Tanker Deal: Why Boeing Shouldn't Protest

Despite its dismay over losing a huge Air Force contract, Boeing doesn't want to delay a plane the military needs

The KC-135 Stratotanker from the 340th Expeditionary Air Refueling Squadron fuels two British GR4 Tornados from the 617th Squadron on Dec. 29, 2003 Getty Images

by Keith Epstein

Boeing (BA) executives, bewildered at losing a multibillion-dollar contract for a fleet of refueling tanker aircraft, are girding for battle as they lay legal groundwork for kicking up a more official fuss—the filing of a formal protest of a U.S. Air Force decision to buy from Northrop Grumman (NOC) and partner European Aeronautic Defence & Space (EAD.PA).

But even with billions at stake, shares tumbling, and an anticipated dent in earnings, there are some good reasons why Boeing shouldn't complain—and just might not. Sources say these downsides, too, are being debated in the company's executive suite and that no decision on a protest will be made until after a Pentagon briefing on the matter. Explains one Boeing source: "We certainly wouldn't want to aggravate our customer"—the Air Force.

Even crafting a statement the company issued Mar. 4 proved painstakingly tedious, as insiders strived to strike a balance in tone. Executives wanted to convey their sense that the company was misled by the Air Force. If Boeing had known the Air Force was seeking a plane with more fuel-carrying capacity and cargo space, say company insiders and a congressional source, it would have based its proposal on the larger Boeing 777 instead of the 767. The statement by Mark McGraw, Boeing's vice-president for 767 tanker programs, sidestepped some of the details but got to the point: "There may well have been factors beyond those stated in the [Air Force request for proposal], or weighted differently than we understood they would be, used to make the decision."

Boeing also complained about having to wait until Mar. 12 for a formal briefing on why it was not selected, but received the hearing on Mar. 7. Company spokesman Dan Beck said then that Boeing won't be deciding whether to file a formal protest for "a few days." The company then has 10 days. But a protest might not be necessary. Congress has already stepped into the fray, grilling two top Air Force acquisition officials, Sue Payton and Lt. Gen. John "Jack" Hudson, at a Mar. 5 hearing of the House Defense Appropriations subcommittee, during which the Democratic chairman, John Murtha of Pennsylvania, reminded them that Congress has the power of the purse and can cancel the contract.

Patchwork Planes

The realities are complex. A protest could add yet another yearlong delay to replacing the military's aged fleet of KC-135 Stratotankers. These Dr. Strangelove-era airborne gasoline stations first entered service in the 1950s and are routinely falling apart and patched up. Yet they remain critical to U.S. global warfighting because they enable U.S. fighter jets and bombers to continue missions rather than return to aircraft carriers or bases.

A protest also could prolong attention to a series of embarrassments and turbulence for Boeing in recent years, including a scandal involving an earlier replacement tanker bid. Boeing also had troubles delivering tankers to other countries. And development of its high-tech "virtual fence" along the U.S.-Mexican border has been plagued with so many problems that deployment is now stalled.

Boeing has had difficulties on the commercial airliner side as well. Delays in the 787 Dreamliner over the last six months have depressed the company's stock. The tanker deal, while potentially worth $100 billion over its life, amounts to a less impressive revenue source on an annual basis. But it represents one of the largest military aircraft contracts in modern times, and comes at a point when projected sales increases for Boeing's defense unit are modest—only about $1 billion above the current $32 billion a year.

Even before the Gulf War, the nation's fleet of Stratotankers was stretched thin and at risk of having trouble with failing parts and systems that would ground too many tankers at once.