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When President Eisenhower warned America about the rising power of the military industrial complex in 1961, defence spending was greater than the combined net income of all American companies. Corporate earnings are now seven times the defence budget, but the procurement process remains politically charged.
The Government Accountability Office recommended on Wednesday that the US Air Force reopen the bid process for a $38bn contract for tanker jets that provide mid-air refuelling. This follows a good deal of public teeth-gnashing, and furious protests from Boeing over victory by a consortium that, while led by Northrop Grumman, uses a foreign EADS-made aircraft.
Yet tempting as it is to see the dark force of protectionism, the charge does not stick. As the investigative arm of Congress, the GAO is non-partisan and has objected to flaws in the process, not the decision itself. More than 60 per cent of the value of the EADS aircraft would be American in origin and both BAE Systems and Finmeccanica have won US defence business against domestic bids.
Instead, the increased willingness of defence contractors to appeal against procurement decisions points to the concentration of spending in large but scarce government programmes. In spite of a considerable rise in defence spending, little of it has gone on new kit, so missing an opportunity is painful. EADS’s tanker jet is proving popular around the world, meaning that if Boeing gets no US order, it will probably have to make do with scraps from Japan and Italy. Meanwhile for EADS, whose shares approached a five-year low on Thursday, losing the tanker contract would be a strategic blow. The earnings impact is minimal, but the project is an essential part of raising the dollar component of its cost base. Without hedging, at current exchange rates the company would lose about €2bn this year. Time for EADS executives to pin the US flag to their lapels.
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