Management: Boeing's next Airbus dilemma?

Chief Executive, The, April, 2004 by Rick Newman

THE STORM FINALLY seemed to be clearing for Boeing last December when Harry Stonecipher replaced Phil Condit as CEO. That seemed to end one of the bumpiest chapters in the company's history, including allegations of fraud in a deal to convert a hundred 767s into refueling tankers for the Air Force. The Pentagon suspended the $17-billion contract while it investigated. Three Boeing executives implicated in the affair left the company.

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But Stonecipher may face a new complication on the tanker deal. When the Pentagon awarded Boeing the contract in 2002, the only competitor was the European Aeronautic Defence and Space Company, best known as the parent company of Airbus--and it was a long shot at best. Some of its technology was incompatible, and the likelihood of Congress sending major defense dollars to a European-owned company seemed remote.

But since then, EADS has been quietly building support in Congress for its proposal to convert Airbus A330 jetliners into Air Force tankers. Insiders say EADS is now poised to take a decisive step by teaming up with a major U.S. contractor such as Lockheed Martin or Northrop Grumman. A deal could be announced by the summer.

Such a team could ultimately create a rivalry as fierce as that for commercial jetliners, a battle in which Airbus has gained the upper hand. To overcome the foreign factor, EADS has adopted the conventional script for snagging a big contract from Congress: link it to American jobs and spread the wealth around key congressional districts. "We've listened to people on Wall Street and in Congress," confides one company official, "and they've told us what we need to do: build factories here."

EADS is already building a helicopter plant in Mississippi--home to Republican Sens. Trent Lott and Thad Cochran--and a microelectronics facility in Alaska, home to Republican Sen. Ted Stevens. Company officials have been hinting that if Congress were to send some business their way, they could build an A330 assembly line in Kansas.

EADS also has recruited American talent. Ralph Crosby, a former Northrop executive who helped shepherd the B-2 bomber through Congress, is running its North American subsidiary. For now, Crosby's main focus is the investigation into whether Boeing got a sweet-heart deal on the tankers, including, allegedly, access to proprietary information that EADS submitted to the Air Force. If the government sanctions Boeing, that could be a green light for EADS. A clean bill of health for Boeing, by contrast, could lead the Pentagon to reinstate the original deal. But that might still leave room for a second supplier.