EADS Shares Soar on Pentagon Deal

PARIS -- Shares in EADS soared on Monday after the European aerospace group won part of a $35 billion deal to supply 179 aerial tankers to the Pentagon in a shock defeat for U.S. rival Boeing.

The U.S. Air Force announced the award late Friday after a lengthy contest between Boeing and a European-U.S. team led by U.S. defense contractor Northrop Grumman, which offered converted passenger jets supplied by EADS unit Airbus.

The deal has sparked a controversy in the United States over potential job losses to Europe but was hailed as a sign of improved European-U.S. relations by both France and Germany.

With aircraft sold in dollars but most of the costs in euros, EADS has been severely hurt by the rise of the euro, which stood close to its record high of $1.52 on Monday.

The contract has taken some pressure off the company ahead of its annual results next week, when it is expected to report a 312 million euro loss for 2007.

Including follow-on orders and in-service maintenance, the aerial tanker contract could be the second costliest military aircraft purchase in coming decades, topped only by Lockheed Martin's F-35 Joint Strike Fighter.

The initial contract for the newly named KC-45 tanker, a modified A330 airliner, covers four test aircraft for $1.5 billion. With plans to buy 175 more planes, it would be worth $35 billion overall, the U.S. Air Force said. Airbus will provide A330 passenger jets, which usually sell to airlines for $172 million each, and a refueling boom developed by EADS. The planes will be assembled in Alabama, where Northrop will also fit them with military electronics.

Washington hopes to start operating the new tankers in 2013.

German Chancellor Angela Merkel said the Pentagon award demonstrated the "good and trusting cooperation with the United States in the areas of security policy."

EADS chief executive Louis Gallois said the contract had been won without low-balling the price. "No we didn't smash the price," he said in an interview.

However, Steve East, an aerospace analyst at Credit Suisse, said the deal may not generate significant profits for EADS and advised investors in a note to "sell into strength," saying the long-term challenges outweighed the positive short-term news.

Boeing can challenge the deal but said it would only decide whether to do so after a debriefing from Air Force officials.

With the U.S. economy in a slump and Boeing backers howling about job losses, the deal could also be held up in Congress where some lawmakers are angry that the purchase coincides with a major trade subsidy dispute between Boeing and Airbus.

The contract is also shaping up as an issue in this year's U.S. presidential election.

The likely Republican nominee, Senator John McCain, led an investigation that killed an earlier Air Force proposal to lease 100 Boeing 767 tankers after a former top Air Force official went to jail for negotiating a senior job with Boeing as she was still overseeing that deal and others.