Politics Stalling Tanker Joint Bid

Northrop Grumman Corp. and the European parent of aircraft maker Airbus are eager to form a partnership to bid on a possible Pentagon aerial refueling tanker contract, but their negotiations are stymied because of political concerns, analysts and industry officials said.

The Century City-based defense contractor is not yet willing to team up on what could be one of the largest military contracts in recent years, sources close to the negotiations said.

Taking a European partner could be highly unpopular, particularly in Congress, at a time when the U.S. and Europe are in a trade dispute over allegations of subsidies paid to Airbus and its American rival Boeing Co.

An agreement would put Northrop on “pretty thin ice, politically,” said Paul H. Nisbet, an aerospace analyst at Newport, R.I.-based JSA Research.

Last year the Air Force canceled a $23.5-billion deal to buy 100 modified Boeing 767 jets for a new aerial fleet of refueling tankers. The deal was scuttled after a former Air Force procurement official admitted to giving Boeing favorable terms on several deals, including the tanker contract.

With the prospects of the Air Force reopening the tanker contract to a new round of competition, Europe’s largest defense contractor, European Aeronautic Defense & Space Co., has been heavily courting Northrop to be its partner. The head of EADS’ North American subsidiary is Ralph Crosby, a former Northrop executive who once headed its El Segundo operations.

Northrop Chairman Ronald D. Sugar has been intrigued by the possibility of a partnership with EADS and is convinced that EADS’ proposal to build and modify Airbus A330 commercial jets could beat out Boeing’s 767 in a tanker competition, a source familiar with the discussions said.

Northrop has declined to comment on the possibility of a partnership with EADS. A Northrop spokesman said that if the Air Force reopened the tanker contract, the company would “assess all the options and respond accordingly.”

Several drafts of an EADS-Northrop partnering agreement have been written, but Northrop has left an “escape hatch” by which it can walk away if the partnership becomes too hot politically, said Richard Aboulafia, an aerospace analyst for Teal Group.

An Air Force official said it might be late summer before the service received two studies on whether the aerial tanker fleet should be replaced or simply refurbished.

Recently, several members of Congress have balked at awarding a contract to a foreign-based company. EADS, headquartered in the Netherlands, owns 80% of Toulouse, France-based Airbus, which in 2003 surpassed Boeing to become the world’s largest commercial aircraft maker.

Meanwhile, the U.S. and Europe are embroiled in a major trade tussle over government financial aid given to Boeing and Airbus, accusing each other of providing improper subsidies for developing new commercial aircraft.

With a transatlantic row escalating, some House members last month inserted a provision in the Pentagon’s defense budget prohibiting the military services from awarding any contract to foreign companies accused of getting government subsidies.

“I don’t see Congress allowing this kind of a [tanker] contract to be awarded to a foreign company, let alone one based in France,” said Scott Hamilton, an aviation industry consultant.

Nevertheless, some Northrop officials think the gains from that partnership could outweigh any potential political flak, believing that the political heat could cool once the tanker contract competition begins, said Loren Thompson, a defense policy analyst for Arlington, Va.-based Lexington Institute.

“They know this is politically touchy but they think they can offer the Air Force an aircraft that costs less and does more,” he said.

In addition, Thompson estimates that Northrop’s portion of the tanker contract could be worth $10 billion or more.

The Airbus A330 is a bigger plane with more range and fuel capacity than the Boeing 767, but it can’t take off and land on unimproved and narrow runways like the 767, which could be an Air Force requirement. And EADS is trying to develop the technology necessary to refuel certain U.S. military planes while airborne.

The Air Force could request that the tankers serve multiple purposes, including carrying cargo and military electronic equipment with radars and sensors for surveillance. Those types of electronics and computer systems have helped make Northrop one of the nation’s largest defense contractors.

Another wild card is that if Northrop partners with EADS it could damage its relationship with Boeing, which contracts out military work to Northrop in dozens of Pentagon programs. For instance, Northrop makes major components for Boeing’s F/A-18 fighter jets, including the center fuselage.

It’s not unusual for large companies to be both partners on one program and competitors on another.

But Boeing is particularly sensitive about the tanker competition since it has held a virtual monopoly on military aerial tankers for decades. Indeed, some Boeing executives have privately grumbled at Northrop’s ties to EADS.

Meanwhile, EADS has been enticing state officials with the prospects of assembling the tanker plane in the U.S.

Although the Air Force has not yet made a decision to buy new tankers, EADS plans to announce on June 22 where it would want to build a $600-million tanker assembly plant. The four finalists are airports in Mobile, Ala., Charleston, S.C., Kiln, Miss., and Melbourne, Fla., where Northrop develops surveillance and battle management systems for aircraft.

Northrop shares closed Friday at $56.61, up 23 cents.