The Air Force Tanker Deal

The next generation of Air Force in-flight filling stations is slated to ride on the wings of an airplane designed in France. A consortium of Northrop-Grumman and Airbus beat Boeing for the contract to supply the next generation of Air Force tankers.

Critics decry a job loss from outsourcing, fret at dependence on foreign suppliers for the capacity to fuel our strategic global reach, and don't want their tax dollars heading toward Europe. But it is worth at least considering the view that the brass are planning a canny game of strategy, looking to maximize bargaining leverage in procuring future generations of weapons.

Boeing is the American national champion airliner manufacturer, fighting a tooth and claw battle with Airbus for survival in the civilian airliner business, where Boeing "bets the company" while Airbus has received forgivable government loans for development of new generations of planes. Symbolically, it troubles many hearts that a version of the highly successful Airbus A330 airliner will serve in the role for which Boeing wanted to use the older and smaller 767 airframe.

Boeing challenges the decision

Boeing is crying foul over the decision, asserting that the criteria were changed from the original request, that the changes benefitted Airbus, and that it was forced to adopt unfavorable accounting practices in its own bid. Boeing has asked the Government Accountability Office to conduct a review. Reuters reports:

Boeing was never even told of certain changes in requirements, [Boeing tanker programs manager Mark] McGraw said on a conference call. He added that the Air Force never indicated that Boeing's 767 airframe, which is smaller than the Airbus A330 airframe proposed by Northrop, was unsuitable for the competition.

"It is clear that the original mission for these tankers -- that is, a medium-sized tanker where cargo and passenger transport was a secondary consideration -- became lost in the process, and the Air Force ended up with an oversized tanker," said McGraw.

Despite those misunderstandings, Boeing said it scored identical marks to Northrop on the five main criteria of the competition, contradicting Air Force officials who have said that the Northrop bid was superior on all but one of the criteria.

Defenders of the deal say there are operational advantages to the Airbus tanker design, and note that:

Since 2001, Boeing and EADS have competed for tanker contracts in six countries outside the U.S. EADS has won four of those competitions-in Britain, Australia, Saudi Arabia, and the United Arab Emirates-for a total of 25 planes. Boeing has won in Japan and Italy, where it had deep political support thanks to key local contractors, for a total of eight.

Fuselage sections, wings, and tails will be shipped in to a new facility in Mobile, AL, and the airframes will be assembled in the United States. In addition to assembly, which accounts for 8-10% of the value added, American jobs will be created in suppliers and services, totaling 60% of the value added of the tanker order. The estimate of spin-off jobs was almost doubled by Northrop-Grumman yesterday to 48,000 by using a multiplier supplied by the Department of Labor formula.

Both sides believe passionately that the national interest is served by their positions.

Buying from a duopoly

In an ideal world, defense dollars generated by American taxpayers might always stay at home. But those who spend military budgets face a world in which there is only one potential American supplier of airliner-based aerial platforms. Competition for Boeing, to keep the procurement process vigorous, must come from the only other major player, Airbus. In 2003, a scandal  erupted over an earlier plan for Boeing to lease a fleet of 767-based tankers that was criticized as costing billions of dollars extra, thanks to the lease terms. Former Air force procurement officer Darleen Druyan ended up with a jail sentence and the Boeing CFO and CEO both lost their jobs in the matter.

Like airlines, the Air Force desperately needs at least two healthy potential suppliers of airframes for airliner-based transports and tankers. The dangers of relying on a monopoly supplier are all too evident in the wake of the scandal a few years ago. While current jobs manufacturing the new tankers are important, so is the question of the effect of this contract on future competitive dynamics.

Not only will a new final assembly facility be erected in Alabama, many other contracts will be let for American suppliers to manufacture components, assemblies, and other specialty equipment to make the airliner shells into functional tankers, and to supply services. Some of these contracts will go to new entrants in the defense aviation business. They will provide the competition for Boeing that was once provided by the likes of McDonnell-Douglas before it merged into Boeing. (An earlier wide body tanker, the KC-10 Extender, was adapted from the DC-10 airliner made by Douglas Aircraft, Boeing's former domestic competitor.)

Airbus and its parent EADS are already on the path to outsource their own European manufacturing jobs to less expensive locations, especially locations within the dollar zone. The sharp rise in the value of the euro versus the dollar has already forced Airbus to adopt the "Power 8" plan to cut manufacturing costs in part by seeking lower-cost manufacturing locations. A new Airbus airliner factory is being established in China. The Mobile, AL facility will join the Tianjin, China factory in the nightmares of European assembly workers, while their unions realize that future bargaining sessions will include the implicit or explicit threat to move more jobs overseas should wage costs be excessive.

It is even possible that once the tanker order is completed, other assembly work for Airbus could be undertaken in Alabama. Demand for wide body airliners keeps growing along with the rise of India, China, and the Middle East as economic powers generating enormous demand for air transport. Currently splitting that market with Boeing, and desirous of the foreign exchange rate advantages, as well as the political advantages of an American production base, Airbus executives are unlikely to rule out such a future course.

The outsourcing danger facing European Airbus workers is also the insourcing opportunity facing American workers in Alabama and many other states. That might be small comfort to Boeing workers in Washington State, but that is the reality of a globalized aviation industry.

As deal critic John Rosenthal has pointed out, Airbus is effectively under the control of the French and German governments, with their direct and indirect shareholdings. He suggests this raises the danger of them using "leverage" against a future American military operation of which they might disapprove, with their control of a vital link in the projection of power.

This strikes me as extremely unlikely. For one thing, it would end the usefulness of Airbus' large investment in its American defense business. The company would never again get a Pentagon contract, if such leverage were attempted. But even more fundamentally, the United States is not some banana republic unable to manufacture advanced aviation components. If there are any critical parts which could not be readily produced by non-European manufacturers, adequate stockpiles could readily be maintained. Keep in mind that the United States has had a decades-long effort to isolate Iran economically, yet that has not stopped the Iranians from flying Boeing 747 airliners in Iran Air's fleet.

Those who complain that the final assembly work in Alabama is a meaningless sop because the wings, tail, and fuselage sections will be shipped in from overseas, should look closely at the Boeing entry in the next generation wide body airliner competition. The Boeing 787 Dreamliner is being assembled in the United States with wings, tail, and fuselage sections shipped in from overseas suppliers.

That is the reality of the world aerospace industry: production is a globalized operation. The Air Force is well-advised to get the best, most competition-enhancing deal it can for the tanker element of its strike capacity. If the result looks something like the supposed "American" entry in the competition to supply the next generation of civilian airliners, it shouldn't really surprise anyone.

Thomas Lifson is editor and publisher of American Thinker.