ACT II: TWO COMPANIES, ONE PLANE
The leasing option might have been dead, but the Air Force tankers were only getting older. John McCain’s crusade had ensured that this time, companies would compete on a new tanker contract. For Ron Sugar, the CEO of Northrop Grumman, the question was whether his company should be one of them.
Sugar spent part of his Labor Day weekend in September 2005 reviewing Air Force documents that sketched out what kind of tanker the service wanted. The Air Force hadn’t yet released a formal request for tanker proposals, but Sugar knew it was coming and could pose a strategic turning point for the company.
Sugar’s predecessor had grown Northrop by gobbling up smaller firms in specialty and niche markets. Sugar continued that plan, but Northrop remained a “tier-two” contractor in Washington, good at comparatively smaller jobs or as the supporting player to larger companies. If Northrop was going to rise to tier-one status, it needed a huge win. Surveying the landscape of potential contracts, he saw that the tanker deal stood almost alone.
But Northrop wasn’t known for building airplanes. Its talent was in putting complex electronics systems inside other companies’ airplanes. That’s what it had done with Boeing on the B-2 stealth bomber as well as a radar-and-surveillance aircraft based on the Boeing 707. If Northrop was going to win the tanker contract, it first needed to find an airplane.
An Airbus jet was the leading candidate for several reasons. EADS and Northrop had a connection in Ralph Crosby, James Roche’s old nemesis. Crosby had worked at Northrop for two decades and had run its Washington, DC, office. Sugar had also said publicly that EADS’s Airbus A330 could topple Boeing’s 767 in a head-to-head competition. EADS also had invested more than $100 million developing the all-important boom, the lack of which had kept it out of the lease race.
EADS wanted to dethrone Boeing in the US commercial-aircraft market. The tanker deal would be its opening salvo. But politically, EADS still wasn’t equipped to go it alone on a high-profile American contract—despite its North American division, it was still viewed as a European aircraft maker.
Northrop needed a plane. EADS needed an American partner. Sugar signed off on the union and headed out to survey damage on the Gulf Coast, where days earlier Hurricane Katrina had torn through Northrop’s shipyards.
An American partner wasn’t enough, though, for EADS to beat Boeing on its home turf. The company would have to build its plane—or at least a major portion of it—on US soil.
In 2005, EADS launched a nationwide site search for a new manufacturing plant. The company fielded queries from 34 locales, including Boeing territory in Washington state and Kansas. The finalists all hailed from the same region—Florida, Mississippi, South Carolina, and Alabama. According to analysts who watched the process, that was no accident. EADS took advantage of Boeing’s high labor costs and its contentious relationship with unions. Says one analyst: “They wanted to beat Boeing by becoming a low-cost, non-union builder of planes. That naturally leads you to the Deep South.”
Ultimately, EADS decided to build a $600-million manufacturing plant in Mobile, where it pledged to build more than half of the tanker and employ more than a thousand workers.
Alabama government officials and its congressional delegation, now firmly rooted in the Republican Party, took an intense interest in the plant’s future. From then on, EADS would be publicly associated with the Republican Party. Boeing, with its major presence in Washington state, had a Democratic tinge. The two companies were poised not just for a corporate war but for a partisan one as well.
The Rules of the Game
Getting Northrop and EADS to pair up was half the battle. The Air Force also had to make the deal worth their while. Northrop insisted that the service use a “best value” procurement, which meant the bids wouldn’t be judged solely on lowest price. The Air Force’s evaluation team would apply a more subjective standard and evaluate each plane on its merits. As a matter of policy, the Defense Department was encouraged to use best-value judgments, largely as a way of ensuring the most bang for the government’s buck. But the approach also was essential for Northrop and EADS because they had the larger and presumably more expensive airplane. The team wanted extra consideration for the A330’s unique attributes, such as greater fuel and cargo capacity. If the Air Force judged the proposals on price alone, Boeing likely would win.
McCain, along with Alabama’s senior senator, Richard Shelby, also pushed for the best-value strategy. In late November 2006, McCain heard that the Air Force evaluation team had met and not chosen that path; the deal was shaping up, from McCain’s perspective, as another giveaway to Boeing. Executives at Northrop were prepared to walk away from the competition if it came down to a price shootout. McCain intervened, sending a letter to Secretary of Defense nominee Robert Gates that, in so many polite words, warned him not to head down this road.
The Pentagon listened. When the Air Force’s proposal request hit the streets a month later, officials publicly announced their commitment to a “capability-based, best-value approach” and a “full and open competition” that didn’t rely solely on price.