Northrop Grumman and the maker of Airbus planes beat out Boeing Co to win a US$35 billion government contract to build military refueling planes, the US Air Force said on Friday.
The selection of Los Angeles-based Northrop Grumman and its Paris-based partner, European Aeronautic Defense and Space Co (EADS), came as a surprise to Wall Street.
It is a big blow to Chicago-based Boeing, which has been supplying refueling tankers to the Air Force for nearly 50 years and had been widely expected to win the deal.
The contract positions EADS to break into the US military market in a big way. And it opens up a huge new business opportunity for Northrop Grumman.
In after-hours trading, shares of Northrop climbed US$3.74 to US$82.37, while Boeing's stock price fell US$2.59 to US$80.10.
The Air Force has estimated the tanker contract will be worth between US$30 billion and US$40 billion over 10 to 15 years. It is the first of three deals that could eventually be worth as much as US$100 billion over 30 years to replace the entire Air Force fleet of nearly 600 refueling tankers.
As the winners of the first award, EADS and Northrop will be in a strong position to win the two follow-on deals, analysts believe.
Military officials say the Air Force is long overdue to replace its air-to-air refueling tankers, which allow fighter jets and other aircraft to refuel without landing. The service currently flies 531 Eisenhower-era tankers and another 59 tankers built in the 1980s by McDonnell Douglas, now part of Boeing.
But the new contract has emerged as a major test for the Air Force, which is trying to rebuild a tattered reputation after a procurement scandal in 2003 sent a top Air Force acquisition official to prison for conflict of interest and led to the collapse of an earlier tanker contract with Boeing.
The tanker deal is also certain to become a flashpoint in a heated debate over the military's use of foreign contractors since Boeing painted the competition as a fight between a US company and its European rival. The Chicago-based company is expected to protest the decision.
The EADS/Northrop Grumman team plans to perform its final assembly work in Mobile, Alabama, although the underlying plane would mostly be built in Europe. And it would use General Electric engines built in North Carolina and Ohio. Northrop Grumman, which is based in Los Angeles, estimates a Northrop/EADS win would produce 2,000 new jobs in Mobile and support 25,000 jobs at US suppliers.
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