By Marina Malenic
LONDON–Transatlantic aerospace rivals Boeing [BA] and European Aeronautic Defense and Space Company (EADS) have offered some insight into their pricing strategies as they compete for a multibillion contract to build a replacement fleet of tanker aircraft for the U.S. Air Force.
EADS CEO Louis Gallois said on Saturday that he is willing to accept a “tightened” profit margin on the company’s A330-based offering but that some margin would remain.
“I want to be extremely clear, we want to gain money,” Gallois told reporters ahead of the Farnborough Air Show, held outside London. “We prefer to lose (the deal) than not to gain money.”
A top Boeing official recently said that its bid based on the 767 would be lower this time than in the previous competition. Jean Chamberlain, vice president of Boeing’s tanker program, told Reuters last week that the company has “been able to develop an offer that meets or beats the Air Force’s 372 requirements at a price that is less than our previous offer.”
EADS, with then-partner and prime contractor Northrop Grumman [NOC], won a 2008 competition, but a Boeing protest was sustained when government auditors discovered technical problems in the way the Air Force evaluated the bids.
The program to replace the 179 KC-135 Eisenhower-era tankers in the Air Force’s current fleet is expected to be worth up $50 billion over the life of the program, Pentagon officials have said.
Gallois expressed skepticism at the Boeing revelation about a lower bid.
“I am a bit surprised that they are reducing the price when it is fixed price,” Gallois said during a July 17 press briefing.
Conversely, he said the EADS bid can be lower because the company is already building tankers akin to the ones they are offering to the Air Force and that risk to the customer has been reduced in the two-year period since the termination of the last competition.
“For us, the risk is lower now than in 2008 because the aircraft is flying now, refueling every day,” he said.
EADS has won a total of 28 A330 tankers orders from four customers–Australia, Saudi Arabia, the United Arab Emirates and the United Kingdom.
Boeing is building 767-based tankers for Japan and Italy. However, the company still plans to upgrade its KC-10 boom for use on the new offering, as well as integrate a digital cockpit from its 787 Dreamliner.
A top Boeing official here, asked about the earlier statement regarding a lower Boeing bid, said the company is focused on life-cycle costs and efficiency.
“We are doing everything we can to reduce cost and provide the most capability and budget that into our bid,” Dennis Muilenberg, the head of Boeing’s defense business, told reporters during a July 18 briefing. “It’s really important to focus on life-cycle costs, and we’ve done that in our offering. We’ve also taken some lessons learned in how do we most efficiently do in-line production, how do we leverage our commercial airplane know-how and our defense know-how into one integrated effort. And I think all of those lessons learned have combined to give us a very effective offering to our customer.”
At the same time, Muilenberg said he is also accountable to the company’s shareholders.
“We’ve put a solid bid on the table, but we also have a responsibility to our shareholders,” he said. “If you look at the business risks associated with this, it’s important to balance those things.”
Last week, the firms submitted offers to the Pentagon. A decision is expected in November.
Gallois said he is confident that decision would be fair. The Pentagon has “demonstrated so far that they wish a competition to get the best price and the best product for the taxpayers,” he said.
“I’m extremely impressed by the way the Pentagon is working with us,” he added. “They have put us in the right position to compete.”
However, he said he is prepared for political opposition from pro-Boeing lawmakers.
Gallois also questioned the fairness of a delay this month in a World Trade Organization (WTO) ruling on alleged illegal U.S. subsidies to Boeing. The panel earlier this month ruled that some European aid to Airbus was illegal under its rules.
“We are in an abnormal and increasingly unfair situation,” he said of the delay.
The report was postponed from July until mid-September. This month’s ruling was used by Boeing supporters to bolster their claim that EADS has an unfair advantage in the competition.