The Secretary of Defense Robert Gates made clear that the Defense Department and the Air Force want some competition for the KC-X aerial tanker program. This is going to have to include EADS (EADS:P) against Boeing (BA) due to the requirements of the program. Gates stressed disappointment with those in Congress attempting to prevent U.S. companies working with EADS on their bid.

If there is going to be any competition for the third attempt to buy a replacement for the aging KC-135 aircraft it will have to include EADS. The only other potentially viable contender would be a Russian aircraft either based on the Ilyushin IL-78 Midas system or perhaps on the IL-96 wide body airliner. Having a Russian competitor would make the contest even more difficult then just one with EADS.

The Secretary of Defense, Robert Gates, testified today to Congress that he felt the leaked World Trade Organization (WTO) ruling on the legality of loans and subsidies to EADS by European nations would not have an effect on the KC-X contest. Of course supporters of Boeing will draw a different conclusion saying the ruling means an unfair advantage for EADS that will affect the pricing of the contract proposal.

Of course right now EADS has not committed to making a bid although there are rumors that the Pentagon would consider a delay of up to ninety days to allow the company to put together a proposal either as the prime or with another partner. If EADS does ultimately end up bidding the WTO ruling will certainly play a role in the politics of the issue if not the actual source selection and contract process.

The Lexington Institute published an op-ed today by Loren B. Thompson that made clear in hid interpretation the launch assist loans clearly were illegal. The A330, he wrote, “was developed using practices that would be prohibited today”.

This could mean that the EADS proposal when it is submitted could be adjusted to reflect the financial advantage received by such aid. This would significantly shift the price difference between EADS, Boeing and any other bidder.

If EADS does bid on the contract the WTO dispute will play a role, that is guaranteed.

In a post on BNET Industries, Matthew Potter notes that the Department of Defense is willing to go ahead with only Boeing bidding on the KC-X:

The Secretary of Defense Robert Gates in testimony to the House Armed Services Committee made it clear that the Defense Department and U.S. Air Force will release the Request for Proposal (RFP) for the new KC-X tanker and award a contract even if only Boeing (BA) submits a proposal. The Department hopes that the Northrop Grumman (NOC) and EADS (EADS:P) will submit a bid but will go forward with the planned contract even if they don’t.

In early December Northrop Grumman’s CEO sent a letter to the Air Force stating that due to the terms of the draft RFP they felt that it so favored Boeing that they and their partner EADS, parent of Airbus, would not submit a proposal. Northrop had won the contract in 2008 only to lose it on protest by Boeing with the Government Accountability Office (GAO) saying that the Air Force changed the requirements and was not completely fair to Boeing. An earlier attempt to award Boeing a lease for KC-767 aircraft collapsed amid scandals and Congressional desire to have contest.

Read the entire post Defense Department Willing To Do KC-X With Only Boeing Bid for more.

At the AFL-CIO Now Blog there is a story about the ten presidents of the AFL-CIO state federations sending a letter to Defense Secretary Robert Gates endorsing giving the tanker contract to Boeing. The union heads state that this is not only in the best interests of U.S. national security but also as an industrial base issue.

One of the reasons the U.S. is where it is at with this contract is that there is only one domestic source for the aircraft, Boeing. The only other manufacturer that can be really considered is EADS. To achieve any level of competition they have to be included otherwise the U.S. should just go back to the sole source lease idea shot down in 2001 – 2003.

This year’s AFA Convention was one of the most action-packed in recent memory.  And one of the biggest news-making events was Defense Secretary Robert Gates’ announcement that he’s putting the Air Force in charge of this year’s tanker competition. 

Boeing welcomes the Air Force’s leadership in the effort to replace America’s KC-135 refueling fleet, and anxiously awaits the release of the Request for Proposal.  Our top priority will be to work with the Air Force to ensure that we understand the service’s requirements and their relative priority. 

It’s particularly important that the requirements for the new competition be crystal clear.  Boeing is the only competitor offering the Air Force a choice between different refueling options, each of which delivers more capability at lower cost.   The KC-767 is a wide-body tanker with a narrow footprint that has more agility and proven technological capability than any competitor.  The KC-777 tanker can also double as a formidable cargo aircraft, providing more capacity at a similar size to Airbus’ A330-based plane.  

As I told so many people at AFA, we’re excited to work hand-in-hand with the Air Force to understand the service’s needs, and look forward to building America’s next tanker – one that meets all the warfighters’ needs at the lowest cost to the taxpayer.