European Institute

In Europe, Boeing Win Seen As New Sign of Pentagon "Buy-American" Bias

Northrop Grumman’s withdrawal from the race to sell a new in-flight refueling tanker to the U.S. Air Force is a huge blow to the hopes of its partner in the venture, EADS, the European aircraft consortium. Its design -- based on a modified Airbus – was initially awarded the contract for the $40 billion deal. But Boeing got the Pentagon to re-run the competition with new specifications, which the U.S.-European team saw as tilted unfairly to Boeing.

The collapse of the joint bid will trigger political fall-out in Europe, prompting officials and the media there to castigate “buy-American” protectionism. EADS’ manufacturing raised political debate in the U.S. about jobs: EADS would have given jobs to its U.S. sub-contractors, but Boeing has major manufacturing facilities in the U.S. Since the decision to quit came from the U.S. partner in the joint venture, there will be questions about the Pentagon’s handling of the controversial venture.

But the outcry in Europe, even echoed by some U.S. voices, is unlikely to significantly worsen the already-lame state of transatlantic defense-industrial cooperation. Reactions among European arms manufacturers was characterized this way by an industry insider: “they felt that their plane was better and lost out due to unfair calls by the referee, but they felt no ‘entitlement’ to such a big contract in such hard times,” according to a European industry analyst. “They will be back for the next contract, a reconnaissance helicopter,” he said, asking not to be identified for his candid view on the sensitive subject.

Finally ending a multi-year contest over the 179-plane contract, Northrop announced its decision March 8, and EADS said that it would not pursue the bid on its own. Now the contract seems set to go this team’s rival, Boeing, which emerged as a sole contender.

The outcome – leaving Boeing in an unchallenged position as the dominant supplier to the Air Force -- runs counter to the Obama administration’s professed goal of promoting competition in Pentagon procurement as a way of cutting costs in the defense budget. Many analysts say that Boeing will now be able to charge a higher price because it is left as the only bidder on the contract.

Northrop said it would not lodge a formal protest against the Pentagon’s handling of the process, a move that will stifle most of the potential domestic political protests about the loss of prospective jobs in southern States – jobs that will now be mainly generated around Boeing’s operations around Washington State.

In Europe, however, the result is also liable to create obstacles for Pentagon hopes of seeing its new multi-role fighter-bomber, the F-35, become a standard warplane for U.S. allies.

In the hours after the Northrop announcement, European governments immediately voiced anger at what they see as Pentagon bias blocking the emergence of a “two-way street” in the trans-Atlantic arms market. The EU Commission warned Washington of negative consequences for future European defense buys from the U.S. if evidence emerges that the handling of the deal favored a U.S. company. In an indirect rebuke to Northrop Grumman, the American partner of EADS, the Commission said it was “highly regrettable” that their joint bid had been withdrawn.

The value of the tanker contract could ultimately amount to $100 billion as the in-flight refueling fleet – the first new one in America since the Eisenhower administration – grows in size over coming decades. As the New York Times reported the story (on an inside page), “the U.S. effort to obtain new tankers has been going on for nearly a decade, and it has come to represent much of what lawmakers say has gone wrong in military contracting. The Air Force’s first effort collapsed in 2004 amid corruption charges involving a proposed leasing deal with Boeing. Northrop Grumman and EADS then won a competition in 2008, only to have the award overturned after Boeing protested that the evaluations had been unfair.

“The Air Force began its third effort last September, and Pentagon officials promised that the rules would be clear enough to steer the contest ‘straight down the middle.’ But analysts said the service’s numerical scoring system seemed to favor Boeing’s plans to offer a smaller plane, which could save billions in fuel costs over the next 40 years. What had been the strength of the previous Northrop and EADS bid — a plane that could carry more fuel and cargo than the Air Force had sought — became a liability as the competition turned into a shootout over which bidder could offer the lower price.

“Northrop’s chief executive, Wesley G. Bush, said in a statement on Monday that the request for bids ‘clearly favors’ Boeing’s smaller plane, even though Northrop felt that its larger plane represented ‘the most capable tanker for the warfighter.’ ”

Mr. Bush, who became the company’s chief in January, has placed more emphasis on improving Northrop’s profit margins than on increasing revenue. His decision on the tanker bid will not endear his company to potential European partners on future projects liable to provide controversial at the Pentagon.