MD Helicopters prevails in dispute with Boeing over MD540F
by Elan Head
MD Helicopters, Inc. (MDHI) appears to have fought off a legal challenge by Boeing that would have barred it from competing for key United States and foreign military contracts.
Earlier this month, an arbitration panel declared that Boeing could not prevent MDHI from offering its MD540F helicopter for the U.S. Army’s Armed Aerial Scout (AAS) competition, according to papers filed on July 17 that ask a federal district court to confirm the panel’s judgment.
The ruling is an important win for MDHI, but not simply because it allows the company to compete for the Army’s hotly contested, multi-billion-dollar AAS program. It also confirms MDHI’s ability to continue to offer helicopters to foreign military customers, an important source of current revenue and prospective business for the company.
“A ban on U.S. government contracts would negatively impact the ability to sell not only to the U.S. military, but also through the U.S. military to some foreign governments via the Foreign Military Sales [FMS] program,” an MDHI spokesman told Vertical in an e-mail. “It is often through FMS sales that U.S. products are exposed to foreign markets and from which follow-on sales are generated.”
Although Boeing briefly owned what is now MDHI after its merger with McDonnell Douglas in 1997, it sold MD Helicopter Holdings Inc. in 1999. In 2005, Patriarch Partners, LLC acquired MD Helicopter Holdings Inc. and recapitalized it as the independent company MDHI.
Boeing’s claims in the current action stem from 2005 agreements that allowed Boeing to offer a Mission Equipped Little Bird (MELB) helicopter based on the MD530F for the U.S. Army’s Armed Reconnaissance Helicopter (ARH) program, in exchange for which MDHI received a $10 million loan, restructuring of certain previous debt owed to Boeing, and a $15 million cash payment. Boeing was unsuccessful in its bid for the ARH contract, which went to competitor Bell Helicopter before the ARH program was cancelled in 2008.
In the meantime, MDHI continued to sell armed helicopters to military customers around the world, including governments in Korea, Japan, Turkey, Argentina, Italy and Finland. In 2011, MDHI sold the armed MD530F for use by the Afghan Air Force through the U.S. government’s Foreign Military Sales program. It made another significant FMS sale, for Saudi Arabia, in 2012.
In early 2012, MDHI launched the MD540F at the Army Aviation Association of America Annual Professional Forum and Exposition, presenting it as a contender for the Army’s AAS program. According to the recent district court filing, Boeing — which is presenting its similar AH-6i helicopter for the competition — then challenged MDHI’s right to compete for the contract, arguing that AAS is the successor to the canceled ARH program and therefore covered under the agreements.
MDHI challenged Boeing’s interpretation, pointing out “critical differences” between the AAS and ARH program requirements, as well as key differences between the MD540F and Boeing’s original Mission Enhanced Little Bird. Given that Boeing had not objected to MDHI’s intervening armed helicopter sales, MDHI says, “Boeing’s radically changed position is a blatant attempt to keep MDHI from competing for this lucrative military contract.”
Moreover, MDHI claims in the court filing, “Boeing’s interpretation of its Field of Use is absurdly overbroad and would bar MDHI from competing with Boeing for any military contract in the world forever if the aircraft contained a part common to the MELB — even if the part was produced by a third party and even if the aircraft is not a MELB.”
MDHI filed a demand for arbitration in August 2012, which, after a five-day evidentiary hearing in May, led to a ruling on July 12. The arbitration panel found that MDHI was not prohibited under the 2005 agreements from offering its MD540F helicopter to the U.S. Army for the AAS program or for sale to any other foreign or U.S. military organization, and denied Boeing’s counterclaim.
In an emailed statement, MDHI CEO Lynn Tilton said, “I’m gratified by the decision and look forward to continuing the collaboration between MD Helicopters and the Department of Defense as we continue developing state-of-the-art aircraft.”
A Boeing spokesman declined comment, telling Vertical, “It is a requirement of the arbitration that both parties (Boeing and MDHI) maintain the confidentiality of the proceedings and the ruling, except to the extent necessary to execute the ruling.”
Beyond the on-again, off-again AAS program, MDHI confirmed that it sees great potential for the MD540F overseas, describing it as “ideally suited for a foreign customer base who will see the inherent benefit in its very favorable performance-to-cost ratio.” The company is also pursuing U.S. Federal Aviation Administration (FAA) certification for the aircraft, which will allow the 540 to be used for law enforcement and commercial utility roles.
“The possible utility and benefits of the 540 to the user are many and varied; this is the beauty of the aircraft, and it is something that MDHI is very proud of having developed for the market,” the MDHI spokesman said.