By Andrea Shalal-Esa - Analysis
Sunday, March 2, 2008; 1:57 PM
WASHINGTON (Reuters) - A surprising U.S. decision to bypass Boeing Co (BA.N) and award Northrop Grumman Corp (NOC.N) and Europe's EADS (EAD.PA) a $35 billion aerial tanker deal underscores the global nature of the defense market, and will clearly be a hot topic in U.S. national politics this year.
Signed late on Friday by Northrop and the Air Force, the fixed-price deal is an enormous boon for No. 3 U.S. defense company Northrop, dramatically expands EADS's foothold in the U.S. market and hastens the end of the Boeing 767 production line.
But with the U.S. economy in a slump and Boeing backers howling about potential job losses to Europe, U.S. lawmakers could still hold up the deal, and it may become a football in the presidential election.
The likely Republican nominee, Sen. John McCain of Arizona, led an investigation that killed an earlier Air Force proposal to lease 100 Boeing 767 tankers after a former top Air Force official went to jail for negotiating a senior job with Boeing as she was still overseeing that deal and others.
Now, opponents say, he has helped hand the huge deal to EADS, the parent company of Airbus. Northrop says 60 percent of its plane will be made in America and even the fuselage and tail of the Boeing 767 would have been built overseas, but "Buy America" rhetoric is an easy sell in hard financial times.
"The last bastion of the losing protectionist is to wave the bloody 'Buy America' shirt," said analyst Joel Johnson of the Teal Group. "It tells you they don't have another argument -- e.g., the (Northrop) product was newer, more capable and less risky."
Democrats Hillary Clinton and Barack Obama, still vying for their party's nomination, have not addressed the deal, but the issue of U.S. jobs going overseas is clearly on their radar.
Their Democratic colleagues in the Senate and House of Representatives are already raising questions about McCain's role in convincing the Air Force to take the U.S.-European dispute over airplane subsidies out of the competition.
"The U.S. government is bringing an action against Airbus in the World Trade Organization and subsidies should have been taken into account" in this competition, Rep. Norm Dicks, a Washington Democrat, told Reuters.
McCain urged Robert Gates, before he was confirmed as defense secretary, to remove the issue from the terms of the competition, saying it could eliminate one of the bidders from the start.
"McCain wrote a very strong letter to Gates," Dicks said. "Clearly it was on the side of Airbus."
Dicks said the Air Force would face tough questions in Congress. "Here we are in a recession and the U.S. government hands such a big contract to the Europeans," he said.
On the flip side, the U.S. military already buys weapons overseas, including a new Army helicopter built by EADS, and a presidential helicopter built in part by Italy's Finmeccanica (SIFI.MI). Britain's BAE Systems (BAES.L) has long been a key player, even on classified systems, and is now the 8th-biggest U.S. defense contractor after its 2005 takeover of combat vehicle maker United Defense Industries.
"Globalization is the way of the world," said Marc Lindsley, director of business development for Northrop.
JOBS HOT BUTTON ISSUE
Boeing supporters decry the deal as "a blow to the American aerospace industry, American workers and America's men and women in uniform," but Northrop insists its plan will create more than 2,500 positions in Alabama and other states still recovering from the devastation of 2005's Hurricane Katrina.
Overall, Northrop says the deal will support 25,000 jobs in 49 U.S. states, and its officials remain convinced that Boeing's claim of supporting 44,000 jobs was exaggerated.
Boeing only projected the earlier tanker deal to support 25,000 to 30,000 jobs, and says its C-17 transport plane, built solely in the United States, supports 25,000 jobs.
European leaders welcomed the decision. French President Nicolas Sarkozy predicted it would strengthen ties between the United States and Europe. German Chancellor Angela Merkel said EADS won in "a fair and open process" and the decision showed the mutual trust in U.S.-European national security ties.
Defense analyst Richard Aboulafia of the Teal Group said it marked the first time in U.S. military procurement -- and possibly worldwide -- that a government had chosen "a foreign plane over a directly competing domestic product."
The deal marks a personal victory for Northrop Chief Executive Ron Sugar, who analysts say had to repeatedly convince a skeptical board to back the venture with EADS.
It is an enormous coup for Ralph Crosby, a retired U.S. military officer who served in Vietnam and former senior Northrop executive who was passed over for the job Sugar got.
Crosby helped create EADS North America, which has won work building a small Army helicopter and maritime patrol planes for the Coast Guard. But the tanker was clearly his holy Grail.
The victory is particularly sweet for Crosby, whose chief rival at Northrop, James Roche, went on to become the Air Force secretary who championed the earlier Boeing tanker deal, but was later forced to resign as the scandal deepened.
In internal e-mails disclosed by McCain's investigation, Roche was clearly shown to be working closely with Boeing, writing "Go Boeing," referring to "the fools in Paris and Berlin," and expressing animosity toward Crosby. Crosby and Roche were both passed over for the top Northrop job.
NORTHROP BOOM PASSES FUEL
The deal also marks a technological achievement for EADS, which was shut out of the earlier tanker deal because it had not yet developed a boom to pass fuel to fighter aircraft.
On Friday, as the announcement neared, Northrop conducted its first flying transfer of 2,000 pounds of fuel to an F-16 fighter through its newly developed boom, although company officials decided not to publish the news until Monday.
Boeing has said only that it is disappointed and will review its options after a detailed briefing from the Air Force.
Defense analyst Loren Thompson of the Lexington Institute said lawmakers would pressure Boeing to protest the decision, but it would likely lose since it got lower scores in four out of five evaluation areas. "It is a fact that the Boeing plane couldn't beat the Airbus plane," he said.
Long delays in Boeing's deliveries to Japan and Italy were also a big negative, Aboulafia noted.
Air Force officials warn a protest could delay work on the new aircraft for 18-24 months and harm U.S. troops. Even under the current plan, some of the current KC-135 tankers will still be flying until 2040, when they are more than 80 years old.
Given the Air Force's glowing assessment of the Northrop plane, Thompson said lawmakers might have a tough time arguing too strenuously for the Boeing 767.
"Congress can stop any Pentagon expenditure it wants. But it faces the dilemma of having to explain why it wants to force war fighters to buy an inferior plane," he said.
Instead of trying to derail the Northrop deal, lawmakers could also add money to the program and require the Air Force to buy both planes, but tight budgets have already forced delays in purchases of other weapons such as warships.
"That would be a good solution, but we just don't have the money," said one congressional aide.
(Editing by Maureen Bavdek)