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:: February 2012 Letter ::

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Dear Fellow International Relations Fans,

My grandparents and great grandparents, fleeing war and pogroms in their home countries, were right about America being the land of opportunity. But times have changed. Foreign aircraft manufacturers, fleeing draconian defense budget cuts in their home countries, are clearly finding a less hospitable reception. Foreign aircraft primes seeking to enter the US market have suffered a recent series of unpleasant reversals. Embraer’s Aerial Common Sensor win was followed by a contract cancellation. AgustaWestland’s VXX Presidential Helicopter win was followed by a contract cancellation. And of course there was Airbus’s KC-30 tanker cancelled KC-X contract, producing the greatest transatlantic spleen venting since 1812.

Every contract death tells a story. But epidemiologists point out that a cluster of deaths tells a more interesting story. Looking closer at each contract death (and ignoring the cluster they create) produces a series of understandable fates. VXX died because of a breathtakingly stupid political exchange started by John McCain and finished by Barack Obama, and due to a massive attack of Navy/White House gold-plating. ACS was killed by a silly Army/USAF fight over what kind of surveillance plane the Army could operate. The KC-30 died from shifting political tides and a changed budget environment.

Yet February saw another two foreign aircraft acquisition deaths, creating a rather stark mortality cluster indeed. DoD released its FY2013 budget, which not only cancelled the 17 Finmeccanica C-27Js remaining to be funded under the Joint Cargo Aircraft (JCA) program (down from the original 145) but also called for the retirement of 21 new C-27Js that had recently been delivered or funded. Then, the USAF cancelled its $355 million Light Air Support (LAS) contract, which had gone to Embraer’s AT-29 Super Tucano counterinsurgency plane. Hawker Beechcraft, whose AT-6 had lost the contract, complained to a federal court, and USAF decided to “set aside” the contract. Both sides claimed that the contract and/or the contract nullification were politicized moves. It’s possible that they’re both right.

Does DoD have a problem here? Possibly not. The latest deaths are as explicable as the others. JCA and LAS are both lasting reminders of Iraq and Afghanistan, two conflicts the US seems eager to forget. LAS was awarded just before two US officers were murdered and NATO advisors were withdrawn from Afghan ministries. NATO advisors will probably be sent back, but if they aren’t the USAF will buy LAS planes for a pseudo-ally they can’t advise (notional yet all-too-imaginable quote: “The American people can rest assured that the odds of these planes being used to strafe NATO troops is no higher than three or four percent, at most”). JCA, like ACS, was also the victim of a dumb Army/Air Force turf war: it originated as an Army effort to purchase 145 cargo planes which the Key West Agreement basically says they can’t operate. Once the Air Force found a way to control of this program (which had been given the “Joint” designation, a surefire kiss of death) they also found a way to smash it with a rock.

Again, each of these cancellations are understandable. Given the number of domestic US programs gone horribly wrong (FCS, ARH, C-130 AMP, Global Hawk Block 30, Comanche, just to name some of many) it’s clear the procurement system is more to blame for these foreign system cancellations than protectionism. Also, there are actually a few examples of successful US aircraft purchases from foreign suppliers other than the UK. The Coast Guard is still buying EADS CN-235 turboprop patrol planes, and is updating its Eurocopter MH-65 Dolphins. The US Army just took its 200th UH-72 Light Utility Helicopter, with another 145 planned. But there’s not a lot going on here in terms of money.

What’s important is perception. To foreign companies, the US defense game has gotten protectionist. Foreign company executives feel they can’t win, even if they use a US partner (all of the dead programs involved a US partner). They’re are starting to vent their anger . Giuseppi Giordo, CEO of Finmeccanica’s Alenia Aermacchi unit, even went so far as to threaten to withhold spare parts and support for the 21 USAF C-27Js now in the pipeline if they’re sold to new users. Vago Muradian’s February 27 Defense News page one scoop tells the compelling story. Two thoughts after reading Mr. Giordo‘s reaction: (1) “I completely understand your anger.” (2) “Good luck changing anything with that.”

But the big risk isn’t angry rhetoric. It’s retaliation. Sure, the Airbus countries weren’t going to look at a Boeing tanker. Given their horrible defense budget trends, they may not look at any tankers. Or planes. But Italy does buy US equipment, and annoying them is unwise. And then there’s the emerging markets. Since Boeing’s F/A-18E/F is still in the running for Brazil’s FX-2 competition, offending Brazil’s government and defense industry may have consequences. Brazil’s foreign ministry stated, “This development is not considered conducive to strengthening relations between the two countries on defense affairs,” a nice example of passively bottled anger.

US officials quickly switched to damage control mode, an unusual event after the cancellation of a foreign aircraft contract. Deputy Secretary of State William Burns, visiting Brazil after the LAS contract was set aside, said the cancellation was not a reflection on the Super Tucano, which he described as “a very fine aircraft” in which the US was still “interested.” USAF chief Gen. Norton Schwartz called the incident an “embarrassment,” and promised to quickly renew the contest.

There’s another problem. The recent deaths were accompanied by a well-meaning but potentially dangerous US Government initiative. Also in February, the US Ex-Im Bank, in conjunction with Citibank and Boeing, announced a $740 million fund to help small businesses that provide Boeing with civil jetliner parts. In times like these, helping small businesses is a populist vote-grabber. But for those of us international relations majors out there, this initiative also reeks of local jetliner content promotion, which is illegal under the WTO’s Agreement on Trade in Civil Aircraft (ATCA) treaty. This is also the kind of industrial policy the Europe likes to mess around with. The line between “let’s create a level playing field” and “let’s enjoy the benefits of a job-creating industrial policy that favors domestic producers, just like the Europeans do” isn’t really that thick.

In short, the US has five foreign aircraft contract deaths, which are on their own quite explicable and justifiable. We’ve got a US jetliner content support program that looks irresistible to export promoters and the aerospace industrial base. But add it all up, and the US has a growing international aerospace image problem. In a time when US aerospace is more dependent on exports than ever, this is a very dangerous development.

Teal February aircraft updates include new Fighter and Special Mission Aircraft market overviews, plus updates of the F-35, F-16, B777, B787, A350XWB, Challenger 300, Challenger 605/Global Express, and B-1. Have a great month.

Yours, ‘Til Traffic Resumes On The Two-Way Street,
Richard Aboulafia
 

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