Boeing's Game: Bid or No Bid?

Its threat to pull out of the renewed Air Force tanker competition with Northrop/EADS could rile up Congress—possibly just what Boeing wants

by Joseph Weber and Keith Epstein

The high-stakes poker game between Boeing and the Northrop Grumman/EADS alliance to build $35 billion worth of airborne refueling tankers is taking a new and—for Boeing—very risky turn. Boeing says it has "little option" but to pull out of the tanker competition if the Defense Dept. doesn't give it six months to submit proposals for the larger plane with greater fuel capacity sought by the Air Force.

Company spokesman Daniel C. Beck tells BusinessWeek that "if Boeing is unable to secure sufficient time to prepare a competitive proposal, there is little option for Boeing other than to no-bid." Within Boeing, sources tell BusinessWeek, some managers are arguing for pulling out of the competition regardless of what the military does.

The Pentagon is expected to issue a formal request for new bids from the two aerospace giants by the first week of September. Whether that request will include the extension Boeing seeks is anybody's guess.

Meanwhile, both companies are in PR hyperdrive, advertising in print and on the radio in key states to gain the support of local politicians in Congress. Boeing has run ads in some 40 newspapers. Northrop Grumman is advertising at the Democratic convention in Denver. The tanker contract is likely to be a topic during the presidential campaign, and in Congress this fall. "Boeing has made this a 'Hill' fight," says Northrop spokesman Randy Belote.

Boeing's Strategy

Although the threat of taking its chips off the table suggests that Boeing plans to simply quit, the move actually may improve the company's chances of winning the new battle. Such a delay could move the decision into the hands of a new White House and Congress that might be more inclined to favor Boeing. Boeing would be taking a gamble that Democrats would control Washington, since they generally are believed to tilt in favor of the heavily unionized company, and even more so because Northrop is allied with EADS, or European Aeronautic Defence & Space (EAD.PA), maker of Airbus planes.

So far, Democratic politicians from Washington State, where Boeing does much of its manufacturing, have pushed hard for the home company. They have pressed for more time and sought to have the decision made by Congress, instead of the Pentagon or the Air Force. The Air Force made significant errors in awarding the contract at first to the Northrop partnership, the Government Accountability Office ruled in June after a Boeing protest. Among them, GAO said, was giving extra credit for a larger plane—based on the Airbus A330 model—after telling both companies initially that it wouldn't give such credit. Boeing based its design on its smaller 767 commercial jet. This was deemed unfair.

If Boeing does actually pull out of the competition, analysts say, it would be betting that Congress won't tolerate a no-bid situation, preferring competition over what would amount to a single-supplier award. The company may figure that Congress would prefer to extend the deadline for just a few months to make sure the Pentagon has a reasonable choice. Indeed, Albaugh in his comments to The Wall Street Journal minimized the delay. "This is an airplane that's going to be in the inventory 40 years," he said. "What we're asking for is an additional four months to have a meaningful competition."

Says Boeing's Beck: "Keep in mind that in the first competition it was nine months" from first indications of the Air Force's requirements to submission by the aircraft manufacturers of their first proposals. It takes months, he says, to "thoroughly understand the requirements, conduct trade studies, finalize a configuration determine costs, and then align costs and schedule."

Boeing has hinted at seeking more time for a while, and the Washington rumor mill has been abuzz about the company's next move for weeks.