Paris: Understandably, shares in the European Aeronautic Defence and Space (EADS) company fell nearly 3 per cent on Thursday, 19 June, while that of Boeing rose more than two per cent as investors reacted to a US government report that faulted the way the US Air Force awarded a $35 billion contract for refuelling tankers to a EADS and Northrop Grumman combine.
The US Congress's Government Accountability Office (GAO) recommended in its mandatory review of the deal that the USAF rebid the contract. The recommendation would give Boeing another shot at the contract for 189 air-to-air refuelling tankers for the USAF. This is only an initial contract, the first of three, for the induction of almost 400 tankers at a total cost of around $100 billion.
For European aerospace conglomerate EADS, whose profitability has been hit by the falling value of the US dollar, the contract is critical not only to break into the US military market but also to reduce its dependency on the commercial airliner market. Airbus, its main revenue generator and profit earner, has seen its profits eroded substantially by the falling dollar.
For Boeing the contract is crucial if it is to keep its 767 line open at the Everett factory. Its competing model for the tanker contract was a version of the 767 line.
Meanwhile, European politicians gave a muted response to the development, apparently careful not to provide ammunition to competing presidential candidates in America. The United States is currently engrossed in the election season, which will end in November when the country votes a successor to the current president, George W Bush. A economy in near-recession accompanied by loss of jobs - some of it through outsourcing - are the principle debating points in the election campaign and European leaders are being careful not to provide unnecessary opportunities for US politicians.
The first major defence contract to be awarded to an European concern has already sparked off jingoistic attacks, particularly as these contracts hold much significance for local State economies.
Presidential hopeful and Republican party nominee, John McCain, has called the GAO decision "unfortunate for the taxpayers." Democratic party nominee, Barack Obama, State senator from Illinois, where Chicago-based Boeing is headquartered, called for a "fair and transparent" rebidding of the contract.
The USAF awarded the contract to the international EADS/Northrop Grumman partnership in February this year. The decision was immediately appealed by Boeing and supported by members of the US Congress who argued that key military contracts ought not to be awarded to foreign companies.
"We have to remain calm," a German finance ministry official was quoted as saying. "The GAO conclusions are not binding."
France, which is already embroiled in a subsidy-related conflict with the United States over arguments related to subsidies being provided for the manufacture of civil aircraft by Airbus and Boeing, declined to comment.
However, Bernard Carayon, a member of French president, Nicolas Sarkozy's ruling centre-right UMP party, said the decision held the potential of a clash sparking off with the United States. "The challenge to the air-refueling contract by the US Government Accountability Office is a blow to our transatlantic relations," he said in a statement.
"The defence by the Americans of their economic interests is more important than choosing the best and cheapest military plan," he added. "It's not the first time that national interest has superseded market logic."
EADS chief executive, Louis Gallois, has already responded, saying he was "disappointed" by the decision but added, "it's important to recognize that the GAO announcement is an evaluation of the selection process, not the merits of the aircraft."
EADS also wants to hear the response of the USAF, which has 60 days to respond to the GAO's findings. Defence industry experts say that EADS will continue to argue that their tanker - the KC-45, based on the frame of the Airbus A330 refueling aircraft - was the best available on the market, having been extensively tested and ordered by Australia, Saudi Arabia, United Arab Emirates and Britain.