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BOEING CLOSE TO USAF TANKER DEAL

5 Nov 02. Boeing Co. (NYSE:BA – News) is closing in on a novel deal to lease modified 767 jetliners to the U.S. Air Force for $17bnn, far less than the original $26bn estimated price that drew criticism from senior legislators.

According to the terms of the plan, in the works for nearly a year, the Air Force would lease 100 of the Boeing aircraft, specially tailored to do in-flight refuelling for military aircraft. The interest rate on the lease would be between 4% and 5%, and a separate but related transaction has been negotiated that would allow the Air Force to pay an additional $4bn to purchase all the planes at the end of their leasing terms. The aircraft are to be leased individually, with the service taking delivery from 2006 through 2011, company and government officials have previously said.

While some of the finer details of the proposed lease are to be hashed out, the Air Force has been briefing the Office of Management and Budget to allay previous concerns by its director, Mitch Daniels. In a May 3 letter to Arizona Republican Sen. John McCain, also a critic of the plan, Mr. Daniels said it would be more cost-effective for the Air Force to modernize its existing tanker fleet than proceed with a financing plan that had been estimated at $26bn. The military doesn’t traditionally use leases to acquire equipment, especially machinery with a lifespan of at least 30 years.

But the new $17bn price is significantly lower, and people familiar with the situation say that it amounts to about $100m less than the cost of buying the aircraft outright. A Boeing spokesman declined to discuss specifics but said the company was hopeful an agreement could be reached by year-end. An Air Force spokeswoman said negotiations continue on the tanker deal, declining to comment on specifics. A final deal will require the approval of Mr. Daniels, Defense Secretary Donald Rumsfeld and Congress.

Comment: This announcement put Boeing in a strong position to win the UK’s FSTA programme with a similar leasing deal on used 767s. Whilst the Airbus offering is seen as technologically more advanced, Boeing ahs the advantage on price and availability.

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