VZCZCXRO3564
PP RUEHAG RUEHDF RUEHIK RUEHLZ RUEHPOD RUEHYG
DE RUEHMZ #0136/01 0951301
ZNR UUUUU ZZH
P 041301Z APR 08
FM AMCONSUL MUNICH
TO RUEHC/SECSTATE WASHDC PRIORITY 4353
INFO RUCNMEU/EU INTEREST COLLECTIVE PRIORITY
RUCNFRG/FRG COLLECTIVE PRIORITY
RUEHZG/NATO EU COLLECTIVE PRIORITY
RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY
RUEKJCS/SECDEF WASHDC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC PRIORITY

UNCLAS SECTION 01 OF 03 MUNICH 000136 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EUR EUR/AGS, EUR/ERA, EB/IFD/OMA AND INR/I 
PASS TO USTR MOWRY 
 
E.O. 12958: N/A 
TAGS: ECON EAIR ETRD PGOV EINV PREL EUN FR GM
SUBJECT: EADS OFFICALS WARY OF TANKER DEAL REVIEW, 
DISTRESSED OVER WEAK DOLLAR 
 
REF: MUNICH 94 
 
SENSITIVE BUT UNCLASSIFIED.  NOT FOR INTERNET DISTRIBUTION. 
 
------- 
SUMMARY 
------- 
 
¶1.  (SBU) In a meeting with ConGen Munich, senior EADS 
officials expressed concern about the potential outcome of 
Boeing,s protest of the U.S. Air Force aerial refueling 
tanker award to the Northrop Grumman-EADS consortium, 
particularly given the political dimension the issue has 
taken-on in the U.S.  The EADS officials dismissed Boeing,s 
criticism of the award as "grasping at straws," and said the 
main reason Boeing lost was that it had a product gap between 
the 767 and 777 aircraft ) a gap EADS, A330-based tanker 
was able to fill.  The officials said EADS was applying 
lessons from Boeing,s difficulties with the 787 program to 
its competing Airbus A350 program, which along with the A380 
superjumbo and A400M programs, was proceeding according to 
schedule.  EADS officials, greatest current concern is over 
the continued falling dollar, saying that the present 
exchange rate has put the company in the "death zone." 
 
----------------------------- 
CONCERNED OVER BOEING PROTEST 
----------------------------- 
 
¶2.  (SBU) ConGen Munich met March 28 with EADS officials 
Wolfgang Wilhelm, Vice President for Aeronautics Strategic 
Business Development, and Goesta Klammt, Executive Assistant 
for Aerospace to EADS Chairman Ruediger Grube.   Our contacts 
expressed concern, although not surprise, over the U.S. 
General Accountability Office (GAO) review of the contentious 
U.S. Air Force KC-45 aerial refueling tanker contract in the 
wake of Boeing,s protest of the award of the contract to a 
Northrop Grumman-EADS consortium (Reftel).  Wilhelm noted he 
would not expect a similar contract to go uncontested in 
Germany if awarded to a U.S. defense contractor. 
 
¶3.  (SBU) Wilhelm said he had just been in Alabama (where the 
EADS tanker is to be built) and had a very positive meeting 
with Governor Bob Riley, and hoped the Alabama political 
leadership would be able to serve as a counterweight to 
Boeing,s vocal supporters in Congress who would like to see 
the tanker award retracted.  Klammt expressed particular 
concern that there might be a blatant political attempt to 
overturn the Air Force decision by Congress, or the next 
president, even if the GAO found the Air Force had 
consistently and appropriately applied USG contracting rules. 
 
--------------------------- 
&BOEING GRASPING AT STRAWS8 
--------------------------- 
 
¶4.  (SBU) When asked about the concerns Boeing had raised 
over Northrop-EADS, successful tanker bid, Wilhelm said 
Boeing was essentially "grasping at straws," by raising 
issues such as the current WTO case involving Boeing and 
Airbus, EADS' untested alliance with Northrop, and alleged 
technical shortcomings of EADS' Airbus A330-derived tanker, 
including the unproven design of the refueling boom.  Wilhelm 
said the reason Northrop-EADS won was that with the A330, it 
had a proven aircraft ready to go into production as a 
tanker.  EADS also had a successful track-record with other 
U.S. defense contracts, most notably the Eurocopter LH-72 
"Lakota" light helicopter award. 
 
¶5.  (SBU) Furthermore, Wilhelm added, EADS was not as 
inexperienced with tankers as Boeing had suggested, as it had 
been chosen to provide A330-based tankers to the Australian, 
British, Saudi and UAE Air Forces, and similar A310-based 
tankers to the Canadian and German Air Forces.  Wilhelm was 
quick to dismiss the issue of the WTO case, noting that the 
U.S. and EU had signed the Agreement on Large Civil Aircraft 
in 1992, and the Air Force had itself determined that the WTO 
case would not be a factor in selecting the tanker. 
Concerning the critical and complicated refueling boom, 
Wilhelm noted that EADS had recently tested the boom under 
realistic conditions, and it had proven successful. 
 
