May 1, 2010  

Eyes on the prize

Tanker bid would support EADS’ widening ambitions for U.S. market

The Air Force’s KC-X program should instead be called the KC-360, for all the twists, turns and about-faces bringing parties full circle three times now.

In February, Northrop Grumman followed through on its threat to withdraw its bid offering the KC-30 tanker with its partner, EADS. This appeared to give Boeing a free ride to obtaining the contract for its KC-767 NewGen while striking a major blow at the heart of the EADS strategy to increase its business with the Defense Department.

EADS was relying on the tanker contract to be a major breakthrough in its goal of becoming a major DoD contractor; to allow the establishment of a U.S. production location in Mobile, Ala.; and to enable EADS and its subsidiary Airbus to significantly broaden its dollar cost-basis as a hedge against the euro. Northrop’s withdrawal seemed to indefinitely dash EADS’ hopes on all counts. Only a day or two after the Northrop decision, EADS CEO Louis Gallois said EADS would not bid alone. At the same time, Gallois reaffirmed that EADS wants to broaden its U.S. footprint and increase its DoD business.

Within days of Gallois’ statement, stories emerged that EADS might be willing to bid on the KC-X after all and was looking for another partner — this time as a subprime, the position EADS held to Northrop — and that EADS sought a 90-day extension to the May 10 deadline to submit a bid.

EADS was expected to make a decision about mid-April on whether to proceed with a bid.

What changed to prompt EADS to reconsider its initial posture?

A key development was the Pentagon declaration that EADS now was a “qualified” defense contractor, as defined by DoD rules. When EADS partnered with Northrop, with the latter as the prime contractor, EADS was not a contractor “qualified” to be a prime. Since then, EADS has supplied 103 light utility helicopters to the Army, National Guard, Navy and U.S. Customs and Border Protection. EADS North America delivered the helicopters on time and on budget, using a production model somewhat similar to that proposed for the KC-30: Initial build was in Europe, followed by the establishment of an assembly line in Columbus, Miss., with components built in Texas and Mississippi. The services have an option for 240 more Lakota helicopters. This performance earned EADS the “qualified” status.

The Pentagon also indicated that it would be willing to grant the 90-day extension to enable EADS to prepare a bid, and it began providing EADS information previously provided Northrop as a prime.

Whatever EADS decides on the KC-X , the company still wants to increase its DoD contracts and U.S. footprint.

Sean O’Keefe, chief executive officer of EADS North America, told AFJ that, in addition to the possibility of expanding its UH-72 Lakota order with the 240 options, EADS will bid on the Armed Reconnaissance Helicopter (ARH), for which orders could exceed 350. Bell Helicopters had initially won the contract, but cost overruns prompted DoD to cancel it. EADS will be up against, among others, Boeing in the re-compete.

The ARH is a derivative of the UH-72 airframe, and “we have production capacity in U.S.,” O’Keefe said. There are no presumptions of venue in the request for information, but O’Keefe said, “We are acting as if we should, can and will” build the ARH in the U.S. if EADS wins the contract. The supply chain, logistics and servicing would be done in the U.S. But it could be a year or more before the request for proposals (RfP) is issued.


For all the complaints and criticisms over the prospect of “outsourcing” the KC-X to a “French” company, EADS already supplies critical components to DoD and Homeland Security Department with the possibility of more. EADS North America also has several Homeland Security contracts: The Border Patrol uses 10-12 UH-72, and EADS provides helicopters, the HC-144 fixed-wing cargo aircraft (a version of the C-235 from CASA, a Spanish subsidiary of EADS) and radar on surface vessels for the Coast Guard. Through an EADS North America company called PlantCM, it also provides a variety of 911 security notification systems for one-third the capacity of the national 911 system.

