Wall Street View

Here's a brief analysis of yesterday's multibillion-dollar KC-X tanker contract award to Boeing written by the folks at Credit Suisse:

We See 3 Possible Outcomes: 1) The competition stands as is with Boeing as the winner; 2) EADS protests the win (has 10 calendar days to protest which could trigger the U.S. government to issue a stop-work order while GAO evaluates the award, or EADS can request an orderly debriefing after which it has 5 calendar days to protest); or 3) An adjustment is made and there is a dual-award to both Boeing and EADS which could eventually be facilitated by awarding a future contract for eventual replacement of the Air Force’s other (larger) tanker variant, the KC-10, to Airbus.

Expect Minimal Profitability…at Least Initially: We believe BA and EADS submitted very aggressive pricing proposals as DoD noted both proposed a/c were capable of winning the competition. As such, we do not expect particularly high profitability from the initial award for 18 a/c. We also note DoD committed to a fixed-price contract structure that would provide the USAF with a capable a/c at the most competitive price. Therefore, we see limited room for error and/or cost overruns early in the process. If the development program goes on to replace the full tanker fleet (179 a/c valued at >$30B), we see it as incrementally profitable for BA in the long term.

DoD Evaluated “Price, Lifecycle Costs, & Warfighter Capabilities”: DoD’s source selection process determined if the proposals demonstrated the ability to deliver on 372 mandatory requirements, and both offers were considered awardable. It took into account fleet mission effectiveness, price, lifecycle costs, warfighter capabilities, fuel efficiency, and military construction costs.