Analysts thought that EADS (EAD.F), purely on the grounds of technology and capabilities, should have won the competition, yet they still lost to Boeing (NYSE: BA). Why you ask? Some will contend that it was a ‘Buy America’ decision but although the companies have yet to be briefed, here is what I expect they will say -- cost and Airbus’ refueling accident roughly about a month ago were the deciding factors.
Budgets are much tighter than anticipated and Congress is putting pressure to reduce expenditures. Any dollar committed at this time by the DoD is one less dollar they have to do other aspects of its mission. Conserving and allocating limited resources in a more prudent fashion will be a key factor in future DoD awards.
According to Defense News, the Airbus plane is larger and burns more than a ton more fuel per flight hour. The additional size would also require changes to aircraft hangers and runways. In comparison, the Boeing plane, an older design comparable to what the Air Force currently flies, likely means fewer service surprises as compared to a new design in which problems may surface later.
In addition, EADS, a European firm, planned to build a manufacturing facility in Alabama, hiring nearly 50,000 people directly and using suppliers throughout the U.S. in order to get around the ‘Buy America’ sentiment. However, some likely would have seen this as a risk to the program. The increased likelihood that a new facility, with new employees, and operating under a new management system could create programmatic risk to the program and hence, cost overruns was also likely a factor.
From the Boeing perspective the win keeps its 767 production line going for another decade. Almost as importantly, it keeps EADS from getting a manufacturing foothold in the United States which would enable them to more easily compete against Boeing in the future.
So after a decade-long battle for this contract, which began with a contract to lease Boeing 767 aircraft in 2001, the soap opera is finally over. The first 17 KC-46A tankers designed to replace Eisenhower/Kennedy-era aircraft are to be delivered by 2017.
For investors, the decision may be a win for Boeing from a business standpoint but overall it is liekly just a wash. Revenues from this program will offset that from the C-17 Globemaster which is being eliminated by the Air Force. Pratt & Whitney (NYSE: UTX) will benefit as the engine supplier for the 767 and will a number of aerospace parts suppliers. Ultimately, for many investors, an ETF such as the Powershares Aerospace & Defense (NYSE: PPA) is the easiest way to get exposure to the sector.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: I manage the SPADE Defense Index (NYSE: DXS), an investment benchmark for companies operating in the defense, homeland security, aerospace, and government space sector. The index has been licensed to Powershares and is used as the underlying index for their Defense ETF, (NYSE: PPA)