Tanker spat raises threat to US arms sales

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US armsmakers face potential retaliation from Europe after the bitter demise of a transatlantic bid for a potential $50 billion US aerial refueling aircraft contract. At least in the short term, Boeing in particular could be in for rough treatment since it is at the heart of the matter, says John Magnus, president of TradeWins LLC, a trade-policy consultant that has worked in the aerospace industry.

What is more, “a significant number of US companies might encounter some choppy waters” as a result of the collapse of the transatlantic bid based on an A330 airliner built by Toulouse, France-based Airbus, Boeing’s rival in commercial planes, he added in a Reuters analysis.

Top US arms exporters include Lockheed Martin, Boeing, Northrop Grumman, General Dynamics, Raytheon and United Technologies. Chicago-based Boeing, the No. 1 US exporter, remains the sole known bidder after Northrop Grumman and Europe’s EADS withdrew Monday from a renewed competition to supply tankers to the US Air Force, alleging an uneven playing field.

For EADS, Airbus’ corporate parent, the stand-down punctuated a major push to pierce the lucrative US military market. European leaders were quick to accuse the United States of foul play. “I think that the attitude of the American government on the matter of the air tankers is a serious breach of the rules, which are those of fair competition between our economies,” French Prime Minister Francois Fillon said Wednesday during a visit to Berlin’s Humboldt University.
“The American government — I am saying it — has obliged EADS to quit the competition,” he added. Separately, France’s European Affairs Minister, Pierre Lellouche, said the multibillion-dollar matter was not closed and would lead to further developments. “This has gone beyond acceptable,” he said.

The exit supended a nearly decade-long struggle to replace the US Air Force’s KC-135 tankers, which are used to refuel other aircraft in mid-air. Separately, President Barack Obama on Thursday tapped Jim McNerney, Boeing’s chief executive, to co-head the President’s Export Council, a private-sector group that advises the White House on trade. Boeing is the largest US exporter by sales.

Stuart Eizenstat, who served as US envoy to the European Union from 1993 to 1996, and in other top slots dealing with transatlantic trade and economic ties, said the tanker spat could have serious repercussions at a time of growing protectionist pressures on both sides of the Atlantic. “I hope that cooler heads will prevail and we won’t have mirror-image retaliation, but the risks are certainly there” amid concerns about a jobless economic recovery, he said in a telephone interview from Berlin where he was traveling.

A study done for Boeing and released Wednesday found that a Boeing-built aerial tanker would create 10 times as many new US jobs as the abortive Northrop Grumman-EADS plan over the contract’s projected 18-year life. The study was done by Sonecon LLC, a private consultant headed by Robert Shapiro, a US undersecretary of commerce for economic affairs from 1997 to 2001.

US Deputy Defense Secretary William Lynn said the department was disappointed by Northrop’s boycott and rejected any suggestion the competition was skewed against it and its European partner.
“The department strongly supports transatlantic defense industrial ties and believes they benefit the American war-fighter and taxpayer,” he added in a statement Monday.

Richard Aboulafia of Teal Group, a Fairfax, Virginia, aerospace consultant, said the biggest danger was that European countries might shun US military hardware and buy home-grown systems in retribution for any perceived unfairness. “In a worst-case scenario, this could spill over into a cycle of retaliatory tariffs and others barriers that obliterate any hope of a two-way street in weapons procurement.”

Northrop and EADS won the last competition in February 2008 with a bigger A330-based plane, but the Pentagon canceled that deal after government auditors upheld a Boeing protest. Northrop said it would not protest the final bidding specifications to avoid any further delay in replacement of the current fleet of nearly 50-year-old KC-135 tankers, although it felt it had “substantial grounds.”



That leaves Boeing positioned to build up to 179 tankers based on its 767 airliner over the coming 18 years. In addition, it would be well-positioned to bid for follow-on orders that could bring the total fleet value to $100 billion or more.