Procurement: July 14, 2004

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The U.S. Air Force isn't the only one trying to creatively finance a new air tanker fleet, nor is it the only one running into problems with their arrangements. EADS and the British Royal Air Force (RAF) were attempting to reach agreement on a $24 billion tanker program that would privately finance the building and ownership of converted Airbus A330-200 aircraft, but the British Ministry of Defense has appeared to terminate efforts to reach a final agreement. The RAF had hoped to start replacing its aging VC10 and Tristar tankers in 2008. 

The Ministry of Defense had hoped for an arrangement where they could only pay for services as they used them, keeping the actual aircraft off the UK's balance sheets, in order  to reduce costs. It was hoped that private sector financing would be used to fund the program, rather than having the ministry actually purchase and own the aircraft. As with many other European defense budgets, there is a gap between procurement desires and available funding.

EADS had proposed a mixture of up to 16 new-build and second-hand aircraft and the tanker deal had been seen as a way to build its presence in the UK. The Ministry of Defense was expecting EADS to generate third-party revenue with the aircraft to offset costs when they were not in use by the RAF. Financial analysts had predicated the deal was unlikely to work from the start, since the responsibility for risk and an unknown market for third-party usage was unknown, leaving a bid winner with a substantial financial loss. 

Meanwhile, the Boeing/U.S. Air Force tanker lease/buy deal is likely to under review at the Pentagon for quite a while. Boeing had proposed a lease of one hundred converted 767 passenger aircraft to replace the Air Force's aging tanker fleet, but ethical and political problems are likely to tie up any decision to move forward with Boeing on any sort of deal until after the 2004 Presidential elections. Doug Mohney

 


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