This is an article I wrote at BNET: Government about EADS decision to submit a proposal.

“The decade-long saga to replace the KC-X aerial tanker contract begins a new chapter. The European aerospace giant EADS (EADS: P) and Airbus, its subsidiary, announced that it will definitely submit a contract proposal to the Air Force. The program will replace the aging Cold War KC-135 tankers (pictured).

Boeing (BA) thought it had won the contract for at least 179 new aircraft earlier this year when Northrop Grumman (NOC) who had bid in partnership with EADS withdrew from the bidding. Then, earlier this month, the Pentagon agreed to extend the deadline, at EADS’ request, to allow it time to submit a new bid.”

Read the rest at BNET.

It seems that EADS North America the subsidiary of the EADS (EADS:P) is searching for a U.S. company to partner with them on the KC-X tanker contract. Reports are that L-3 Communications (LLL) had been the prime target for this role but now they are rethinking that role.

EADS had planned to be a sub-contractor to Northrop Grumman (NOC) providing A330 aircraft that would then be militarized by Northrop. Now they are planning on being the prime contractor with a U.S. company to aid them. The roles are different enough that it will put pressure on EADS to prepare most of the proposal themselves as well as provide most of the contract management. With their history so far in the U.S. that might be a bit too much for them.

Here is the latest post I wrote for BNET: Government –

“When Northrop Grumman (NOC) announced in March that it would not bid for the new aerial tanker for the U.S. Air Froce, the KC-X, Boeing (BA) and its many supporters in Congress believed it was sure to get the $35 billion contract. Now the deadline to bid has been extended 60 days to allow the European aerospace giant, EADS (EADS:P), to submit a proposal.

There are already reports that EADS, which would seek to provide A330 airliners made by its subsidiary, Airbus, to be modified into the tankers, is talking to other defense contractors about partnering.”

The rest may be found here.

Reports are starting to emerge that EADS (EADS:P) and its subsidiary, EADS-North America, are discussing teaming arrangements with other defense contractors to support bidding on the KC-X RFP. The deadline has now been extended until July by the Department of Defense. Supposedly L-3 Communications (L3) is considered the front runner for this work. There is still no definite confirmation that EADS will launch a bid after previous partner Northrop Grumman (NOC) decided not to participate in this the third round of bidding for the Air Force’s new aerial tanker.

Supposedly EADS talked to Raytheon (RTN) and BAE Systems (BAE:L) about this contract. Both of these companies reportedly expressed little interest. BAE Systems is already a partner in EADS as a whole and would stand to gain some work if the A330 made by Airbus is selected by the Air Force. Raytheon has not led an effort to make a large aircraft like this but obviously has strong system integration and engineering experience. L-3 does work on aircraft and purchased Raytheon’s aircraft integration unit several years ago.

If EADS is going to bid teaming with another large, preferably American, contractor makes the most sense. They will help work with the customer using their experience with the U.S. military. That is why the original plan with Nothrop made so much sense.

At a joint press conference with France’s President Sarkorzy President Obama said that he expected the KC-X contest to be a “free and fair” one. This of course assumes that another company besides Boeing (BA) bids on the program.

France has spoken out strongly about concerns the current RFP was written in such a way that only Boeing could win it. Northrop Grumman (NOC) decided not to submit a bid this time around due to these kind of issues. EADS (EADS:P) who had planned on partnering with Northrop is currently considering submitting a separate bid. Sarkozy has expressed his support of EADS and supposedly discussed the issue with Obama today. Obama also stressed that the DoD makes the final decision and he has no role in any of this.

The political fallout if Boeing doesn’t win will be significant this time around — even for Obama.

Now, that Boeing is the only bidder on the KC-X, the Seattle Times notes that Boeing now has to make sure that it is not seen as taking advantage of being the sole bidder:

Northrop Grumman walked away from the $40 billion Air Force refueling-tanker competition Monday, drawing a widely criticized and nearly decadelong procurement process close to an outright Boeing victory.

With the likely prospect of air tankers rolling out of Everett until around 2027 at least, the outcome could secure as many as 2,000 direct jobs in Everett and an additional 6,000 statewide at suppliers and others, according to previous Boeing estimates.

Yet Northrop’s withdrawal leaves Boeing with a pricing dilemma as it prepares a final bid. The Pentagon, embarrassed by the lack of competition, now will be under extra scrutiny over what it pays for its tankers.

