KC-X, EADS and Implications...

So.

EADS won the tanker competition, as reported here.

Boeing was clearly expected to be the winners here, and I mean that they were expected to be an absolute shoe-in, as Bill Sweetman opines here.

Why did Boeing lose?

Fundamentally, EADS offered a better airplane: the plane that Boeing offered is the freighter version of the 767, which is at the end of its production life. Normally, that is in and of itself not so bad, given that you acquire a highly mature aircraft with all the bugs worked out, while the EADS offer is much newer than the 767. Newer generally means better productivity.

EADS delivers the airframe, basically blank, and Northop-Grumman installs all the military equipment. This is where EADS failed earlier, as they tried to also force their refueling system as well (drogue and pod, rather than the flying boom that the US vastly prefers).

Now, neither I nor you, dear reader, know exactly what drove the deal at the end of the day: Boeing had argued that a smaller capacity aircraft could be more flexible than a larger one, but given the fact that the number of aircraft to be acquired was the same, that doesn't hold up well.

Now, what are the implications?

If the 767 had been chosen, it would have continued to be manufactured: this, in all likelihood, means the end of the 767 production. This means that Boeing can wind production down and transfer its people to other areas, such as the 787 and future planes.

Now that EADS has gotten the contract, they will have to assemble the plane in the US (part of the deal), along with Northrop/Grumman, their partner here. This means new plant in Alabama, where the planes will be put together. Further, EADS has not had great success with the A330, but rather than ceasing to make the plane, it will instead invest fairly heavily in order to produce the 179 planes of the contract in the US. This means that it will bind resources for the foreseeable future.

Now, EADS has a severe problem with the weak dollar: this may well open EADS to the possibility of using increasing number of US suppliers without much of a political backlash within Europe. They have already called for their suppliers to co-locate, meaning that for the life of the program, the US has gained a technology center for this kind of product where there wasn't one before, in a state that can use it.

The loser, of course, is Boeing: the contract is one of the biggest military contracts for the foreseeable future, for US $35 -$40 bn. That is not peanuts, and I can well imagine that there is enormous pressure on Boeing internally to protest the decision.

Given the size of the contract and the political significance - EADS and Boeing are bitter rivals in civilian aerospace and Boeing quite rightly severely criticizes the subsidies that EADS gets - of the decision, this will be a problem for EADS in the coming months.



So what are the implications?

First of all, I think that Boeing blew it: they did not offer, at the end of the day, the machines that could compete. The 767 was too old a design to compete against the significantly newer A330 for that what the military specified. But Boeing needs to view this positively: they can now wind down the 767 and transfer productive assets to other projects that moves Boeing forward. The KC-X is followed by the KC-Y program to replace the larger KC-10 fuelers, and while Boeing will face an uphill battle here, it is one that they can readily win by making the better airplane (think mil spec 747).

Second, this is a big win for the US aerospace industry: EADS will be coming to the US and in many ways has to. The weak dollar has made their products very, very weak on world markets and they have severe productivity and profitability challenges that will force them to move large-volume business out of Europe. The A320 is due to be assembled in China in the near future and the A330 may well move entirely to the US to take advantage of better US productivity and profitability.

Third, this is the point where EADS no longer has a leg to stand on in terms of its subsidy policies. Up to now, EADS has argued before the WTO - incorrectly, in my opinion - that the government subsidies that it receives only serve to balance out the military business of Boeing. Now that EADS is in exactly the same business, it cannot continue to use that argument seriously: this means that EADS will be forced to forgo frankly unfair subsidies and that EADS and Boeing will, in the future, operate on a much more level playing field.

This is good for both industries. Just as Boeing has internationalized with the 787, so EADS must internationalize with the winning of the KC-X contract. This should reduce the rabid nationalism of EADS, which has been a real hindrance to proper management and profitability.

So, at the end of the day, Boeing blew it, and EADS may have screwed themselves: while they won the contract, they will have to change how they do business. Boeing has been handled a massive hammer to pound on EADS at the WTO by none other than EADS itself...