VZCZCXYZ0350
PP RUEHWEB

ZNR UUUUU ZOC STATE ZZH
MSI4574
PP RUEHC
DE RUEHMZ #0094/01 0631804
ZNR UUUUU ZZH
P 031804Z MAR 08
FM AMCONSUL MUNICH
TO RUEHC/SECSTATE WASHDC PRIORITY 4316
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY
RUEKJCS/SECDEF WASHDC
RUCPDOC/USDOC WASHDC
RUEHZG/NATO EU COLLECTIVE
RUCNMEU/EU INTEREST COLLECTIVE
RUCNFRG/FRG COLLECTIVE

UNCLAS MUNICH 000094 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EUR EUR/AGS, EUR/ERA, EB/IFD/OMA AND INR/I 
PASS TO USTR MOWREY 
 
E.O. 12958: N/A 
TAGS: ECON EAIR ETRD PGOV EINV PREL EUN FR GM
SUBJECT: EADS' TANKER WIN - ANATOMY OF A (VERY BIG) DEFENSE 
CONTRACT 
 
SENSITIVE BUT UNCLASSIFIED.  NOT FOR INTERNET DISTRIBUTION. 
 
REF: 06 MUNICH 558 
 
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SUMMARY 
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¶1. (SBU) THE FEBRUARY 29 ANNOUNCEMENT THAT THE U.S. AIR FORCE WOULD 
AWARD A USD 40 BILLION CONTRACT FOR AERIAL REFUELING TANKERS TO A 
CONSORTIUM FORMED BY EADS AND NORTHROP GRUMMAN, A DEAL THAT DEFENSE 
EXPERTS HAD BEEN ALL- BUT-CERTAIN WOULD GO TO BOEING, LANDED LIKE A 
BOMBSHELL AT EADS' CO-HEADQUARTERS OUTSIDE OF MUNICH.  EADS HAD 
HOPED TO GET, AT BEST, A PORTION OF A SPLIT DEAL WITH BOEING.  THE 
DEAL MARKS THE CULMINATION OF EADS' EFFORT TO BECOME A PLAYER IN THE 
U.S. DEFENSE MARKET BY BUILDING ALLIANCES WITH U.S. DEFENSE 
CONTRACTORS AND LOCATING PRODUCTION FACILITIES IN THE U.S. 
 
--------------------------------------------- --------- 
LARGEST PENTAGON CONTRACT EVER TO GO TO A FOREIGN FIRM 
--------------------------------------------- --------- 
 
¶2.  (U) ON FEBRUARY 29, THE U.S. AIR FORCE ANNOUNCED ITS SELECTION 
OF A NORTHROP GRUMMAN-EADS (EUROPEAN AERONAUTIC, DEFENSE AND SPACE) 
PARTNERSHIP OVER BOEING TO BUILD 179 NEW "KC-45" AERIAL REFUELING 
TANKERS TO REPLACE THE MILITARY'S AGING FLEET OF BOEING 707-BASED 
KC-135S.  THE IMPORTANCE OF THE USD 40 BILLION CONTRACT -- THE 
LARGEST EVER U.S. DEFENSE CONTRACT TO GO TO A FOREIGN CONTRACTOR -- 
TO EADS, IS DIFFICULT TO OVERSTATE.  THE NORTHROP/EADS KC-45 IS 
BASED ON A MODIFIED VERSION OF THE EADS/AIRBUS A330 WIDEBODY 
AIRFRAME AND WILL BE ASSEMBLED AT A FACTORY IN MOBILE, ALABAMA, 
USING A330 SUBASSEMBLIES SHIPPED FROM EUROPE.  AT LEAST 58 PERCENT 
OF THE AIRCRAFT'S CONTENT, INCLUDING GE ENGINES, WILL BE SOURCED IN 
THE U.S.  THIS INITIAL AWARD WILL COVER THE FIRST PART OF A 
MULTI-PHASED CONTRACT SPANNING SEVERAL DECADES, WITH THE FIRST KC-45 
EXPECTED TO GO INTO SERVICE IN 2013.  OVER TIME, THE AIR FORCE PLANS 
TO REPLACE MORE THAN 500 KC-135S AT A TOTAL PRICE ESTIMATED AT MORE 
THAN USD 100 BILLION.  ACCORDING TO AIR FORCE OFFICIALS IT'S 
POSSIBLE THAT LATER PHASES OF THE CONTRACT COULD BE AWARDED TO 
BOEING, WHICH OFFERED A MODIFIED VERSION OF ITS WIDEBODY 767 IN ITS 
BID. 
 
