A $40 Billion Tanker Battle

Boeing and Northrop Grumman are vying for a Pentagon contract to supply 179 new refueling tankers for the U.S. Air Force

by Christopher Palmeri

It's a classic dogfight. On one side, cruising at a good clip, flies Boeing (BA), the U.S.'s second-largest defense contractor with some $66 billion in total sales. Ready to attack is $32 billion Northrop Grumman (NOC), the No. 3 contractor. It has allied itself with European Aeronautic Defence & Space (EADS), Boeing's archrival in commercial and military aircraft. At stake is a $40 billion contract to supply the U.S. Air Force with 179 new refueling tankers.

With the nation's Bush-era defense buildup in its waning years, the contract could be one of the last major aircraft acquisitions for some time. The Pentagon's Defense Acquisition Board met on the afternoon of Feb. 25 and was predicted to pick a winner as early as Feb. 26. A spokesperson for the Air Force said the branch had no further information or comment.

In many ways the contract is Boeing's to lose. The company is already the largest provider of refueling tankers. The Air Force owns 502 Boeing KC-135 Stratotankers, workhorse aircraft that carry 202,000 pounds of jet fuel to supply thousands of Air Force, Navy, and Marine planes in midair. The tankers have played a key role in the conflicts in Afghanistan and Iraq, where access to foreign bases and airspace has been a major hurdle. The average age of the current fleet is some 45 years, however, and Boeing and others have argued it is need of an update.

McCain Has Questioned the Program

The history of the contract has been a long and tortuous one. The Government Accountability Office first suggested modernizing the tanker fleet in 1996. The Pentagon awarded Boeing a $23 billion contract to lease 100 new tankers in 2002, but the acquisition proved controversial. Current Presidential candidate John McCain (R-Ariz.), sitting on the Senate Armed Service Committee, criticized the deal as expensive and a departure from regular procurement procedure. The Office of Management & Budget also challenged the cost of the lease. The Air Force had argued that a lease program would help it to obtain the planes faster.

Congressional hearings were held. In 2004, former Air Force lead negotiator Darleen Druyan and former Boeing Chief Financial Officer Michael Sears pled guilty to secretly negotiating a job for Druyan with Boeing while she was simultaneously overseeing the tanker award. In the wake of that investigation, the Defense Dept.'s Inspector General also cited Air Force Secretary James Roche for improperly recommending the brother of a colleague for a job at Northrop, Roche's former employer. He resigned. The controversy also helped shoot down the career of Boeing Chief Executive Philip Condit.

In December, 2007, McCain raised concerns that the Air Force was not adequately preparing to keep the KC-135s in service for as long as possible. "Given that taxpayers have made a significant investment in the KC-135 fleet, the Air Force should not be permitted to precipitously retire them simply because it wants to buy as many new tanker aircraft as possible," he said.

Dueling Aircraft

Both companies have been lobbying hard to win the new contract. Los Angeles-based Northrop, which is briefing analysts in New York on Feb. 26 about its 2008 outlook, would clearly like to report that it's taking the lead in a new aircraft acquisition after years of serving mainly as co-pilot in Lockheed Martin- (LMT) and Boeing-led projects.

Northrop's plane, the KC-30, is a derivative of the successful Airbus A330 commercial airliner. Its military tanker version has already been selected for service by Britain, Australia, and Saudi Arabia. The Northrop tanker will carry 250,000 pounds of fuel, 25% more than Boeing's plane. Partner EADS, the parent of Airbus, has invested heavily in new manufacturing facilities in Mobile, Ala., part of an overall effort to ensure more than half of the tanker's components are American-made.