In Defense of Northrup-Grumman's USAF Contract Win

The big fight over the next few weeks will be the USAF decision to award a potential $35b contract to a consortium of companies led by Northrup-Grumman (NOC) and Airbus to build the next generation of vital air refueling tanker aircraft. Tanker aircraft allow our airborne assets to be utilized worldwide. Tanker aircraft also take the politics out of landing rights - unfortunately, they do not take the politics out of Washington.

There is an outcry from the usual political suspects - especially in Washington State and Kansas, that appear to view the military as a jobs program instead of procurement of defense assets of the highest quality at the best price. Granted that the "best price" at times becomes a cost overrun embarrassment, in this case, the decision by the Air Force was both prudent and in keeping with their military procurement guidelines. The fact the Boeing (BA) (the loser) tried to juice contracts to the USAF on this program and others over the years was not taken into consideration - but should have been, which would have made the decision even more decisive.

In an obvious slap at the politicians, Pentagon acquisition officer John Young said that the Air Force followed the bidding rules carefully and there was no obvious reason to protest the contract. "An independent team of Pentagon civilian and military experts tracked every step of the process". The NOC-Airbus consortium proposal was judged to be a superior acquisition in almost every respect. The fact that Boeing tried to use the 767 instead of the 777 fuselage in their proposal was viewed as a poor choice, as the USAF was interested in quantity of fuel to be transported, not just a small measure of fuel efficiency from the smaller aircraft.

The fact is, NOC will be building the plane in Alabama and will create 25,000 jobs in the United States during the production of this aircraft. Companies such as EADS North America, General Electric Aviation (GE), Sargent Fletcher, Honeywell (HON), Parker, AAR Cargo Systems (AIR), Telephonics, Knight Aerospace and others in the US will benefit.

Although this is a big win for NOC, I believe that Northrup Grumman, currently priced at $80.25 per share (with a 52 week range of $71.31-$86.21) is a $100.00 stock based upon its many other facets. With a market cap of $27.1b, this company is a well-respected producer in command and control systems, large scale intelligence information systems, missile defense systems, advanced radar systems, civilian government and public safety information systems,conventional and nuclear powered naval ships (like the recently launched "New York" made of steel from the Word Trade Center), satellites for a wide variety of missions, system sustainment, logistics support and training, high energy laser systems, health information systems and unmanned aerial vehicles. NOC is one of the very best defense contractors and is on the leading edge of military system to protect our country our friends worldwide.

It is my view that regardless of what party wins the White House, aerodefense will command a top priority as adversaries such as China and fanatic minions with access to ever more compact and powerful weapons and WMDs ramp up for power politics not too far into this century. NOC will reward our country and its shareholders with steady profits, earned from a job well done.

Full Disclosure: The author does not hold a position in NOC.

Comments

[Wedge:]

First rate article. In fact it is the only rational one that I've read since this tanker news hit the press. Many thanks.

2008 Mar 05 09:46 AM

[AJ, Washing...:]

I think NATO/EU already uses the EAD tanker. Long term logistical and maintenance will be simplified by having one tanker design. Final assembly of the tankers will be in the US, even though the components may be made in Europe, which is pretty much the same as any commercial large aircraft these days, with parts coming from South Asia. Besides, having EAD in the mix will probably sell additional tankers in Europe and the middle east and even Japan, which will bring the overall procurement cost down. In any case, the Engines will be supplied by GE, and built in North Carolina. Boeing should give it a rest - this was one contract that they knew they would have difficulty getting, ever since the 2002 debacle. Thanks for the great article.

2008 Mar 05 10:05 AM

[User 160400:]

Perfect article. The only reason that Boeing is crying foul is that they have fallen into a comfort zone of which they feel they deserve everything handed to them. Especially when their price is higher and more gets pocketed for themselves... Grow up Boeing start working for the people and the country and stop stuffing your pockets.. Then try again next time..

2008 Mar 05 10:13 AM

[how_many_wh...:]

The author failed to note that the smaller 767 was based on the original requirement by the USAF and the ability of the plane to fit in existing infrastructure. I wonder how much will be spent rebuilding or creating new infrastructure to maintain the Airbus plane. Cost is an important factor but remember EADS is already under scrutiny for accepting government subsidies that helps the European company under bid the competition. They have also shown a history of heavily overrunning cost and schedule on their new A380. EADS said that they are very interested in getting some of the non-commecial U.S. military business...how do you think they proposed their cost; realistically high or low? Let's be honest...The majority of the manufacturing for this aircraft will be done in Europe, by a parent company that told us we could not fly over their airspace during the war. From a national security perspective, this does not seem like a good decision. I wonder how many C17's the French have puchased from the U.S.?