------------------------------------------- 
"WE'RE THRILLED, BUT HOLDING OUR BREATH..." 
------------------------------------------- 
 
¶3.  (SBU) A SENIOR EADS OFFICIAL TOLD CONGEN MUNICH THAT THE AIR 
FORCE ANNOUNCEMENT CAME AS A VERY PLEASANT SURPRISE; EADS HAD HOPED, 
AT BEST, TO BE AWARDED ONLY A PORTION OF A SPLIT CONTRACT WITH 
BOEING.  HE ADDED THAT THE AWARD HAD NOT ONLY OPENED THE DOOR FOR A 
SIGNIFICANT PHYSICAL PRESENCE IN THE U.S. FOR EADS, BUT WOULD ALSO 
ESTABLISH A MINI-AEROSPACE INDUSTRY AROUND THE TANKER'S PRODUCTION 
IN ALABAMA, GIVEN THE MANY SUB-CONTRACTORS AND OTHER FIRMS NEEDED TO 
SUPPORT LARGE-SCALE AIRCRAFT PRODUCTION.  THE EADS OFFICIAL SAID HE 
WAS CONFIDENT THAT EADS' PERFORMANCE WITH OTHER U.S. DEFENSE 
CONTRACTS, MOST NOTABLY WITH THE U.S. ARMY'S EUROCOPTER UH-72 
"LAKOTA" LIGHT HELICOPTER (REFTEL), HAD EASED ANY CONCERNS THE AIR 
FORCE MAY HAVE HAD WITH SELECTING A FOREIGN FIRM. 
 
¶4.  (SBU) THE SAME EADS CONTACT DID EXPRESS CONCERN, HOWEVER, THAT 
THE AWARD WAS "NOT A DONE DEAL," GIVEN THE STRONG POSSIBILITY THAT 
BOEING WOULD CONTEST THE DECISION, WITH THE SUPPORT OF CONGRESSIONAL 
DELEGATIONS FROM ILLINOIS (BOEING'S HEADQUARTERS), WASHINGTON STATE 
(WHERE 767S ARE PRODUCED), AND KANSAS (WHERE THE 767S WOULD BE 
CONVERTED INTO TANKERS).  THE EADS OFFICIAL ADDED, HOWEVER, THAT THE 
GOVERNOR OF ALABAMA, ALONG WITH THE STATE'S CONGRESSIONAL 
DELEGATION, HAD HAILED THE NEWS OF THE CONTRACT AWARD.  HE ALSO SAID 
THE CONTRACT REPRESENTED A VINDICATION FOR AIRBUS CEO TOM ENDERS, 
WHOM HE CALLED "A BIG SUPPORTER OF THE TRANSATLANTIC STORY." 
 
----------------- 
"MADE IN AMERICA" 
----------------- 
 
¶5.  (SBU) EADS VIEWED ITS 2006 SUCCESS IN WINNING THE USD THREE 
BILLON CONTRACT TO SUPPLY THE U.S. ARMY WITH OVER 300 UH-72 LIGHT 
HELICOPTERS -- EADS FIRST MAJOR ENTRY INTO THE U.S. DEFENSE MARKET 
-- AS A STEPPING STONE TO THE MASSIVE AIR FORCE TANKER CONTRACT. 
LAST YEAR A SENIOR EUROCOPTER OFFICIAL TOLD THE CONSULATE THAT IN 
ADDITION TO IMPROVING THE STANDING OF EUROCOPTER WITHIN THE EADS 
CONSORTIUM, EUROCOPTER'S SUCCESS AT BREAKING INTO THE U.S. DEFENSE 
MARKET WOULD INCREASE THE PRESSURE ON HIS COLLEAGUES AT EADS TO WIN 
 
ALL OR PART OF THE AIR FORCE CONTRACT. 
 
¶6.  (SBU) EADS LEARNED SEVERAL KEY LESSONS FROM THE EUROCOPTER 
SUCCESS, WHICH IT APPLIED TO THE TANKER BID.  FIRST, THE IMPORTANCE 
OF PUTTING A U.S. "FACE" ON THE BID.  IN THE CASE OF EUROCOPTER, THE 
FACE WAS U.S. HELICOPTER MANUFACTURER SIKORSKY, WHICH WAS TAPPED BY 
EADS TO PROVIDE CONTRACTOR LOGISTICS SUPPORT (CLS) AS PART OF THE 
BID.  EADS OFFICIALS TOLD US THAT SIKORSKY'S NAME AND FAMILIARITY 
WITH U.S. DEFENSE CONTRACTING WAS KEY IN SELLING THE BID TO THE 
ARMY.  IN THE CASE OF THE KC-45 TANKER, NORTHROP GRUMMAN WAS THE 
PARTNER.  WHILE THE EADS KC-45 WILL BE SUBSTANTIALLY THE SAME 
AIRFRAME AS AN AIRBUS A330, NORTHROP WILL MANAGE THE PROGRAM'S LARGE 
NUMBER OF SUPPLIERS AND WILL INSTALL DEFENSIVE AND OTHER SYSTEMS ON 
THE AIRCRAFT.  BUT MOST IMPORTANTLY, THE PARTNERSHIP WITH NORTHROP 
ALLOWED EADS TO MARKET ITS TANKER IN THE U.S. UNDER THE NAME OF A 
RESPECTED PILLAR OF THE U.S. DEFENSE ESTABLISHMENT. 
 
