UPDATE: EADS Signs UK Tanker Contract

Airbus parent landed its second big government order when it signed a $26.36 billion contract to replace the Royal Air Force's aging fleet of mid-air refueling tankers.

LONDON (AP) -- Airbus parent EADS landed its second big government order in as many months Thursday when it signed a $26.36 billion contract to replace the Royal Air Force's aging fleet of mid-air refueling tankers.
Airbus will provide the Royal Air Force with 14 new A330-200 passenger aircraft converted for military use under a 27-year contract between the EADS-led consortium AirTanker Ltd. and the Defense Ministry.
European Aeronautic Defence & Space NV was the junior partner in a consortium headed by U.S. defense company Northrop Grumman Corp. that was chosen over Boeing to supply the U.S. Air Force with 179 refueling aircraft for $35 billion.
EADS has also landed contracts for its A330-200 aircraft with the militaries of Australia, Saudi Arabia and the United Arab Emirates.
Under the terms of the British deal, the planes will be owned by AirTanker, but will fly in RAF colors, providing air-to-air refueling and passenger air transport tasks. The consortium will also have the rights to commercially lease five of the aircraft, which can carry 290 passengers and freight.
The aircraft will replace Britain's fleet of Tristar and VC-10s, with the first plane expected to come into service in 2011 and all expected to be flying by 2016.
Payment for the project will start when the first plane is delivered. Ann Taylor, the defense minister responsible for procurement, added that the project will create 600 new jobs.
The deal follows a rocky two years for EADS. It lost billions because of delays to its commercial superjumbo A380 and mid-size A350 jets. The company is selling off sites and slashing thousands of jobs in a major overhaul aimed at recouping those losses.
Uncertainty surrounding the global financial markets made financing the deal particularly difficult, said AirTanker CEO Phil Blundell, who conceded that plans to raise the funding through a combination of debt and bonds had to be ditched.
''The bond markets collapsed so we had to restructure the deal in an all debt finance,'' he said.
Blundell said AirTanker had borrowed 2.5 billion pounds ($5 billion) at just 1 percent above the interbank lending rate, or Libor, to pay its costs. The total cost to the consortium is expected to be around 3.5 billion pounds ($7 billion).
A banker close to the deal told The Associated Press that the amount of money the consortium will receive will be directly linked to the amount of air miles flown by the new planes.
AirTanker ''is taking significant risk'' on the RAF using the aircraft a lot, he said, speaking on condition of anonymity because of sensitivity of his position. ''If they do then shareholder return is at the top end.''
Celebrations over the deal were checked when EADS received some bad news over one of its other projects. Talks collapsed over the sale of three EADS manufacturing sites in Germany to MT Aerospace, a branch of
Germany's OHB Technology AG. The selloffs are part of EADS' sweeping cost-cutting plan.
OHB CEO Marco Fuchs said the deal ''didn't make sense'' given current market conditions and the weak U.S. dollar, and predicted that Airbus may have trouble finding other buyers.
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