Boeing Tanker Win Keeps Alive 767 Jet, Eases Sting From Delays

Feb. 24 (Bloomberg) — Robert Livingston, founder of the Livingston Group. and a former U.S. Representative from Louisiana, talks about Boeing Co.’s victory over European Aeronautic, Defence & Space Co. (EADS) in competition for a $35 billion contract to build 179 new aerial refueling tankers for the U.S. Air Force. Livingston talks with Pimm Fox and Peter Cook on Bloomberg Television’s “Taking Stock.” EADS is represented by the Livingston Group. (Source: Bloomberg)

Feb. 24 (Bloomberg) — The U.S. Defense Department’s selection of either Boeing Co. or European Aeronautic, Defence & Space Co. to build the Air Force’s new fleet of refueling tankers may spur competition among U.S. lawmakers as they bid to gain thousands of jobs from the $35 billion tanker contract. Boeing’s backers are the Washington State and Kansas delegations. EADS’s supporters are primarily in Alabama, as well as Mississippi and Florida. Bloomberg’s Peter Cook reports. (Source: Bloomberg)

Boeing Co. kept alive its 767-model jet and eased the sting from months of delays on its two marquee airliners with its surprise win in a U.S. Air Force tanker program valued at about $30 billion.

“This says that they faced the toughest competitor they know in the market and they came out first,” Howard Rubel, a New York-based analyst with Jefferies & Co., said yesterday in an interview. “It says that maybe they are not as bad as their last two projects would have told you.”

Boeing beat European Aeronautic, Defence & Space Co. for a contract to build the first 18 tankers, extending its role as the sole supplier of Air Force refueling aircraft since 1948. EADS was part of a Northrop Grumman Corp.-led team that won a 2008 contest, before a Boeing protest forced new bidding.

Building the refueling aircraft means Chicago-based Boeing can continue making the wide-body 767 jet on which the tanker is based. The backlog on that plane has dwindled to 50 orders as customers await the 787 Dreamliner, the composite-plastic plane now about three years behind schedule.

“It keeps them in the tanker business,” Scott Hamilton, an Issaquah, Washington-based aviation consultant for Leeham Co., said in an interview. “This is a great boost to their morale.”

The news was an antidote to Boeing’s struggles in recent months with the Dreamliner and the 747-8 jumbo jet. The passenger version of the 747-8 is a year late, and Boeing is running two years late on the freighter model.

Shares Gain

The shares jumped on the Pentagon’s announcement, which came after the close of New York Stock Exchange composite trading. Boeing gained $2.74, or 3.9 percent, to $73.50 at 7:56 p.m. in New York.

Among the questions now facing Boeing is whether it can make money off the tankers, because the planemaker was so competitive with the price, said Ken Herbert, a Wedbush Securities analyst in San Francisco who like Jefferies’ Rubel recommends buying Boeing.

Herbert said he expected that the Air Force would split the award between Boeing and EADS to “minimize conflict and risk with challenges and everything else.”

The initial tanker contract is valued at $3.5 billion, said Daniel Beck, a Boeing spokesman. He said the total will be about $30 billion as the military buys the rest of the planned 179 tankers to refresh the fleet of Boeing KC-135s that entered service in the 1950s.

Washington and Kansas

Boeing plans to do the main assembly work on the plane on the 767 line in Everett, Washington, and finish it in Wichita, Kansas. The program eventually will support as many as 50,000 jobs at Boeing and its suppliers, according to the company. A spokeswoman, Leslie Hazzard, declined to say how many people the 767 program now employs.

Chief Executive Officer James McNerney alluded to the cost pressures on the planemaker’s tanker bid in a Feb. 10 presentation to analysts at a Cowen & Co. conference, saying Boeing had made an “aggressive” bid.

“The people in this room would be glad if we won at the bid level that we’ve put in, and would be happy if we lost at a lower level,” McNerney said.

The main value of Boeing’s win is keeping EADS away from a franchise that the U.S. company has controlled for decades, said Richard Aboulafia, a military aircraft analyst with Fairfax, Virginia-based consultant Teal Group.

“In terms of profits, this is not going to be an incredibly lucrative program,” Aboulafia said. “It’s a lot of challenges ahead. At the end of the day we’re talking about 14 planes a year. Even if they do get the profitability balance right, it’s just a modest increase of revenue going forward.”

Defense Business

Boeing’s defense and space business produced $31.9 billion in revenue in 2010, compared with $31.8 billion for the commercial airplanes unit, according to data compiled by Bloomberg.

Boeing’s first attempt at the tanker contract was derailed in 2004 by a scandal involving former Air Force procurement official Darleen Druyun and Michael Sears, then Boeing’s chief financial officer. Sears was sentenced to four months in prison for offering Druyun a job in October 2002 during the initial tanker negotiations.

EADS, based in Munich and Paris, expected a win for its solo entry after the victory in 2008 in tandem with Northrop Grumman. The EADS tanker was based on the company’s Airbus SAS A330 jetliner.

“This is certainly a disappointing turn of events,” EADS North America Chairman Ralph D. Crosby Jr. said in a statement.

Boeing’s allies in Congress also were caught short. After the Pentagon’s decision, the office of U.S. Representative Jay Inslee, a Washington Democrat, sent a news release with the wrong subject heading, “Jay Inslee on tanker, ‘Decision will not stand.’” A spokesman, Robert Kellar, replaced it with the correct heading, “Best Choice Made for Next Gen Tanker.”

“We honestly had no idea what was going to happen,” said Kellar, who had prepared statements for both possibilities.

To contact the reporter on this story: Will Daley in New York at wdaley2@bloomberg.net

To contact the editor responsible for this story: Ed Dufner at edufner@bloomberg.net

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