A Big Win for Boeing

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European Subsidies Gave Advantage

Northrop previously said it considered the competition the "most rigorous, fair, and transparent acquisition process in Defense Dept. history."

The central complaint behind Boeing's appeal was the aircraft chosen by the Air Force is very different—most significantly, bigger—than what the Air Force initially said it wanted. Otherwise, say Boeing executives, they would have offered a modified 777 rather than a 767, which is smaller and can carry less cargo and fuel than the winning A330-based tanker. Boeing also complained about European subsidies that the company asserts gave Northrop/EADS a cost advantage.

The ruling is likely to fan controversy surrounding the award. Loren Thompson, a Lexington Institute defense analyst with close ties to the military, had once been dismissive of Boeing's assertions that it had been wronged. But Thompson came to see signs of merit in some of its complaints about the way the Air Force made its decision. "It's hard to have confidence in a process that repeatedly confounds warfighters and technical experts," Thompson said.

Waiting for the Air Force to Make its Move

In a June 16 interview with BusinessWeek, Boeing Vice-President Mark McGraw predicted if the company's complaints are sustained, "We'll end up in a re-competition" for the contract, perhaps next February.

Deciding how to proceed could still be among the toughest and most fateful moves in the career of Boeing CEO Jim McNerney, who has said he recognized the "extraordinary step" of formally challenging a decision by one of Boeing's most important customers, the U.S. military. For now, at least, he doesn't have to decide much. Other executives say the company will wait for the Air Force to make its move.

There's more at stake than the $35 billion contract. The winning aircraft manufacturer and its subcontractors will likely have an edge on the entire $100 billion replacement of the U.S. aerial refueling tanker fleet, and the military in other countries likely will favor the manufacturer as well. For EADS, the contract could mean an all-important first step toward ambitions in North America—and that would be a threat to long-dominant aerospace player Boeing.

With Carol Matlack in Paris.

Epstein is a correspondent in BusinessWeek's Washington bureau.