2008 Mar 05 10:14 AM

[Bill_P:]

I'm a Northrop-Grumman employee and would like to add a small bit of insight - Boeing's plan outsourced large portions of the build to foreign countries as well (S. Korea for one).

2008 Mar 05 10:18 AM

[bobbeer:]

So it adds 25000 jobs but because Boeing shuts down a full production line how many jobs arre lost....my bet is that there is a net loss of over 20000 jobs in the US....

2008 Mar 05 10:40 AM

[buyitcheaper:]

I agree with the award. One couldn't possibly award it to Boeing without the taint of scandal. Was it though a possible gift to Sarkozy since he's a new "friend of Bush?" I wonder. I doubt it would've happened with the former head of the country.

2008 Mar 05 02:46 PM

[how_many_wh...:]

From the French Thomson Financial:

According to EADS, the Mobile plant will employ 1,000 workers to produce the airframe of the A330 MRTT (Multi Role Tanker Transport) plane, designated by the USAF as the KC-45A.

Final assembly will employ a further 300.

The main parts of the Aircraft, including the wings, will be made in existing plants in Europe.

2008 Mar 05 05:00 PM

[katec:]

I think this is one of the most prudent decisions that a branch of our Armed Forces have made in quite sometime! Outsourcing has become that way of American businesses......so spread the wealth and if funds are saved then it is to the taxpayer's benefit.

2008 Mar 05 06:17 PM

[boeman:]

What a sweet deal for Europe! Now the US taxpayer can help offset the subsidies that this program originally enjoyed.

2008 Mar 06 09:22 AM

[Woofer:]

As a Seattle resident and long-time Boeing fan, I applaud the AF decision. If you are going to have a bidding process, it needs to be fair. From all indications the EADS-Northrop product meets the requirements best. It is political silly season and the whine is flowing freely.

2008 Mar 07 12:49 AM

[for america:]

Probably the best thing for Boeing is for the contract to proceed and there to be problems surface as they have already. Northup is saying how many jobs are coming to America and Airbus is saying how many job are not leaving Europe....already retraction of statements and confusion is surfacing. My husband flew tankers in 2 gulf wars. The Boeing plane allows pilot override of the computer in difficult flying situations and the Airbus plane does not. Ask the pilots currently flying which option they prefer? I trust our pilots more than the French computer. Bad decision!

2008 Mar 07 11:52 AM

[Pepper99:]

Great piece. It reminded me of a seeming contradiction in logic by Boeing politicians, who argue that foreign government subsidies hurt Boeing’s ability to compete, including on the tanker contract. Did your readers know that Boeing in fact benefits from foreign government subsidies? It is a fact that Boeing awarded the extremely lucrative contract for the wings and other components on the 787 Dreamliner to Japanese aerospace companies, which benefited from low interest government loans ($1.5 billion, according to article from Seattle Times, May 2005). These gov’t subsidy supported companies successfully underbid U.S. companies, including Boeing, for the contracts, sending the work offshore.
This begs the question: Wh, if foreign subsidies are so terrible, hasn’t our government filed a WTO complaint against Japan for providing subsidies? Could it be because it is Boeing who benefits from them?
Maybe this should be classified under “BELIEVE IT OR NOT! Foreign government subsidies… (surprise)… to Boeing! “

2008 Mar 12 10:37 PM

[Pepper99:]

The "For America" writer is mis-informed about Airbus fly-by-wire aircraft. The system can certainly be overridden by the pilot - but you would only do that in extreme circumstances that this pilot cannot imagine.

Another thought about the tanker contract: Why would you want your sons or daughters,your grandchildren and great-grandchildren to be saddled with an airplane, the B767, that no commercial airline in the world wants to buy?
Remember the B767 was designed as an answer to the Airbus A300 & A310, which were the first twin-engine wide body aircraft.
The A330 was an answer to the B767.
The B787 is an answer to the A330. That's the plane Boeing should have offered, instead of an out-dated model.

2008 Mar 12 10:49 PM