EADS hammered as US closes ranks

Thought it was too good to be true when the US awarded EADS a big defence contract? You were right.

by
Last Updated: 31 Aug 2010

The US government has re-opened the tender process for a $35bn contract to provide refuelling tankers for the Air Force – which it’s already awarded to Franco-German aerospace group EADS. However, the original decision provoked howls of dismay from US politicians and (not surprisingly) US rival Boeing, which lost out in the bidding. Now the government has suddenly had a change of heart, and conveniently noticed that ‘significant errors’ were made in the original decision-making process. ‘Picking a non-American firm’ presumably being the major one...

It’s rotten news for EADS, which had teamed up with US-listed company Northrop Grumman to win the contract (much to the surprise of the watching world, let alone Boeing). With some analysts predicting that it could now be forced into job cuts, its share price has taken a hammering today, wiping millions off its market value (it's also come on the same day that a fourth EADS executive has been questioned in France over an alleged insider trading scam, which probably hasn't helped).

So where did it all go wrong? The US Government Accountability Office initially decided that their joint bid would work out cheaper over the 30-year course of the contract, but after re-doing its sums, it now seems to think that maybe Boeing will be cheaper after all (and more American – did we mention that?).

Of course, technically there’s still a chance that EADS could win the re-opened tender – but the consensus seems to be that this is about as likely as the US government selling the White House to the North Koreans. Although Northrop Grumann was putting a brave face on things today (‘we are reviewing the decision to ensure the re-competition will provide both companies a fair opportunity to present the strengths of their proposals’, it said), you can’t help feeling that Boeing (who will be allowed to re-bid) must be in the driving seat – largely because they haven’t partnered with some unreliable cheese-eating surrender monkeys from the other side of the pond.

Ultimately this is going to be a political decision rather than a financial one – and with the US’s famed openness to trade with foreign investors (particularly where defence matters are concerned), there’s surely only going to be one winner. The market certainly seems to think so, judging by the drop in EADS’ share price.

In fact, the only surprising thing about this episode is that EADS ever got anywhere near winning this contract in the first place...

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