Northrop Spurns Defense Prize


The Pentagon won't alter the bidding criteria for a lucrative contract for tanker aircraft. Northrop Grumman is likely to withdraw, leaving Boeing as the only bidder

Top Pentagon officials, at a meeting on Jan. 17, rejected Northrop Grumman's (NOC) concerns that the bidding criteria for an initial $20 billion competition to build a new fleet of more than 100 aerial refueling tankers favored Boeing (BA), say people familiar with the matter.

It now appears likely that Northrop will withdraw from what could be the richest military acquisition program of this generation—a program that eventually would replace more than 600 aging KC-135 and KC-10 refueling tankers and could be worth more than $100 billion over several decades. The first order on the contract is worth up to $20 billion for 179 planes.

No Changes to RFP

A key closed-door meeting headed by Kenneth Krieg, Under Secretary of Defense for Acquisition, Technology & Logistics, backed the Air Force's decision to not include any of Northrop's suggested changes to the draft proposal, say people familiar with the meeting. The Pentagon is now expected to sign off on the final proposal by the end of the day on Jan. 19 and release it publicly next week. "They're not going to make any further changes to the RFP [request for proposal]," says a government official familiar with the negotiations. "The Air Force is telling us that they've made a good-faith effort to address all the concerns of Northrop Grumman. But at the end of the day, they can't have competition for competition's sake."

An Air Force official confirmed the Jan. 17 meeting but declined to offer any details, other than to say the "process is moving forward."

Northrop officials on Jan. 18 declined to say the company was pulling out of the tanker replacement program, known as the KC-30. But Northrop spokesman Randy Belote said that his company would quit the competition if the final evaluation criteria remained biased against its tanker proposal. Northrop is offering the Air Force a plane that's about 33% more expensive than the option from Boeing, though Northrop's plane is larger and more fuel-efficient. The Air Force is focused primarily on cost. "If the capabilities-to-cost evaluation metrics aren't included in the final [proposal], Northrop feels the KC-30 will be noncompetitive and we will no-bid," Belote said.

"Zero Expectations"

An influential defense analyst went further and said Northrop will drop out of the contest. "Northrop plans not to bid because they don't believe they can win," said Loren Thompson, president of the Lexington Institute, a Washington defense think tank, who is often in conversations with defense industry executives. "They said they have zero expectations for winning a price shoot-out for a low-cost tanker."

Following Northrop's broadside a week ago, when a letter citing its "fundamental concerns" over the selection criteria was leaked to media, it seemed like the tanker saga once again was turning into a political controversy. Northrop wrote at the time that "the evaluation criteria in this version simply do not allow for a competitive KC-30 proposal."

Northrop's threat to pull out created political complications that could have led to more delays in what already has turned into an exhaustive and expensive five-year Air Force effort to replace its aging fleet of Boeing KC-135s. The tankers are used to refuel fighters, bombers, and other military airplanes while in flight. The release of the final request for proposals, which explains the specifications for the new Air Force tanker, is a major step forward for a program tainted earlier by scandal after influential government watchdog agencies criticized Boeing's proposal as wasteful and too costly.

Too Big, Too Expensive

Northrop's concern had hinged on one fundamental issue: frustration that the Air Force was ignoring the performance advantages the larger and more fuel-efficient A330 had over the smaller and older Boeing 767 aircraft. Northrop is offering the A330 jetliner as a refueling tanker in a joint effort with Airbus parent European Aeronautic Defense & Space (EADS).

But the Air Force has concluded it doesn't need the bigger A330, say people familiar with the matter. The issue for the Air Force isn't how much fuel it can carry but how many planes it can buy to cover the world. The smaller 767 tanker, which already operates for the Italian and Japanese military, seems to be a better fit. "The tanker argument for a bigger plane is not very strong," says Thompson, of the Lexington Institute. "If you fly a big plane into some places where the Air Force operates, it will be harder to land, harder to move the planes on the ground, and take up too much space."

The other big issue comes down to cost. The larger A330 costs about $160 million per plane vs. $120 million for the 767. Northrop couldn't close the cost gap enough and so tried to switch the debate and the criteria to focus more on the capabilities of the aircraft, where the Airbus model had a stronger case. "The Air Force's requirements aren't for the size of tanker Airbus has to offer," says the government official. "They simply have a need for a smaller, cheaper, more fuel-efficient tanker than Airbus can offer." The official went on to characterize Northrop's gambit as a "Hail Mary pass, because at the end of the day, they knew they didn't have the tanker the Air Force was looking for."

Now, the drama switches to Congress. Political leaders will have to decide whether they will be comfortable giving one of the most lucrative defense contracts to Boeing in the absence of any competition.

Holmes is a correspondent in BusinessWeek's Seattle bureau . Kopecki is a correspondent in BusinessWeek's Washington bureau.

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