Airbus parent EADS told the Pentagon on Tuesday that it will compete directly against Boeing Co for a military refueling plane deal worth up to $50 billion, according to sources informed about the matter.
EADS' decision comes against the backdrop of ongoing problems with its A400M military transport plane in Europe and mounting opposition from Boeing supporters in Congress.
Analysts said the European aerospace giant faces an uphill battle given that its A330-based tanker is larger and more expensive to operate than Boeing's 767-based tanker.
But U.S. defense officials privately say they are pleased the Air Force's third attempt to replace its aging KC-135 tankers will be a real competition, rather than a sole-source deal with Boeing. An earlier lease-buy tanker deal with Boeing collapsed in 2005 amid a huge procurement scandal.
Washington has been waiting for EADS' decision after the Pentagon offered to extend the deadline for tanker bids by 60 days until July 9. That move came after European governments accused the United States of engaging in protectionism with revised tanker competition rules that prompted EADS' former partner, Northrop Grumman Corp , to quit the contest.
Northrop and EADS had won the last U.S. tanker competition, but the Pentagon later canceled the projected $35 billion deal after government auditors upheld a Boeing protest.
Boeing had no immediate comment, but the company is likely to be very concerned about changes the Pentagon is making to facilitate an EADS bid, said defense analyst Loren Thompson of the Virginia-based Lexington Institute.
Thompson said U.S. defense officials had agreed to waive duties on imports into the United States that EADS would need to build its A330-based tanker, although they were insisting the change was part of a package of export reforms that Defense Secretary Robert Gates is due to unveil on Tuesday.
Officials had also agreed to waive a defense acquisition rule that limits a foreign company's ability to provide classified communications equipment for U.S. weapons, he said.
The Pentagon said it would not change the terms of the solicitation in order to encourage EADS to participate, but it appears that is precisely what they are doing, he said.
A source familiar with the matter said EADS North America, the company's U.S. unit, had informed the Pentagon on Tuesday that it would compete for the tanker contract.
EADS North America confirmed it would make an announcement on the competition at 1800 GMT, without giving further details.
An EADS decision to bid is certain to trigger a politically charged campaign over jobs and transatlantic competition ahead of congressional elections in November. The Pentagon hopes to pick a winner in early fall, shortly before Americans vote.
Boeing and Airbus also remain locked in a row over civil subsidies.
Norm Dicks, chairman of the House of Representatives Defense Appropriations panel, said last week he hoped EADS would not launch a bid.
On Monday Republican Senator Jeff Sessions accused Dicks, a Democratic congressman from the big Boeing state of Washington, of trying to intimidate EADS' would-be partners.
There are going to be a large number of obstacles that will be faced, said Howard Wheeldon, senior strategist at BGC Partners in London.
Sources close to the matter, who were not authorized to speak publicly, told Reuters on Monday that EADS would proceed to bid for the contract even after failing to secure a key supplier.
EADS will still be backed by over 200 suppliers, including engine maker General Electric , Honeywell International and Rockwell Collins .
The company will also continue to add other suppliers to its team, said the sources.
Analysts said EADS faces a tough battle by offering the A330 against the smaller 767 model being offered by Boeing.
I think there is next to no chance that EADS can win the tanker competition as it stands today, said Macquarie Securities analyst Rob Stallard.
The request for proposals (RFP) clearly favors the 767, and Boeing has put significant political capital into securing this win. What EADS can get out of the competition is the good will of the Department of Defense he added.
(Reporting by Andrea Shalal-Esa in Washington and Tim Hepher in Paris; additional reporting by Matthias Blamont)
(Editing by David Cowell and Gunna Dickson)