Boeing's Big Tanker Contract Has National -- and State -- Winners and Losers

Boeing midair refueling tanker, artist's renderingThe business of building aircraft is intensely political -- as it probably should be. After all, what happens if you wind up at odds -- even go to war -- with a country that supplies your military aircraft? And how can you expect to run a modern economy without an airline industry? But not only do aircraft makers get tied up in international political dogfights, such battle lines are drawn between states as well.

This comes to mind in considering the competition for the $35 billion airborne refueling tanker that the Pentagon awarded late Thursday to Boeing (BA) instead of Airbus parent European Aeronautic Defence and Space (EADSY). At stake are 50,000 jobs paid for by American taxpayers in exchange for 179 tankers -- gas cans with wings that the Air Force uses for in-flight refueling of military aircraft (artist's rendering of Boeing's plane pictured).

The battle for those jobs pitted blue state Washington against red state Alabama -- and Washington won.

Political Hot Potato

Looking at the merits of each, as defense policy analyst Loren B. Thompson at the Lexington Institute told the Washington Post, Boeing's bid would cost the Pentagon less money -- both to build the tankers and to operate them over 30 years. Thompson noted that "The Airbus plane is so much bigger and burned over a ton more fuel per flight hour. Multiply that by 179 planes, times 30 years of service life and it becomes very big."

These political battle lines were also drawn in 2008 -- right in the middle of the presidential campaign. Back in February 2008, an EADS/Northrop Grumman (NOC) joint venture was awarded this contract, but Boeing protested that decision on the basis of a flawed process -- and the General Accounting Office agreed.

It also happened that Airbus had chosen sides in the 2008 presidential campaign -- picking John McCain and agreeing to build the tanker in a red state, Alabama. As I posted on BloggingStocks in March 2008, McCain had hired EADS lobbyists to senior posts in his campaign, and EADS employees contributed $40,000 to his presidential run.

It's a Draw

But the airline industry's national competition goes back a lot further. Over the years, the U.S. has accused Europe of subsidizing Airbus with risk-free loans to help it build new aircraft, and Europe has countered by suing the U.S. for subsidizing Boeing through military contracts and tax breaks.

While these battles get hashed out in decades-long legal battles, the results are generally considered a draw. For example, according to Global Economy Journal, the two aerospace combatants signed a subsidy agreement in 1992, but Boeing pulled out of it. In 2004, the companies took their battle to the World Trade Organization. In January 2011, the WTO found that Boeing got $24 billion in illegal subsidies from the U.S. -- after it issued a June 2010 finding that Airbus had gotten $20 billion in such illegal subsidies, according to the Associated Press

Still, Airbus and Boeing end up splitting the global aircraft market just about equally. According to Reuters, in 2010 Airbus sold 644 planes valued at $84 billion, while Boeing sold 625. This gave Airbus 52% of the world market to Boeing's 48%.

Enter, China

One new twist to this aircraft industry/national rivalry between Europe and the U.S. is whether a third player, China, will emerge to upend this cozy structure. And strangely, Boeing and its engine supplier, General Electric (GE), seem to be competing to see who can betray America the fastest.

How so? As I posted on DailyFinance in January 2011, GE CEO Jeff Immelt, who now heads the President's Council on Jobs and Competitiveness, is providing aircraft electronics through a Chinese joint venture to China's military -- creating a big competitor for GE's aircraft engine customer, Boeing. And Boeing CEO Jim McNerney was, at least at one point, contemplating a big shift in aircraft production to China, according to a long-time Boeing executive I interviewed for an August 2009 DailyFinance post.


Back to the tanker competition: Will EADS now protest the way Boeing did when it lost the first round of this battle in 2008? Alabama Senator Richard Shelby argues that his state deserves the 48,000 tanker jobs that EADS would create on the grounds that the Airbus tanker is a more capable aircraft and that the victory for Boeing was a result of "Chicago politics."

However, Lexington Institute analyst Thompson told the Washington Post that EADS is unlikely to protest noting that both aircraft were rated equally on performance and that an EADS effort to claim that the plane price calculations were done incorrectly would not pass muster.

Likewise, Mayor Sam Jones of Mobile, Ala., told the Los Angeles Times: "We are certainly disappointed, but not discouraged. After a debriefing, if we learn that the decision was made on a fair assessment of the merits, we don't have any political rhetoric, we are ready to move on to other opportunities."

It looks like Boeing won this round. But the aircraft industry rivalry between countries -- and U.S. states -- aren't about to end.


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