EADS today has about $1.5 billion to $1.6 billion in direct sales to DoD with a goal of $10 billion in a decade through organic growth and acquisitions. O’Keefe sees helicopters, more HC-144 sales to the Coast Guard and the tanker as leading organic growth possibilities. Acquisitions of mid-cap companies are focused heavily toward providing services for the kind of platforms EADS builds. In this, the EADS strategy is very similar to rival Boeing, which has invested heavily in growing its services businesses.

“The more and more penetrating we are within this market, the more we can do service and maintain readiness rates for the Navy, Coast Guard and Army,” O’Keefe said. He strives for one-quarter of the $10 billion from the services industry.

While EADS selected Mobile as the site for the KC-30 assembly plant for political reasons as well as a business-friendly climate, O’Keefe said acquisitions may not necessarily be in states that are already politically friendly to EADS — something that is often viewed as an important criteria by DoD contractors seeking to curry political favor with local jobs distribution.

“Location is not irrelevant, but it is not the first or second factor we look at,” O’Keefe said. “It is based on what capacity can bring benefit to core competency.”

In selecting Mobile, EADS considered what the state provided in incentives; the presence of an Airbus engineering center; existing servicing of Coast Guard assets there; and generally that Alabama is, in O’Keefe’s words, an attractive state in which to do business. State laws, compliance rules and structured framework made Alabama “friendly” to EADS, O’Keefe said. “They are very progressive, no doubt about it.”

EADS has a critical component on the Lockheed Martin lead Littoral Combat Ship (LCS) with the TRS 3D radar. If the Navy selects Lockheed for the follow-on LCS over General Dynamics, Lockheed could build 65 LCSs, all with the EADS TRS 3D radar. The radar unit for the lead ship was built in Germany, but if Lockheed wins the contract, O’Keefe said the plan is to build the radar in the U.S.

EADS North America also supplies surface missiles to the Pentagon.


But the tanker remains the crapshoot for dramatic expansion of EADS’ ambitions with DoD. Although EADS may still decide not to proceed with a bid, it’s worth noting some of the thinking that led to reconsidering going for the $35 billion contract for 179 tankers.

O’Keefe said the Pentagon made it clear that EADS would be given time to make its own assessment rather than being expected to merely step into Northrop’s shoes.

“We laid out what we need to submit a proposal: access to all information Boeing and Northrop had as prime contractors,” O’Keefe said. “Is there a willingness to help us begin at the beginning, or are we going to walk in in the middle of the movie? DoD says it will enable us to begin at the beginning.” And, according to O’Keefe, it has, acting “in good faith” to provide data.

There was a national intelligence review to ensure EADS can handle material and handle integration, which Northrop previously was going to do, and all the relevant materials were supplied to EADS North America by the end of March.

EADS still believes the fundamental RfP emphasizes the value of a “smaller, less capable airplane, but we are gaining greater understanding of how evaluation will work and what they need,” O’Keefe said.

Although there had been speculation Northrop would file a protest over the final RfP — one in fact had been written — O’Keefe said EADS had no plans to do so.

If EADS decides to bid, O’Keefe said two basic factors weigh heavily in this decision: that it has an aircraft and much of the risk reduction work has been completed.

“We have an aircraft today that is largely what we will offer, it is test flying, all the risk and challenge of integration of fuel systems, interactivity, cockpit requirements, cargo, fuel offload, we’ve got it,” he said.

O’Keefe offered to bring the KC-30 to Seattle’s Boeing Field to demonstrate the airplane if the launch customer, the Royal Australian Air Force, would permit it.

“We have a significant reduction in risk exposure versus 24-36 months ago,” O’Keefe said of the overall program.

Secondly, O’Keefe believes that “this looks a lot more [possible] when you get past RfP phase. There are attributes and aspects that can accrue to advantage to operate at [maximum] range and to offload fuel at maximum capabilities, which results in cost reduction the way this model is constructed. [Boeing] has a great-performing simulation, which has a great deal of risk associated with it.”

SCOTT HAMILTON is a consultant with Leeham Co. www.leeham.net.