On one hand, because the contract is a fixed price — meaning the winner must swallow the loss if program costs escalate beyond the price it bids — Boeing typically would be expected to aim high, especially with no competition.

At the same time, Boeing will want to avoid the appearance that it is taking advantage of Northrop’s withdrawal to jack up the price.

“This competition was supposed to be a model for future procurement,” said Issaquah-based aviation analyst Scott Hamilton of Leeham.net. “It’s clear the Department of Defense fell short again in running a procurement process that works.”

The contract is to supply the Air Force with 179 tankers used to refuel fighter, transport and bomber aircraft en route to their targets.

Northrop had teamed with EADS, parent of European planemaker Airbus, to offer a tanker based on the Airbus A330.

In 2008, the Defense Department cited a rough contract value of $35 billion, or about $196 million per airplane, plus an extra $5 billion in operational support and other costs.

Certainly, the rivalry in the previous round of the tanker competition between the Boeing 767 and the A330 drastically reduced the cost to the taxpayer.

Read the entire article at the Seattle Times.

The Wichita Eagle reports that the a group backing building both the Boeing and EADs tankers, doesn’t want to reveal its backers:

The investors backing a campaign asking the government to split its contract for aerial refueling tankers between Boeing and Northrop Grumman want to remain anonymous for now. The campaign is called Build Them Both.

“We are funded by a group of investors who have asked to remain nameless at this time,” said the effort’s campaign manager, Carrie Giddens.

The group is not union sponsored and does not have ties to either Northrop or Boeing, Giddens said in an e-mail exchange. However, “we have sought out funding from both companies, their suppliers and unions who would be impacted by building them both.”

The requests went out in the past two weeks.

On Monday, Giddens called Northrop’s decision to pull out of the bidding process “bad news for American workers, our men and women in uniform, and for the taxpayer.”

With only one company seeking a contract, 50,000 jobs that would have been created won’t be, Giddens said in the statement. “Without an ongoing competition there is no way to control costs, to the detriment of our military and taxpayer.”

There is a rumor that the Pentagon may delay the deadline for submission of a proposal for the KC-X to accommodate either a solo bid or another partnership. This contradicts what was reported yesterday that EADS-NA CEO Sean O’Keefe said the company wouldn’t bid without Northrop Grumman (NOC). It will be seriously difficult for the company to bid by itself. It would need to find another U.S. company to work with.

This might be second thoughts by DoD as they realize how difficult doing a single bid contract award will be. This is not a sole source contract but right now it would only receive one qualified offer.

Congressman Howard McKeon (R-CA) put out a statement today supporting Northrop. He said that he was “disappointed that Northrop Grumman has decided not to submit a proposal to build the Air Force’s next generation aerial refueling tanker.” He would like Northrop to reconsider its position.

Northrop is currently headquartered in California and has several thousand employees there. It is planning on moving to the Washington DC area in the near future.

The decision leaves Boeing as the sole announced bidder.

Statement on US Refueling Tanker Program Announcement

WASHINGTON, March 9 /PRNewswire-USNewswire/ — The European Commission notes yesterday’s decision by Northrop Grumman / EADS not to submit a bid to the US Department of Defense for the US Air Force’s aerial refueling tanker contract.

“It is highly regrettable that a major potential supplier would feel unable to bid for a contract of this type. Open procurement markets guarantee better competition and better value for money for the taxpayer,” stated EU Trade Commissioner Karel De Gucht.

In February 2008, Northrop Grumman / EADS was selected and awarded the contract to provide aerial refueling tankers for the US Air Force in a fair and transparent competition. This was a positive sign for free and open competition across the Atlantic. This also seemed to indicate that successful bids are possible when European industry teams up with US industry and they are allowed to compete fairly. This award was subsequently cancelled at the end of 2008.

In December 2009, Northrop Grumman / EADS expressed serious concerns to the Department of Defense and the US Air Force on the proposed acquisition criteria for the contract.

The European Commission would be extremely concerned if it were to emerge that the terms of tender were such as to inhibit open competition for the contract.

The US defense trade balance with the EU has traditionally been significantly in the US’ favor. In 2008 the US exported $5 billion and imported only $2.2 billion worth of defense material, in line with a historic ratio of double exports to imports.

The Commission will be following further developments in this case very closely.

Source: Delegation of the European Union to the United States