the United States and the European Union (EU) over airline development and sales the report on Boeing (BA) was leaked to the press and found that the Chicago based company received illegal subsidies from the U.S. Government and four states. In September this finding was also leaked as a preliminary to the completion of the final report.

Earlier last year the WTO had ruled in favor of the U.S. in their complaint about launch aid for EADS’ (EADS:P) Airbus products. Since that time there have been those in Congress trying to rewrite acquisition law and regulations so that the illegal aid to EADS would be taken into account in the upcoming KC-X new aerial tanker decision on which Boeing and EADS submitted bids for the initial $39 billion contract.

The findings by the WTO that both sides provided illegal aid that caused unfair competition to the other should lead to negotiations to settle the matter. The normal WTO punishment of having the losing company pay back the economic affect on the other will probably not happen due to the large amounts involved.

The two decisions may aid the Pentagon in deciding the KC-X contract as it possibly removes the issue from the competition and might limit some chances for a protest by the loser. The Pentagon has made clear for months that it cannot take into account the WTO rulings in their source selection and evaluation hence the attempts by Boeing’s supporters in the legislative branch to change the rules.

Now with both bidders confirmed to have benefited from illegal subsidies of some sort it hopefully will remove the issue and allow a competition based on merits and meeting the requirements as defined by the Air Force and Defense Department.

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House Votes to Require Pentagon to Consider “Unfair Competitive Advantage”

The House of Representatives winding down the lame duck session voted today to pass legislation forcing the Pentagon to take into consideration in source selection whether one of the bidders has an unfair competitive advantage. While not naming any names the law is oriented towards EADS (EADS:P) bid for the new KC-X aerial tanker program. The law has little chance of being considered in the Senate anytime in the next few days.

This is fallout from the World Trade Organization (WTO) ruling earlier this year that EADS had received illegal subsidies from European nations. This was mainly in the form of “launch aid” loans that would only be paid back if the aircraft were profitable but also included tax breaks and infrastructure funding. The Pentagon has made clear that U.S. procurement law and regulation do not allow these types of rulings to be a factor so Boeing (BA) supporters in the House and Senate have been making efforts to change the law so that EADS will not have a “competitive advantage”.

The WTO has also made a ruling against the European counter claim against Boeing that it had received some aid from the U.S. government.

The KC-X is in this situation as there are currently only two Western companies that are able to build this aircraft. In order to gain any competition with a goal of cost savings Boeing and EADS must be considered. A wild card attempt by U.S. Aerospace teamed with Ukrainian manufacturer Antonov was not considered.

If you think Congress is upset about EADS think about how they would react to an Antonov win no matter how cost effective or capable it would have been.

Until the Air Force makes its source selection decision known this kind of fighting will continue. Protests by the loser are also to be expected as the KC-X saga enters its tenth year.

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WTO Reported As Ruling Against Boeing in Subsidy Case

A few months ago the World Trade Organization (WTO) ruled that EADS (EADS:P) had received illegal subsidies from various European governments in the form of launch aid loans and tax breaks. The decision was quickly seized upon by Boeing (BA) supporters who want the Department of Defense and the U.S. Air Force to take the advantage these subsidies gave EADS into account in their source selection for the KC-X aerial tanker.

At the same time the WTO was considering a complaint by European governments that Boeing’s (BA) many years of contracts from the American government also aided them in developing their products and reducing their costs. The results of that case were leaked today and they indicate that the WTO will provide some criticism of the U.S. support.

This then was quoted by EADS’ American allies to reiterate the need for these not to be considered in the decision of who will win the contract to build over $35 billion of new tankers.

Because the rulings will not be exactly even and cancel each other out the argument will still go on even as the WTO leaves the issue. Unfortunately the decline of the world’s industrial base to where there are only two Western companies able to build this type of aircraft have led to this situation.

There is no easy resolution to the problem and no decision by the U.S.A.F. that will placate everybody. Once again the chance of a protest seems to be a given.

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House Adds Language to Force Pentagon to Consider Subsidies to Defense Authorization Bill

The House of Representatives in their vote on the 2011 Defense Authorization Bill added an amendment sponsored by Washington and Kansas members to force the Pentagon to consider the WTO ruling on illegal subsidies when it comes time to consider EADS’ (EADS:P) bid. The Pentagon has made it clear in the past that their contracting and acquisition laws and regulations do not allow them to factor that into their cost evaluations. This language if it is in the final version of the bill when it is passed after Conference will supposedly make them do that.

