Boeing Co's chief executive said government subsidies received by archrival Airbus give the European aircraft builder a significant advantage in their rematch for a potential $50 billon U.S. Air Force aerial-refueling fleet contract.

Two days after Airbus parent EADS said it would compete for the deal, James McNerney said on Thursday that Boeing was very concerned about the subsidies' impact in a fixed-price development competition for an initial 179 tanker aircraft.

We're not afraid of global competition, he said at the Woodrow Wilson International Center for Scholars. We just want level-playing-field rules applied in a common sense way.

In a fixed-price deal, a contractor must bear any cost overruns rather than pass them along to the government.

McNerney made his remarks in response to a question after delivering a speech on U.S. global competitiveness, innovation and approaches to public-private cooperation.

President Barack Obama tapped McNerney last month to chair the President's Export Council, the principal national advisory committee on international trade.

McNerney referred to a World Trade Organization ruling last month that Airbus had benefited from illegal subsidies, including to develop the A330, the plane it is pitting against a modified Boeing 767 in the Air Force rematch.

In a fixed-price development competition, that subsidy is a significant advantage, he said.

The tankers are used to refuel other aircraft in mid-air. They would replace Boeing KC-135 Stratotankers that average about 50 year old.

The Airbus-Boeing subsidy dispute goes back decades. A WTO panel is to rule in coming months on a European Union challenge to allegedly WTO-incompatible U.S. federal, state and local subsidies benefiting


The U.S. Defense Department has resisted pressure from Boeing's political backers in Congress to factor the WTO ruling against Airbus into the tanker competition.

My lawyers tell me that the WTO case gives us no basis on which to make a judgment, Defense Secretary Robert Gates told a House of Representatives Appropriations defense subcommittee on March 24.

Guy Hicks, a spokesman for EADS' North American arm, said in response to McNerney that Boeing and EADS compete on the global stage daily in highly competitive, price-based selections.

The tanker competition is essentially the same dynamic of offering the greatest capability at an appropriate price, he said in an email. Competition has proven time and time again to substantially benefit both military and commercial customers.

EADS said Tuesday it would bid against Boeing for the contract, acting as its own prime contractor. Final bids are due July 9.

EADS partnered with Northrop Grumman Corp to win a similar contest in 2008, only to have its award overturned after Boeing lodged a formal protest with the U.S. Government Accountability Office. Auditors found the Air Force had failed to follow its own judging rules.

Northrop withdrew last month. Wes Bush, its chief executive, said the Pentagon's final tender clearly favors Boeing's smaller 767-based tanker.

The Air Force initially tried to lease and buy modified Boeing 767s as tankers in a $23.5 billion deal rooted in the post-September 11, 2001, commercial aviation downturn. That deal collapsed amid a conflict-of-interest scandal that sent two Boeing executives to prison, one of them the Air Force's former No. 2 weapons buyer.

(Reporting by Jim Wolf; Editing by Tim Dobbyn)