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Boeing Wins Tanker Bid a Second Time (BA, EADSY, LMT, NOC, GD, UTX)

After a second do-over, Boeing Co. (NYSE: BA) has once more bested Airbus maker EADS (OTC: EADSY) in the bidding war for a new US Air Force tanker. But the battle could go into overtime if EADS decides to appeal, and it’s not out of the question given the outlook for defense spending in the years ahead.

It has taken 11 years, a bribery scandal that sent a Boeing official to jail and cost the company’s former CEO his job, and a third round of bidding due to irregularities in the first re-bid. The tanker contract may be the last of the big-time defense deals for a long time, and that’s what makes it so important.

The US Congress and the Defense Department are starting to cut back on defense spending, which does not augur well for defense contracts like Boeing, Lockheed Martin Corp. (NYSE: LMT), Northrop Grumman Corp. (NYSE: NOC), General Dynamics Corp. (NYSE: GD), United Technologies Corp. (NYSE: UTX), and others. The Pentagon has already cautioned defense contractors against mergers, or at least mergers that are considered without Pentagon input. That leaves only organic growth to boost the companies’ revenues and profits, and those will be under pressure as defense spending decreases not just in the US, but globally.

The nominal price tag on the tanker contract is $35 billion, but as much as three times that amount is at stake given maintenance and upgrades over the life of the tanker. The current Air Force tanker has been in service for more than 50 years, and that’s a lot of incremental income for the builder.

EADS has 10 days to file a protest following a meeting with Air Force officials on February 28th at which time the European company will be briefed by the Air Force on the results of the bidding. A ruling on the protest could take weeks or months, and if EADS prevails, there could be yet another round of bidding.

The Defense Department would like very much to avoid that. The new tanker, which will be designated the KC-46A, needs to get off the starting line if the full order of 179 planes are going to get built. As Pentagon budgets shrink, that number could fall. As it is, the win for Boeing immediately pays just $3.5 billion for delivery of the first 13 planes, which are scheduled through 2027.

And given Boeing’s headaches getting its new passenger planes out the door, there should be concern about the company’s ability to deliver the new tanker on time and on budget. If Boeing misses deadlines and busts budgets, it’s reasonable to expect that the Congress and the Pentagon will be reluctant to go ahead with the full complement of tankers.

Boeing’s shares are up about 3% this morning on heavy volume.

Paul Ausick

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