EADS/Airbus Government Ownership, Protection, Intervention & Subsidies: The Effect on American Free Enterprise and National Security

APPENDIX: CASE STUDIES OF PRIOR EADS TANKER SELECTIONS

EADS has promoted the prior sales of Airbus 330-200 Multi-Role Transport and Tanker (MRTT) to Australia, Saudi Arabia, the United Arab Emirates and the United Kingdom as proof of the superiority of that aircraft. These relatively small sales have been used to argue for the much larger U.S. Air Force contract for 179 tankers.

A close analysis shows that rather than an endorsement of the EADS/Airbus tanker, there is instead a pattern of taking advantage of closed markets, subsidy largesse and highlighting sales where its receipt of the contract was never in doubt. These engineered selections may provide EADS/Airbus clever marketing copy for its U.S. tanker campaign, but they raise more questions about EADS/Airbus’ commitment to competing fairly and within “established rules.” In each case, it is clear that free enterprise and free markets had little, if anything, to do with the awards.

United Kingdom

Under pressure to “buy European,” the UK Ministry of Defence spent 10 years and nearly $100 million to devise a leasing scheme for EADS/Airbus.

The EADS tanker deal for the UK’s Royal Air Force (RAF) was belabored and far from transparent.  It was the first contract involving the Airbus A330 frame, but negotiations delayed the final signing almost ten years. The Financial Times reported that “most people involved would concede it should not have taken a decade to close the deal … the decade of negotiations has cost the taxpayer £47.5m.”⁷⁹ In the end this has been an experiment with public and private funds, without adequate oversight or accountability.

Initially, EADS/Airbus (as AirTanker Ltd.) and a consortium including Boeing competed for the contract; the two bids were received in February 2003.⁸⁰ The UK Ministry of Defence announced the award to AirTanker in January 2004. However, as early as April of that year, press reports stated that the UK’s Defense Procurement Agency delivered an ultimatum to the victorious bidder demanding they lower the price. Nearly another year of closed-room negotiations went by until revisions to the original bid were agreed on by the two parties. As the press reported at the time, the Ministry of Defence “called for a reduction in price in the £13 billion program [sic] to… between £120 million and £230 million.”⁸¹

Common sense would dictate that the EADS tanker either provided the best “value for money” or was too expensive, not both. If the UK was concerned with bringing the tankers in at a lower cost, fostering competition before the bidder was selected would have been the sensible thing to do. This has led some to suggest that the original competition was less than rigorous and London deferred to the manufacturer more likely to sustain and provide European jobs.

[A] reason that the budget is under such strain is the political constraint to buy British or European whenever possible … This virtually guarantees that the [Ministry of Defence] must buy products which will only be made in small quantities, causing unit costs to skyrocket and enhancing the difference in budgets. As a rough rule of thumb, the British expenditure in any given area will be a tenth of America’s; and the items purchased often have unit costs ten times higher owing to a lack of competition and economies of scale.⁸²

Unfortunately for the UK, its politicians and procurement officials were so focused on selecting EADS that they failed to manage requirements properly; the tanker they chose did not have the protective armor or anti-missile systems needed to operate in combat areas such as Afghanistan.⁸³ According to the UK National Audit Office, fixing these oversights will likely cost an additional several hundred million pounds. Due to this mistake, and a five-year delay in the program, the National Audit Office has also reported that it is unable to conclude that the Ministry of Defence has achieved value for money from the procurement phase of the EADS tanker deal.⁸⁴

Not only has the quality of the EADS tankers been under recent scrutiny, but the UK has now determined the quantity of 14 tanker order is more than the RAF requires.⁸⁵ Fortunately for the UK, France has once again stepped forward to ensure an EADS order is not cut short. France, which has already made known it will not buy Boeing tankers, has reportedly been in contact with the British about the possibility of using some of their tanker over capacity.

The EADS supporter’s version of the “free market” is in evidence here as merely disguised protectionism. As the chief executive of EADS’ UK tanker bid stated, the procurement was “about breaking Boeing’s global monopoly in air-tanking … and making Britain, and not the U.S., the centre of airtanking.”⁸⁶

Australia

Never a serious customer for the smaller Boeing 767, the Australians went with the Airbus product, which offered -reduced—and, arguably, subsidized—development costs with retrofitted Quantas A330s.

After losing tanker competitions in Japan and Italy, EADS saw the Royal Australian Air Force (RAAF) competition as its last chance to develop the boom technology it had never possessed.

According to Australian defense analysts at the Air Power Studies Centre, Boeing’s 767 was not the optimal tanker frame for the RAAF. The need was for a significant cargo capacity and the larger Airbus A330 would accommodate greater airlift capabilities. Indeed, Australian defense analysts initially favored a 747-based tanker that Boeing had sold to pre-revolutionary Iran in the 1970s.⁸⁷ Boeing, however, could not offer the 747 tanker without prohibitive development costs for the RAAF. The Australian Air Force was looking for a larger plane, and Airbus offered to provide refurbished Quantas A330s.

Although EADS did not possess boom technology at this time, they were able to underbid Boeing. Given EADS’ government owners’ history of generously subsidizing its new products, it is not unreasonable to question if, once again, the free market had been subverted. The Australians wanted to avoid paying high research and development costs on the new and untested refueling technology, and European subsidies would have been an acceptable way to save on the Australian defense budget.

From all indications, Australia tried to get the best tanker deal for their money and took advantage of the stock of Airbus products in the Quantas fleet to cut the cost of service to the tankers.⁸⁸ They took the substantial risk, however, of choosing the untested product which may ultimately prove to be more expensive. The tankers have already experienced several delays and are now planned to be delivered 15 months late.⁸⁹

To help ensure A330 tanker costs are held lower, for years Australians in Washington have lobbied for EADS/Airbus to get the U.S. Air Force deal. A representative from the Australian embassy was quoted as saying Australia would welcome a decision by the Air Force to choose the Airbus tanker, since that would lead to much lower maintenance and (operating) costs for their A330s in the longer term … “It would be great for us.”⁹⁰ Unfortunately, the same cannot be said for the American taxpayer.