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Last Updated: Thursday, 21 June 2007, 23:03 GMT 00:03 UK
Rivals eye Boeing's US airforce deal
By Jorn Madslien
Business reporter, BBC News, Paris air show

Parked discreetly at the end of the airfield - beyond crowd pleasers such as the giant Airbus A380 super-jumbo - there is a large military aircraft that is unlikely to attract much attention as the Paris air show opens to the public this weekend.

KC-30 tanker
The KC-30 is bigger and more fuel efficient than its rival

Yet, despite its plain exterior, the KC-30 aerial refuelling tanker could soon change forever the way huge defence contracts are being negotiated.

The aircraft is the result of a joint venture between US defence group Northrop Grumman and the Franco-German aerospace giant EADS.

The two companies have teamed up to beat incumbent rival Boeing to a $40bn (20bn) US Air Force tanker contract, the first of three orders worth $100bn in total.

"This clearly changes the competitive paradigm," declares Tom Enders, co-chief executive of EADS.

Market entry

The KC-30 bid, led by Northrop Grumman, should be seen in the light of a procurement scandal in 2003 that culminated in the sacking and arrest of Mike Sears, the chief finance officer of Boeing's defence division at that time.

Following the scandal, a tanker contract with Boeing was ripped up and the company was fined more than $600m.

But the fine was small compared with the potential long-term cost of the disaster, given that it paved the way for the aerospace giant's arch rivals Northrop Grumman and EADS to enter the game.

Tom Enders, joint chief executive, EADS
We didn't have a tanker business five years ago
Tom Enders, co-chief executive, EADS

"We didn't have a tanker business five years ago," observes EADS's Mr Enders. "We started the business from scratch."

So far, EADS has enrolled the UK, Australia and the United Arab Emirates (UAE) into its tanker programme, and Saudi Arabia is said to be close to placing an order for the military version of the Airbus A330.

EADS eagerly points out that its more modern KC-30 tanker both drinks less and carries more fuel than the well-established Boeing KC-767 Global Tanker, plus its capacity to carry crews and cargo is greater.

Crucially, the KC-30 is also a relatively risk-free venture for EADS, since costs have been curbed by modifying an Airbus plane rather than developing a new aircraft from scratch.

This also means it can rival the price of the KC-767, a modified version of a Boeing cargo plane.

Fight back

Boeing has responded to the rival bid by upgrading its KC-767.

"The KC-767 Advanced Tanker will...revolutionise mobility operations," James Albaugh, chief executive of Boeing's defence division, said in April.

Defence experts say it could be tricky for a newcomer to match Boeing's tanker expertise - not least its established aerial refuelling system, which enables jets to fly side-by-side with the tanker while filling up.

Ron Sugar, chief executive, Northrop Grumman
The US is the largest market for defence, but for aerospace and aircraft there's a big market beyond the US as well
Ron Sugar, chief executive, Northrop Grumman

"Boeing has been designing, building, modifying and supporting tankers for nearly 75 years," the company says in a statement.

Boeing is also eager to stress that losing the tanker contract could cost US jobs.

"This KC-767 Advanced Tanker will support more than 44,000 American jobs and 300 suppliers," said Mark McGraw, vice president, Boeing Tanker Programs, earlier this year.

Nevertheless, EADS and Northrop Grumman are so confident they will win the deal, that they have just started final assembly of the plane and claim they will be able to deliver it to the US Air Force in November, a month after the scheduled awarding of the contract.

For a while, there were doubts about whether the KC-30 would even be considered by the US Defence Department, though in the end Northrop Grumman's lobbying proved fruitful.

"The free market place is the most important thing at work here," says Northrop Grumman's chief executive, Ron Sugar.

"We made a very careful decision to enter the programme only when we believed that the process was going to ask for full, fair and open competition.

"We're in it to win."

Global business

Boeing KC-767 refuelling another plane
Boeing has a long tradition of refuelling US airforce planes

Yet, it is noteworthy that the US pitch is led by the US partner behind the KC-30.

"In the rest of the world, EADS is the prime contractor," acknowledges Northrop Grumman's Mr Sugar.

The partnership should thus enable both firms to grow in markets that have previously been tricky to get into.

EADS is pitching for the tanker contract as part of its efforts to gain market share in the US, where Mr Enders suggests it might "look for acquisitions...that fit our business model".

For Northrop Grumman, the EADS deal should help it gain outside the US.

"The US is the largest market for defence, but for aerospace and aircraft there's a big market beyond the US as well," points out Mr Sugar.

"Our business flourishes if we have as few barriers as possible on both sides of the Atlantic."

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