¶7.  (SBU) SECOND, EADS LEARNED THAT IT NEEDED TO GIVE THE "MADE IN 
AMERICA" LABEL -- WITH ALL THE ECONOMIC BENEFITS THAT IT IMPLIES -- 
TO ITS TANKER PROPOSAL.  IN THE CASE OF EUROCOPTER, THE DECISION WAS 
MADE TO LOCATE FINAL ASSEMBLY OF THE UH-72 IN COLUMBUS, MISSISSIPPI. 
 FOR THE KC-45 TANKER, MOBILE, ALABAMA WAS CHOSEN FROM SEVERAL 
POTENTIAL SITES IN THE SOUTHERN U.S.  THE WEB-SITE FOR THE KC-45 
PROGRAM PROUDLY CLAIMS THAT THE TANKER PROGRAM "WILL EMPLOY 25,000 
AMERICAN WORKERS AT 230 U.S. COMPANIES IN 49 STATES."  IN JANUARY 
2008, EADS FURTHER SWEETENED THE DEAL BY ANNOUNCING THAT IF IT WERE 
AWARDED THE TANKER CONTRACT, IT WOULD ASSEMBLE ALL OF ITS A330 
COMMERCIAL FREIGHTER AIRCRAFT AT THE MOBILE SITE AS WELL, CREATING 
AN ECONOMIC "MULTIPLIER EFFECT" FROM THE TANKER PROGRAM.  A SENIOR 
EADS OFFICIAL TOLD THE CONSULATE THAT EADS/AIRBUS MIGHT ELECT TO 
ALSO BUILD OTHER COMMERCIAL AIRCRAFT BEYOND THE A330 FREIGHTER AT 
THE MOBILE PLANT IN THE FUTURE. 
 
-------------------------- 
MITIGATING THE WEAK DOLLAR 
-------------------------- 
 
¶8.  (U) BECAUSE ALL LARGE COMMERCIAL AIRCRAFT ARE PRICED IN U.S. 
DOLLARS REGARDLESS OF WHERE THEY ARE MANUFACTURED, EADS/AIRBUS HAS 
COMPLAINED OF A TREMENDOUS FINANCIAL STRAIN DUE TO THE RELATIVE 
STRENGTH OF THE EURO TO THE DOLLAR.  IN NOVEMBER 2007, AIRBUS CEO 
TOM ENDERS TOLD THE MEDIA THAT "THE DOLLAR'S RAPID DECLINE IS 
LIFE-THREATENING FOR AIRBUS," AND THAT "THE DOLLAR EXCHANGE RATE HAS 
GONE BEYOND THE PAIN BARRIER."  ENDERS ADDED THAT PART OF THE 
STRATEGY TO COMBAT THE IMPACT OF THE WEAK DOLLAR WOULD BE TO 
POSSIBLY SHIFT SOME PRODUCTION TO DOLLAR-ZONE COUNTRIES.  BY 
ASSEMBLING THE KC-45 TANKER AND A330 FREIGHTER IN ALABAMA, EADS HAS 
FOUND A WAY TO LOWER ITS PRODUCTION COSTS WHILE SIMULTANEOUSLY 
SELLING THE ECONOMIC BENEFITS TO THE U.S. ECONOMY. 
 
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COMMENT 
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¶9.  (SBU) THE KC-45 TANKER AWARD IS THE LARGEST U.S. DEFENSE 
CONTRACT TO EVER BE AWARDED TO A FOREIGN CONTRACTOR, AND REPRESENTS 
ONE OF THE LARGEST ORDERS IN AEROSPACE HISTORY.  FOR EADS, IT ALSO 
REPRESENTS RECOGNITION THAT THE FIRM IS A PLAYER IN THE U.S. DEFENSE 
MARKET, AND CAN HOLD ITS OWN AGAINST FORMIDABLE COMPETITION SUCH AS 
BOEING -- A FACT THAT WON'T HURT EADS' SALES WORLDWIDE.  EADS IS ALL 
TOO AWARE THAT EUROPEAN GOVERNMENTS, FACING INCREASING 
DEMOGRAPHIC-INDUCED SOCIAL COSTS AND A LACK OF PUBLIC SUPPORT FOR 
INCREASED MILITARY SPENDING, WILL NOT PROVIDE SIGNIFICANT 
OPPORTUNITIES FOR THE FIRM'S FUTURE GROWTH.  WITH THE U.S. SPENDING 
MORE ON DEFENSE THAN THE REST OF THE WORLD COMBINED, EADS MADE A 
STRATEGIC DECISION TO GO "WHERE THE MONEY IS" -- A BET THAT APPEARS 
TO BE PAYING OFF BEYOND EADS EXECUTIVES' MOST OPTIMISTIC 
EXPECTATIONS. 
 
¶10.  (U) THIS REPORT HAS BEEN COORDINATED WITH EMBASSY BERLIN. 
 
¶11.  (U) PREVIOUS REPORTING FROM MUNICH IS AVAILABLE ON OUR SIPRNET 
WEBSITE AT WWW.STATE.SGOV.GOV/P/EUR/MUNICH/ . 
 
NELSON