A Twist in the Boeing-Airbus Tanker Saga

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That timetable and pricing stricture don't augur well for Boeing, which has conceded it would be hard-pressed to have the KC-777 in production by then—and would likely be hesitant to bid a fixed price before it knows what its true manufacturing costs will be. "Since the 777 tanker is still a paper airplane, I'm not sure Boeing is going to be willing to guarantee a delivery date or price," says Scott Hamilton, an aerospace industry consultant in Issaquah, Wash. "That could represent an intolerable risk for the company."

Political Shift

In the end, many analysts think the contract won't be decided on these exacting requirements but on politics. While the initial award was made when the Republicans were still in power and would have brought jobs to GOP strongholds such as Alabama and South Carolina, the political winds have since shifted. With the Democrats in control, that bodes well for Boeing, since most of its factories and employment hubs are concentrated in blue states such as Illinois, Connecticut, and Washington.

Already some Democrats, such as Senator Patty Murray (D-Wash.) and Representative John Murtha (D-Pa.), have pressed the Pentagon to pick Boeing, since the World Trade Organization issued a preliminary ruling in mid-September that European governments had given improper subsidies to Airbus. Murtha, who chairs the House Appropriations subcommittee on defense, inserted a provision into the defense appropriations bill that has passed the House (it's not in the Senate's version) which would authorize the Pentagon to boost the number of tankers it purchases each year to 36, vs. the 15 that are planned currently. Murtha's plan calls for the Air Force to divide the contract equally at first—and then steer more future sales to the aircraft maker that delivers its planes at the lowest cost each year.

Analysts say Murtha's proposal could be the compromise to end a politically tinged process that's now in its eighth year. While Deputy Defense Secretary William Lynn on Sept. 24 reiterated the Pentagon's plan "to make a single award," splitting the contract may be his best hope for heading off the inevitable appeals and protests by whichever manufacturer loses the second round. A joint contract, say analysts, would also make sense from an operations perspective: By doubling up on orders, the Pentagon could accelerate the retirement of its current fleet of Eisenhower-era tankers, some of which will be 80 years old before they're replaced under current plans. The Pentagon would gain a mix of Airbus KC-30s that would be optimum for longer-range assignments across the Pacific Rim and the smaller Boeing KC-767s that would offer a cheaper alternative on shorter refueling jobs. "The Democrats, which are Boeing's backers, are in the ascendance," notes Richard Aboulafia, vice-president for analysis at Teal Group, a Fairfax (Va.) aerospace consulting firm. "No matter what happens, Boeing is going to get a piece of the action."

And when the Boeing KC-777s are ready sometime in the next decade, they could be brought in as a replacement for the KC-10s, an aging fleet of planes whose fuselages will have to be replaced at great expense in coming years. While a split order might raise the Pentagon's initial costs—and create political problems for Gates, who has promised to rein in defense procurement—it could generate savings down the road by negating the heavy costs of modernizing the rest of the aging tanker fleet. It would also bring a painless end to a political battle that otherwise could at some point outlast the oldest of the Pentagon's tankers.

Foust is chief of BusinessWeek's Atlanta bureau.

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