- The Washington Times - Monday, February 25, 2008


The Air Force is likely days away from handing out one of the biggest Pentagon contracts in years — a deal valued at up to $40 billion to replace 179 planes in its fleet of aerial refueling tankers.

For the three companies bidding, there is more at stake than just the monetary award: jobs and reputation.

Boeing Co. has supplied the Air Force with refueling tankers for nearly 50 years and doesn’t want to let go of that. The incumbent is considered the favorite to win — an assumption already reflected in its stock price.

But European Aeronautic Defence and Space Co. and its U.S. partner, Northrop Grumman Corp., want to be in on the game. For France-based EADS, the parent of rival Airbus, the contract is an entree into the massive American military market just as overseas spending cools. And for Northrop Grumman, it would tap into a major new military revenue stream at a time when Pentagon spending may be leveling off.

Analysts say the tanker award could be announced any time after Pentagon officials meet Monday to sign off on the Air Force’s tanker purchase plan.

The contract — worth $30 billion to $40 billion over 10 to 15 years — is the first of three deals to replace the Air Force’s entire fleet of nearly 600 tankers, which allow aircraft to refuel without landing.

For Wall Street, the award’s potential really takes off with the follow-on contracts likely going to the incumbent. As much as $100 billion over the next 30 years is at stake, says Loren Thompson, a defense industry analyst with Lexington Institute, a policy think tank.

Mr. Thompson said the Air Force will eventually buy more than 400 new tankers to modernize its full fleet in “the biggest new aircraft contract anywhere in the world.” The Air Force currently flies 531 Eisenhower-era tankers and another 59 tankers built in the 1980s by McDonnell Douglas, now part of Boeing.

“This is one of the biggest defense contracts to come along in decades and will be for future decades,” said Scott Hamilton, an aviation industry consultant based outside Seattle. “You have to take the plums when they come along.”

Because Northrop Grumman is considered an underdog, its shares likely will jump if it wins, but may not take a drubbing if the contract goes to Boeing. Yet Boeing’s stock would almost certainly take a hit if the company loses, and only rise moderately if the award comes through since a win is already factored into the share price.

On Capitol Hill, members in both parties are lobbying hard for a victor whose spoils include local jobs.

Chicago-based Boeing would perform much of the tanker work in Everett, Wash., and Wichita, Kan., and use Pratt & Whitney engines built in Connecticut. The company says a win would support 44,000 new and existing jobs at Boeing and more than 300 suppliers in more than 40 states.

“The Boeing proposal is far superior,” said Rep. Norm Dicks, Washington Democrat, a senior member of the House Appropriations subcommittee on defense who represents a district that is home many Boeing jobs. “I’m very hopeful that on the merits we’re going to win.”

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