Recent Tanker News Link Round Up

The site has been quiet since the award of the KC-46A contract to Boeing (BA), but here are some links to articles about different aspects of the program and the companies involved in the contest:

Boeing is slowly releasing information about the KC-46A design.

World Trade Organization softens ruling against EADS (EADS:P). Boeing and U.S. still claim victory.

House puts strong cost controls on KC-46A with mandatory reporting requirements for Air Force.

First Australian KC-30 arrives at RAAF base for introduction into service.

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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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Effort to Add EADS Subsidies Consideration to Defense Authorization Bill Fails

Senator Murray (D-WA) and Senator Brownback (R-KS) attempted to attach an amendment to the Senate’s 2011 Defense Authorization Bill today that would force the Defense Department and U.S. Air Force to take into account the World Trade Organization (WTO) ruling on subsidies to EADS (EADS:P) by European governments. Due to the fact that the bill did not win enough votes to advance mainly due to the attempt by the Democratic leadership to add the repeal of “Don’t Ask/Don’t Tell” policy on gays in the military the amendment wasn’t considered.

The two whose states stand to gain several thousand jobs if Boeing (BA) wins the KC-X contract will have to wait for this bill to be re-considered or add the amendment to another one. Certainly there are Senators from Alabama and other Southern states who favor EADS who might try to work against the amendment.

Currently the U.S. military cannot consider these kind of trade disputes and rulings in their source selection which is why the attempt was made to add the rule.

This continues to show that the fight for this contract will continue in Congress, the media and across the internet.

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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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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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Differing Views On The WTO Rulings Effect

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.

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Labor Council for Latin American Advancement (LCLAA) Opposes Airbus

Jason Lean, the Executive Director of the Labor Council for Latin American Advancement (LCLAA) has sent a letter to the Tallahasee Democrat opposing the award of the KC-X contract to Airbus on the grounds that “taxpayers shouldn’t pay for foreign jobs.” The letter reads:

“Nearly all Americans know how dire the unemployment picture is today. Unfortunately, the recent job loss numbers show that even harder times are on the horizon (“Jobless rate inches higher statewide but drops slightly in Leon County,” news article, Jan. 23).

But what most Americans don’t know is that the Department of Defense is considering awarding to the Europeans a major defense contract that outsources an additional 50,000 jobs abroad.

Even worse, the European defense contractor in question — EADS/Airbus — is a pariah company that was just found by the World Trade Organization to have thieved tens of thousands of American jobs in an illegal subsidy scheme that allowed it to steal market share from the U.S. aerospace company, Boeing.

There may be controversy about whether we need another federal stimulus plan to create American jobs. But there should be no controversy over the view that American taxpayers should not fund a European jobs stimulus plan for an outlaw company.”

You can read the letter at Tallahasee Democrate.

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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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