March 4, 2011 – By Andrea Shalal-Esa
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WASHINGTON (Reuters) - Airbus parent EADS <EAD.PA> conceded defeat in an epic, decade-long contest to sell aerial tankers to the Pentagon and confirmed it would not protest the award of a $30 billion contract to Boeing Co <BA.N>.
EADS North America Chairman Ralph Crosby expressed disappointment after Boeing won the contract on the third attempt, but said the U.S. company had undercut the bid to use European Airbus aircraft by a total of $2 billion.
"It's clear that there is no foundation for protest," he said, adding that while EADS still had misgivings about the way the Air Force had structured the competition this time, the service had followed the new ground rules scrupulously.
In the end, Crosby said EADS decided that it could not have undercut what he described as an "extremely lowball bid" submitted by Boeing to keep Airbus from securing a U.S. production site for mid- to large-sized airliners.
"When you're in a fixed-price game and the other guy decides he's going to win at any cost, there's probably not a lot more that could be done," Crosby told reporters.
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But he said he did not believe EADS made a mistake by competing on its own after its former partner Northrop Grumman Corp <NOC.N> pulled out of the running, and said the competition had saved about $16 billion from the initial 2001 tanker deal that the Air Force proposed with Boeing.
EADS confirmed its decision at a news conference after Reuters reported on Thursday that it was poised to waive its right to appeal the contract for 179 planes, turning its focus to other weapons contracts and acquisitions.
EADS North America Chief Executive Sean O'Keefe said the company was actively looking at a possible acquisition target and could be ready to make a move soon, although he declined to give any specific timetable or scope for a possible deal.
EADS' decision to skip a protest may ease transatlantic tensions over defense contracts but came as a huge disappointment to officials and workers in Alabama where EADS planned to assemble its fleet.
For Boeing, the move marks a double victory -- keeping its 767 production line running for a decade longer, and blocking Airbus from establishing a commercial airplane manufacturing site in the United States on the back of the tanker deal.
Boeing welcomed the news and said it was ready to go to work on an initial $3.5 billion development contract for the first 18 planes that it signed with the Air Force last week.
The new KC-46 planes will replace the Air Force's fleet of KC-135 tankers, which are about 50 years old on average.
The Air Force underscored that both competitors were "world-class companies" and said it expected to continue the long-standing relationships it had with both firms.
This is the Air Force's third bid to buy new refueling planes since 2001. The first deal collapsed amid a procurement scandal that sent two former Boeing officials to prison.
The Pentagon canceled the second attempt in 2009 after government auditors upheld a Boeing protest.
EADS shares closed down 0.4 percent. Boeing was down 1.28 percent at $70.43 after making big gains on Thursday.
The Pentagon awarded the hotly contested contract to Boeing last week, calling it the "clear winner" in a competition that Alabama Senator Jeff Sessions said had devolved into a "low price shootout."
Defense analyst Loren Thompson said Boeing now faced tough pressure to perform under the aggressive bid it submitted.
EADS officials said Boeing's bid was riskier than their own, given that EADS is already building very similar tankers for Australia and other foreign countries, and said EADS would be ready to jump in if Boeing's performance faltered.
EADS said its own analysis showed that Boeing's proposed price was $21.4 billion against its own offer of $23.4 billion, making the EADS proposal more than 9 percent more expensive.
It said the Air Force's total evaluated price of the Boeing bid was $20.6 billion, a figure arrived at after subtracting an estimated $800 million from Boeing's bid for an estimated fuel usage advantage and $300 million for military construction.
EADS said its evaluated price was $22.6 billion, noting that the $800 million advantage earned by the company on a complicated fuel effectiveness model was effectively canceled out by Boeing's advantage for fuel usage and construction.
EADS said its proposed engineering and development costs of $3.5 billion compared to $4.4 billion for Boeing.
(Additional reporting by Kyle Peterson)
(Reporting by Andrea Shalal-Esa; Editing by Phil Berlowitz, Tim Hepher, Dave Zimmerman)