One question though is the Air Force plans to receive bids on July and announce a decision in the late Fall. There is a good chance that the source selection if it follows that schedule will be complete before the bill makes it out of Congress. While the Authorization Act often is done before the Appropriations one it is often not complete by 30 September as it should be. The Pentagon could also argue to ignore the language setting up some sort of court fight. EADS could also adjust their prices to take into account the effect of the WTO ruling.

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Congress Wants WTO Taken Into Account In KC-X Bidding

Kansas legislators in both the House and Senate are planning to introduce a bill that would require the Pentagon to take WTO rulings into account. The Department of Defense has maintained that in accordance with U.S. laws and regulations that those matters cannot be considered or punished in contract awards. If it did that would be a violation of the WTO itself.

The bill would allow price adjustments to be made in bids to reflect illegal subsidies rulings. The legislators, Senator Brownback (R-KS) and Congressman Tiahart (R-KS), claim it would be applicable to any defense contract but it is obviously targeted at EADS (EADS:P) and their KC-X bid. The legislators claim that without taking these subsidies into account the price of the A330 based tanker will be artificially low.

They would prefer the contract go to Boeing (BA) who would do substantial work in Kansas on their tanker program.

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The WTO Will Not Play A Role in KC-X Dispute

The World Trade Organization (WTO) which is expected to announce formally its ruling against EADS (EADS:P) for receiving illegal subsidies to support Airbus airliners and is also considering a complaint against the U.S. and Boeing (BA) announced that it does not intervene in military contracts and cannot be involved in the KC-X dispute between the U.S. and Europe.

The chance of France or the E.U. filing a complaint over the terms of the proposal which are seen as limiting EADS chances to bid seems remote. Certainly President Sarkozy of France has raised the issue with President Obama. The Air Force has extended the deadline for proposal submission sixty days to allow EADS to submit a proposal if they want.

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Boeing Appreciates Congress

Recently 125 members of Congress wrote a letter that was sent to President Obama and released publicly to try and get the U.S government to take punitive actions against EADS and Airbus for receiving illegal subsidies. The World Trade Organization (WTO) supposedly has ruled on that a few months ago. The case is still ongoing with counter charges and reviews. Many in Congress who support Boeing feel that this should be taken into a account when the KC-X bids are reviewed. Although Northrop Grumman and EADS have threatened not to participate.

Boeing releases a statement about the letter and their appreciation for the Congress Members actions:

“Boeing is encouraged to see such strong bipartisan congressional support for U.S. action to end the illegal subsidies that European governments have for decades provided to Airbus at the expense of American industry and its workers.

“Despite an imminent final WTO ruling on illegal subsidies, Airbus appears poised to extend and continue the practice of using illegal subsidies for its new aircraft, the A350. This new plane directly targets America’s aerospace industry and the tens of thousands of workers who design and build aircraft in the United States.

“As stated in the congressional letter to the president, our government policies should not reward foreign governments or companies that benefit from illegal subsidies. We look forward to working with Congress to ensure this matter of principle and of important policy is enforced.”

EADS and others have made claims that Boeing through its military contracts over the last sixty years has received the equivalent of these subsidies themselves. That case is still pending at the WTO.

Of course the Defense Department needs two bids to efficiently carry out the competition so all this back-and-forth may ultimately have no effect.

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Pro-Boeing Legislators Want Air Force To Penalize EADS

Several Representatives and Senators from states where Boeing (BA) would do much of the work if they won the KC-X tanker contract are pushing the Air Force to either exclude outright EADS (EADS.P) or place a cost factor on their bid. This is all due to the World Trade Organization (WTO) draft ruling that the company received illegal subsidies from several European governments. Supporters of the Northrop Grumman (NG) and EADS say that the ruling is draft and not finalized and should not apply in this competition.

If there was such a move by the Air Force it would significantly reduce the competition in the contract process. It would make the Air Force award the contract to Boeing as the other bid would not be competitive. Of course this is what the legislators want, but a sole source award to Boeing probably would not be palatable to others in Congress or the Department of Defense. There should be at least two bids for each contract and this one is limited to Boeing, EADS and possibly the Russian company Ilyushin. Chances are that a Russian aircraft would not be chosen no matter how cost effective it is. This leaves the U.S. in a very limited position with the KC-X.

This kind of fighting can be expected to go on for the next several months to after the contract award and resolution of any protest.

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