Boeing Files Tanker Protest

The Chicago-based aircraft maker will formally protest losing a huge U.S. Air Force contract to Europe's EADS. But a win could trigger backlash abroad

by Judith Crown and Keith Epstein

W. James McNerney Jr., chairman, president and CEO of Boeing Brendan Smialowski/Getty Images

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Escalating a contentious dogfight over one of the most lucrative military contracts of the modern era, Boeing (BA) on Mar. 11 filed a formal protest over its loss of a $35 billion contract to replace the Air Force's fleet of aging refueling tanker aircraft.

Boeing, which says it has not taken such a step in more than 30 years, complained in its formal filing to the General Accountability Office that the Air Force skewed the process so that the service ended up with a bigger tanker than it actually needed. "We were surprised at the value placed on the extra capacity of the competitor," Mark McGraw, vice-president and program manager, Boeing Tanker Programs, said in a conference call Tuesday.

McGraw indicated Boeing would be satisfied with an opportunity to rebid the contract, even possibly offering their larger 777. He said that, based on the Air Force specifications, Boeing's proposal with the 767 exceeded the military's requirements for fuel, cargo, and passenger capacity. "There was no reason to believe it was undersized," he said.

Odds Are Against Boeing

He also said changes in the Air Force model led the service to embrace the larger A330 aircraft offered by a partnership of Northrop Grumman (NOC) and European Aeronautic Defence & Space (EADS). But Boeing contends the winning model constitutes something of a disconnect with operating realities such as rising fuel costs and limited runway and parking space at some airfields.

The odds are somewhat against Boeing. While generally serving as an investigatory arm of Congress, the GAO is supposed to weigh disputes over contracts in an impartial manner, free from the influence of politicians. Only about a quarter of protests, both military and civilian, filed with the GAO are found to have merit. However contractors—both small and large—are filing more formal complaints over losing bids and disputes involving costs, and winning more. In fiscal 2007, some 1,411 cases were filed. Among 1,393 cases closed, the GAO ruled 335 had merit—16% more than four years earlier.

A decision could take as long as 100 days, further delaying years of attempts by the Air Force to get new refueling tankers into the air to replace its Eisenhower-era aircraft.

Keeping Jobs at Home

After a debriefing on the decision by the Air Force on Mar. 7, Boeing officials said they spent three days reviewing the case and concluded that a protest was necessary.

Northrop Grumman, meanwhile, issued a statement on Tuesday in which it increased its previous estimate for how many jobs its winning tanker would produce in the U.S. The company said its 230 suppliers in 49 states "have completed a careful review of their employment projections and determined that America's industrial base will expand by 48,000 direct and indirect new jobs. None of these U.S. jobs will move to Europe." Previously Northrop had released a statement saying that the competition was "the most rigorous, fair, and transparent acquisition process in Defense Dept. history."

The Air Force released a statement following the Boeing announcement, which said the service would "carefully evaluate the protest, defend our source selection decision, and allow the GAO to make its final decision." It added that "the proposal from the winning offeror is the one the Air Force believes will provide the best value to the American taxpayer and to the warfighter… The Air Force and the offerors had hundreds of formal exchanges regarding the proposals throughout the evaluation process. The Air Force provided all offerors with continuous feedback through discussions on the strengths and weaknesses of their proposals."

Support Among Democrats

The protest to the GAO will hinge on narrow questions of whether the Air Force procurement was somehow faulty, either because the same information was not communicated to both sides in the competition, or because some of their arguments were not considered. "Were there discrepancies in how the two bidders were treated or flaws in how the data were assessed?" asks John Pike, director of a Web site specializing in military information.

Congressional protests, which have centered on the loss of potential jobs and the handing off of sensitive military information to a foreign supplier, won't influence the GAO's decision, experts say. But down the road, Congress could intervene directly to thwart the Northrop/EADS victory. It could vote not to authorize the financing of the purchase by directing the Air Force to rebid the contract or even split the award. Representative John Murtha (D-Pa.), who presides over the powerful House Defense Appropriations subcommittee, has reminded Air Force officials that Congress holds the strings of the purse and that it can cut appropriations for the program.

Members of Congress already have scheduled several hearings in which they aim to challenge Air Force officials. Boeing appears to have broad support among congressional Democrats, who are highlighting the weak economy and ongoing job losses as the Presidential and congressional races heat up this year.

Backlash From Foreign Suppliers?

"If the GAO upholds the protest, the politicians get a talking point," says Richard Aboulafia, vice-president of analysis for Teal Group, an aerospace consulting firm. "If it rejects it, they have the wind taken out of their sails."

But Boeing needs to be careful what it wishes for. A decision to reverse the award sends a signal that offshore suppliers need not apply for government work. And that could lead to a backlash among foreign governments, which could boycott Boeing for their military contracts.

While Boeing once objected to the possibility of a contract split among the suppliers, that result could turn out to be a wise compromise, says Aboulafia. "It might turn out to be a good idea—even an excellent idea."

Crown is a senior correspondent for BusinessWeek and BW Chicago. Epstein is a correspondent in BusinessWeek's Washington bureau.