Northrop's $35 Billion Tanker Win Is `Game-Changer'

By Edmond Lococo and Tony Capaccio

Northrop Grumman Corp., the world's largest warship builder, stormed back to reclaim its aircraft- manufacturing roots with a surprise win in a $35 billion U.S. Air Force contest over heavily favored Boeing Co.

The Air Force contract to build as many as 179 aerial refueling tankers may be as important to Northrop historically as the contract for the B-2 Spirit stealth bomber was in the 1980s, Chief Executive Officer Ronald Sugar said in an interview yesterday. The new tanker plane, based on the A330 airliner built by Boeing rival Airbus SAS, is also a victory for European Aeronautic, Defence & Space Co., which has won access to a market dominated by Boeing since World War II.

``This is a big deal and in some ways it could be considered a game-changer,'' Sugar said. ``This is a major systems- integration job.''

Founded in 1939 by John ``Jack'' Northrop, the company in its early years built aircraft including the N-3PB bomber and P- 61 Black Widow fighter. As Lockheed Martin Corp. and Boeing became the Air Force's largest suppliers of combat and transport aircraft, Northrop evolved into the world's largest warship builder through the acquisitions of Litton Industries Inc. and Newport News Shipbuilding Inc. in 2001 and 2002, respectively.

Northrop and EADS, Airbus's owner, won an initial $1.5 billion contract yesterday for development and design of four test tanker aircraft and five options valued at $10.6 billion to build 64 aircraft, the Air Force said in a statement.

A330 Tanker Customers

The new aircraft, called the KC-45A will replace Boeing- built KC-135 tankers flown by the Air Force since 1956. The model will use the airframe of the 253- to 335-seat, twin-aisle A330 built by Toulouse, France-based Airbus, the world's biggest maker of commercial aircraft. Saudi Arabia's government placed an order for another military-tanker version of the A330 on Jan. 3, and the United Arab Emirates signed a purchase order on Feb. 25.

``For Northrop, it's a nice program win, but for EADS it's a major breakthrough in the most important defense market in the world,'' Richard Aboulafia, an aviation consultant with Teal Group in Fairfax, Virginia, said in a Feb. 25 interview.

The contract comes as Paris- and Munich-based EADS struggles to restore profit at Airbus following delays with developing the A380 and A350 airliners, coupled with a decline in the dollar against the euro.

``After recent difficulties, EADS has brilliantly succeeded by landing a record order, and moreover in one of the most difficult and demanding defense markets,'' French President Nicolas Sarkozy said in a statement today.

Alabama Factory

If all contract options are fully funded, the tanker program would become the largest Pentagon project since 2001, when Bethesda, Maryland-based Lockheed won the contract to build the Joint Strike Fighter. EADS promised to build an assembly plant in Mobile, Alabama, for the tankers and freighter versions of the A330 if its team won the contract.

``It's just a staggering win for Northrop,'' said Jim McAleese, an industry consultant with McAleese & Associates in McLean, Virginia. ``This marks the re-entry of Northrop as an aircraft mass-production prime contactor for the Air Force. Historically, those roles have been held by Lockheed and Boeing. Northrop had a reputation as a specialty aircraft maker: high intensity but low-volume demand aircraft like the B-2.''

Nuclear Vessels

The B-2 first flew in 1989, and only 21 were built at a cost of about $1.16 billion each. Northrop's shipyard acquisitions made the Los Angeles-based company the only producer of Nimitz- class nuclear-powered aircraft carriers and one of two builders of Virginia-class nuclear submarines.

The announcement came after the close of U.S. and European markets. Northrop rose $4.79, or 6 percent, to $83.40 in after- hours trading. Chicago-based Boeing shares fell $3.04, or 3.7 percent, to $79.75. EADS shares fell 61 euro cents, or 3.4 percent, to 17.43 euros in Paris yesterday.

Boeing was the unanimous pick to win in a Bloomberg News analyst survey in February.

Assistant Secretary of the Air Force for Acquisition Sue Payton took issue with the notion there was a favorite for the contract.

``There are no underdogs out there,'' Payton said. ``We have very strong industrial partners. We had two very competitive offers. Northrop Grumman clearly provided the best value to the government.''

Boeing said it hasn't decided whether to protest the decision. The company won't learn the detailed reasons for its loss until a March 12 meeting with the Air Force.

Boeing `Review'

``Our next step is to request and receive a debrief from the Air Force,'' Boeing said in a statement. ``Once we have reviewed the details behind the award, we will make a decision concerning our possible options, keeping in mind at all times the impact to the warfighter and our nation.''

Because of the high stakes involved, nine of the respondents in the Bloomberg survey said they expected the losing bidder to file a protest against the tanker award.

Efforts to replace the fleet have been held up since 2004, when a $23 billion plan to lease and buy 100 new aircraft from Boeing collapsed amid ethical violations by a company executive and an Air Force official.

Today's order is the first step to replacing more than 500 KC-135 aircraft. Two more competitions will be held to replace the rest of the fleet.

``These tankers will provide the air-bridge for the United States to defend our national interests and assist our friends anywhere on the planet,'' Secretary of the Air Force Michael Wynne said. ``Today's announcement is the culmination of years of tireless work.''

Different Approaches

The two bidders took different approaches to the contest, with Northrop and EADS offering a larger plane to carry more fuel, cargo or passengers, and Boeing offering an aircraft closer in size to the current model.

The KC-45A, previously named the KC-30, is 192 feet (56 meters) long and carries 250,000 pounds (113,000 kilograms) of fuel, 24 percent more than the 202,000 pounds that Boeing's 159- foot KC-767 can haul. The current tanker is 136 feet long and carries 200,000 pounds of fuel.

EADS gets two thirds of its revenue from Airbus. Aircraft- industry purchases are written in dollars, while most of Airbus's costs are in euros. The dollar fell 11 percent versus the euro in 2007, reducing revenue converted into the European Union common currency. It's now near a record-low $1.52 per euro.

Airbus, partly in response to currency shifts, introduced a spending-cut program in February 2007 with the aim of saving 2.1 billion euros ($3.2 billion) in costs by 2010. Nick Fothergill, a Lehman Brothers analyst, estimates savings need to total 3.5 billion euros as the U.S. currency has slid further.

Both EADS Chief Executive Officer Louis Gallois and Airbus CEO Tom Enders have said Airbus's best shot at living with a weak dollar will involve for moving jobs to the U.S. or to countries with lower costs than Europe. EADS has been building its position in the U.S., where it had little presence in the military area until two years ago.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aav8PMtznRLY&refer=home