Boeing faces questions after tanker loss

Boeing Co – and its shareholders – will be looking for answers this week as to how the plane maker and defence giant managed to lose a $US35 ($NZ44.45) billion tanker contract to smaller and less experienced Northrop Grumman Corp.

The loss won't seriously hurt Boeing's finances, but it does dent its revenue growth plans and is an embarrassing blow for a company that touted itself as the only serious option for building the US Air Force's refuelling fleet.

The setback comes on top of costly delays to the 787 Dreamliner jet, which have dragged down Boeing's stock by more than 20 per cent since last summer, and mis-steps on other defence contracts.

"Any way you look at this, it is part of a gradual erosion in Boeing's defence operations," said Loren Thompson of the Lexington Institute, a Virginia-based think-tank with close ties to the Pentagon.

"Boeing is still coping with the aftermath of the procurement scandal earlier in the decade," he said. "It had great difficulty communicating with its Air Force customer and understanding how its customer was thinking."

In 2004, Congress killed a $US23.5 billion Air Force plan to lease and then buy 100 modified Boeing 767 tankers after a Pentagon procurement scandal that put two Boeing officials behind bars.

Despite that, the Chicago-based company was still heavy favourite to win the contract. Its shares fell 3 per cent after the surprise award to Northrop and its European partner EADS late on Friday afternoon.

The contract is initially worth $US1.5 ($NZ1.90) billion for four development planes, but should be worth $US35 billion overall.

That's not a huge amount when spread out over the long life of the contract, but it's money Boeing wanted as it looks to eke out top-line growth in a defence market which may have peaked.

Boeing's defence unit, based in St Louis, reported sales of $US32 billion last year, but is forecasting no more than $US33 billion this year.

"This is an important programme for us to win," Jim Albaugh, Boeing's defence unit chief, told the St. Louis Post-Dispatch in January, a few weeks after Boeing submitted its final tanker proposal to the US Air Force.

Beyond the immediate financial impact, Boeing faces the loss of a valuable franchise, ending its 75-year involvement in building US Air Force tankers, and puts it at a disadvantage in bidding for future tanker contracts at home and overseas.

The Air Force's decision also spells the end for Boeing's aging 767, which was the basis for its tanker offering, and could mean the end of the line for Albaugh, the man ultimately responsible for the contract bid.

Albaugh, 57, has led Boeing's defence unit since its creation in 2002, surviving the fallout from the procurement scandal that cost Boeing the original tanker contract and led to the resignation of then-CEO Phil Condit.

It was ultimately Albaugh's decision to pitch Boeing's almost-obsolete 767 against the larger and more modern Airbus A330 offered by Northrop and EADS.

Boeing sold only 36 767s last year, compared with 369 Dreamliners, its mid-sized wide-body successor. Boeing has sold more than 1,000 767s over the last 30 years, but now has only 51 more to deliver, meaning the assembly line in Everett, near Seattle, will likely close in a year or two.

The larger and newer Boeing 777 might have been a better proposition against the A330, some analysts said, but Albaugh and Boeing were adamant that its 767 offering was "optimal".

Boeing may yet contest the tanker award, but has so far said only that it is disappointed and will review its options after a detailed briefing from the Air Force.

That meeting is set to happen in 10 days or so, but Air Force officials made it clear on Friday that the competition was carried out fairly, and that Northrop was the clear winner.

Boeing shot itself in the foot with delays in delivering refuelling tankers for Japan and Italy, undercutting the argument that it was the most experienced and reliable supplier, according to analysts.

"It eliminated one of Boeing's key advantages," said Richard Aboulafia, an aerospace analyst at the Teal Group.

Boeing finally delivered its first tanker to Japan in late February, long after its initial target of 2005. It plans to deliver the first of four tankers to Italy this year, two years behind schedule.

As Boeing struggled, EADS won four international tanker contests with the A330-based plane, getting the nod from Britain, Australia, the United Arab Emirates and Saudi Arabia.

But all is not lost for Boeing. The Northrop/EADS team will produce the first 179 US tankers, but ultimately the Air Force will need 500 or so, leaving open the chance to win work on later tranches of planes.

It may even be a blessing in disguise, said Joel Johnson, a defence expert at the Teal Group, if it allows Boeing to concentrate on its booming commercial aircraft business.

"With Boeing sitting on a six-year backlog and desperate to get back on schedule with the 787, losing 20 to 24 planes a year will have little impact," he said.

"Possibly a positive impact on Everett, where they need the floor space."

 

- Reuters