EADS North America Chief Executive Officer Sean O'Keefe says that while his company has built up its capacity to manage its first Pentagon prime contract -- the UH-72A helicopter -- its abilities are not mature enough to justify going it alone on a bid for the massive U.S. Air Force KC-X tanker contract.

EADS's prime contractor partner, Northrop Grumman, announced March 8 that it would not bid for the contract to build 179 KC-135 replacements, an order valued at about $35 billion. This leaves the Pentagon with a sole-source deal for Boeing's 767-based design.

The partnership was forged more than five years ago with Northrop Grumman to leverage the company's "near-peerless" reputation in systems integration, program management and government compliance processes, O'Keefe said March 9. "We're developing all of those capabilities too," he says. "We do not have anything near that in place that would rival that capacity. We could not bring that to the equation alone."

Overall, EADS was much more eager to compete, but with Northrop at its side. The final call was apparently Northrop's. "Our partners at Northrop Grumman were very concerned with the fixed-price contract," he says. "We were not as concerned." O'Keefe notes that Airbus, which would have supplied the A330-200 airframes, routinely delivers on fixed-price contracts with its airline customers.

The Pentagon's final KC-X request for proposals includes a fixed-price incentive fee development contract and fixed-price production. There would be two opportunities to renegotiate the production price.

The Northrop Grumman/EADS team won a $1.5 billion contract in February 2008 to develop a new tanker for the Air Force, but it was terminated after a Boeing protest led to the discovery of procurement missteps by the armed service. That was the second effort to buy new tankers, after an earlier lend-lease award to Boeing ended in procurement scandal and political criticism.

O'Keefe notes that while the total KC-X effort was much larger, the UH-72A work is worth about $1.5 billion, with 250 more aircraft to be delivered to the U.S. Army alone.

He says the North American subsidiary of the European company is planning to focus on future U.S. business opportunities, including the Army's Armed Scout Helicopter and some electronics business for the Homeland Security Dept.

But the tanker deal was the linchpin of the company's major organic growth target in the U.S., the largest defense market in the world.

It is likely that acquisitions could become a focal point if the company intends to grow more stateside. "We are probably not going to meet the growth goals. They are obviously going to have to change," O'Keefe says.

Finally, O'Keefe says the decision not to bid is a reflection of the economic climate, not protectionism on the part of the U.S. government.

Photo: Northrop Grumman