 
MUNICH 00000136  002 OF 003 
 
 
¶6.  (SBU) Wilhelm continued that Boeing lacked an airframe 
that provided the versatility of the A330, noting that the 
767 Boeing had offered was smaller, lacking the fuel and 
cargo capacity the Air Force was looking for.  Wilhelm said 
the 767 model Boeing had promoted in its bid "didn,t 
actually exist," as it would be a composite of several 
different versions of the commercial 767 airframe.  While 
Boeing had complained that it would have offered its 777 had 
it known the Air Force wanted a larger plane, Wilhelm pointed 
out that the 777 is significantly larger the A330, making it 
potentially too large for certain environments the Air Force 
operates in.  Wilhelm said Boeing could have considered 
offering the 787 airframe, however that would not have been a 
realistic option considering the current backlog of orders 
for the plane. 
 
-------------------------------------------- 
"BOEING HAS A GREAT COMMUNICATIONS STRATEGY" 
-------------------------------------------- 
 
¶7.  (SBU) Saying Boeing has "a great communications strategy" 
that has not been matched by its performance of late, Wilhelm 
noted that Boeing has experienced significant difficulties 
and delays with several projects, from the delivery of 
767-based tankers to Italy and Japan, to well-publicized 
delays with the 787 Dreamliner program.  Wilhelm said 
EADS/Airbus was learning from Boeing,s difficulties 
resulting from its reliance on a worldwide network of 
"just-in-time" suppliers of major subassemblies for the 787 
) lessons EADS intends to apply to the production of its 
Airbus A350 competitor to the 787. 
 
¶8.  (SBU) Wilhelm said that despite these problems, Boeing 
had somehow been spared the level of negative publicity that 
EADS faced due to the delays of its A380 superjumbo, and A350 
programs.  Wilhelm said the A380 was proving a tremendous 
success, and that initial customer Singapore Airlines was 
very satisfied with the aircraft it had taken delivery of. 
EADS/Airbus is on track to deliver 13 A380s in 2008.  Wilhelm 
said the A350 design had been "frozen," and the project would 
now proceed to the pre-production phase -- 2013 remains the 
target for the first A350 delivery.  Asked about the status 
of EADS' A400M military transport, Wilhelm said EADS expected 
the aircraft,s initial flight this year, with the first 
delivery in 2010. 
 
-------------------------------------------- 
WEAK DOLLAR HAS PUT EADS IN THE "DEATH ZONE" 
-------------------------------------------- 
 
¶9.  (SBU) Wilhelm reiterated his previous comment to us that 
EADS intends to also build A330-based freighter aircraft at 
the Mobile, Alabama plant being built for the final assembly 
of the Air Force tankers.  He notably left open the 
possibility that additional EADS/Airbus aircraft may also be 
built in Alabama in the future.  One reason for shifting 
production to the U.S would be to help offset the negative 
impact the weak dollar has had on EADS' bottom line.  Echoing 
comments made earlier by Airbus CEO Tom Enders, Wilhelm said 
the weak dollar was having a devastating impact on EADS, and 
had put the company in the "death zone," as most of EADS, 
costs are in euros, but all commercial aircraft are priced in 
dollars. 
 
¶10.  (SBU) Every 10 cent decline in the dollar costs EADS one 
billion euros.  Furthermore, EADS' restructuring plan 
implemented last year was based on an exchange rate of USD 
1.35 to the euro.  EADS had attempted to mitigate the falling 
dollar with currency hedging contracts, but they will run-out 
this year, leaving the company in a very vulnerable position. 
 Klammt said he wondered if a continued weak dollar might 
ultimately lead to the euro supplanting the dollar as the 
currency of choice for pricing aircraft and commodities such 
as petroleum. 
 
-------------------------------------------- 
"EADS WANTS TO BUILD THE NEXT AIR FORCE ONE" 
-------------------------------------------- 
 
¶11.  (SBU) Despite concerns about Boeing's protest of the 
tanker award, Wilhelm was optimistic that EADS would continue 
to make further inroads into the U.S. defense market, 
 
MUNICH 00000136  003 OF 003 
 
 
acknowledging that European governments would not prove to be 
a reliable source of increased defense spending in the 
future.  Wilhelm suggested, perhaps only half-jokingly, that 
in the wake of the tanker deal and the selection of a 
European design from AgustaWestland for the next Marine One 
presidential helicopter, EADS would work to win the contract 
for the next Air Force One, offering its A380 superjumbo as a 
replacement for the current Boeing 747s. 
 
------- 
COMMENT 
------- 
 
¶12.  (SBU) Wilhelm,s remarks, even if tongue-in-cheek, about 
building the next Air Force One demonstrate a self-confidence 
on the part of EADS we haven,t seen during the past several 
years, given the stream of bad news from the A380 and A350 
programs.  Still, it was evident EADS was not counting on 
walking away with the tanker award just yet, given the 
political maneuvering in the U.S.  If there is one thing that 
worries EADS executives more than losing the tanker deal 
(which Wilhelm acknowledged they didn,t really expect to win 
in the first place), it,s the falling dollar.  While "death 
zone" may be a little dramatic, EADS will indeed face a 
financial crisis following the expiration of currency hedges 
this year if the dollar remains at its current level against 
the euro.  Given this stark reality, and no indication that 
commercial aircraft will be priced in euros in the near 
future, EADS, only viable solution will be to shift some 
production to lower-cost dollar-zone locations such as 
Alabama. 
 
¶13.  (U) This report has been coordinated with Embassy Berlin. 
 
¶14.  (U) Previous reporting from Munich is available on our 
SIPRNET website at www.state.sgov.gov/p/eur/munich/ . 
NELSON