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BOEING AWAITS TANKER LEASING DEAL

11 Feb 03. The Pentagon could announce a decision this week on the U.S. Air Force’s controversial $17bn plan to lease Boeing 767 jetliners as refuelling tankers, a Boeing Co. (NYSE:BA – News) official said on Tuesday.

During an aerospace technology conference hosted by SG Cowen, James Albaugh, who heads the Chicago company’s integrated defense systems business, noted that the Pentagon’s top acquisition official, Edward C. “Pete” Aldridge Jr., last week said the agency hoped to make a decision this week.

“We could have a decision by the end of this week” or, if not, early next week, Mr. Albaugh said.

“It’s hard,” Mr. Aldridge said Friday when asked of the planned leasing arrangement. “Anything new, people have some questions about whether or not it’s doable. But we are working it now,” Mr. Aldridge said, according to a federal transcript.

Mr. Albaugh didn’t say whether or not Boeing expects the Pentagon to approve the proposal.

The company believes that the Air Force desires such an arrangement, and that it has answered questions about its cost effectiveness during the service’s scrutiny of the program in the past year, Mr. Albaugh said.

Under the latest terms of the deal, the Air Force would lease 100 aircraft, specially modified for in-flight refuelling of military aircraft. Even though the price tag has come down from the $26bn originally estimated, the plan has been characterized by some congressional leaders as a way to help Boeing, which has suffered mightily from a steep falloff in demand for commercial jetliners. Boeing expects to deliver 280 commercial aircraft this year, down from 527 airplanes delivered in 2001.

In December, Mr. Aldridge and Pentagon Comptroller Dov Zakheim delayed a decision and asked for further study of alternatives to the tanker leasing arrangement.

Boeing’s Albaugh said Tuesday the company expects “some investments in our
infrastructure” by the government to shore up the troubled satellite
launch businesses of Boeing and Lockheed Martin. The Air Force will provide a $538m boost to Boeing and Lockheed Martin Corp. in coming years to keep both companies in the rocket-launch business, easing the impact of a steep falloff in commercial orders for such services.

As recently as three months ago, it appeared the companies would split about $1bn over a five-year period starting in fiscal 2004. But industry and service officials said competing budget demands forced the government to nearly halve that amount. The move comes amid a continuing downturn in the commercial- satellite market, where orders have all but dried up and aren’t expected to strongly recover until 2005 at the earliest.

The additional funds cap an aggressive, two-year lobbying campaign by both companies in the Pentagon as well as on Capitol Hill. Last year, the head of Boeing’s Delta IV program was explicit about the goal: “to keep both companies in the game and keep them healthy.”

The rocket launch industry has been struggling in the wake of the dot-com and telecommunications busts and the drastic commercial launch downturn. Even so, Boeing and Lockheed have been reluctant to exit the business because of massive investments they made in the past decade and the high cost of closing shops.

The U.S., Mr. Albaugh said, wants two separate healthy launch systems to provide assured access to space over the long term, and will likely provide some sort of financial assistance to Boeing and Lockheed toward that end. The Pentagon has been increasingly relying on satellites in battles, using precision-guided bombs and seeking to build a massive missile defense shield to protect the U.S.Mr. Albaugh said it’s too early to gauge the impact of the Columbia disaster on Boeing’s space business.Boeing merged its defense and space units last year to create the integrated defense systems division to better compete for defense contracts.

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