Boeing Gets Another Shot at Tanker Deal


But the Pentagon, in reopening the Air Force's $35 billion award to Northrop Grumman and EADS, may have put Boeing at a disadvantage

As the Pentagon reopens bidding for a $35 billion contract to provide the Air Force with 179 new aerial refueling tankers, Boeing (BA) may already be at a disadvantage. The Defense Department plans to give extra credit in the bidding process for a larger plane, which would appear to favor Northrop Grumman Corp. (NOC) and its partner European Aeronautic Defense and Space (EAD.PA) over Boeing, according to Congressman Norm Dicks (D-Wa.), who spoke to the Pentagon official in charge of the contracting process.

The tanker plane that Boeing offered in its original proposal is based on its 767 airliner, which is much smaller than the Airbus A330 plane that Northrop Grumman based it tanker on. Boeing had hoped to get credit for the 767's fuel efficiency and had expressed concern that the new request for proposals would "significantly alter the selection criteria." Boeing officials said they had not heard about the preferences for a larger plane, and would not comment until they see the request for proposals. A Pentagon spokesman wrote in an emailed response that the Air Forces requirements call for a plane that can hold more fuel and "there is operational value to having additional offload capacity."

"That suggests to me that the process will be biased from day one," said Loren Thompson, an analyst at the Lexington Institute in Arlington, Va. Thompson said that Boeing would not have time to update its proposal to use its larger 777 instead of the 767, because the Pentagon has said it wants to award the contract within six months. "If the RFP said they wanted a bigger plane, Boeing would consider it, but they couldn't do it in 6 months."

"I feel betrayed here," Dicks said in an interview. "We're gonna fight it. Trust me."

The tanker contracting process has dragged on for years, and has been plagued by problems, many of them outlined in a report that came out last month from the Government Accountability Office. On July 9 the Defense Department acknowledged flaws in the process as it said it would reopen the contract and pick up the pace. The Pentagon expects to have new requests for proposal out within weeks, and hopes to finish the contracting process by December.

At a press conference on Wednesday, Sec. of Defense Robert Gates vowed that "there will be a solution" and urged an expedited recompetition. "There are few programs in the Department of Defense that are more time-critical," he said.

The Pentagon awarded the contract to Northrop and EADS in February. But after Boeing filed an appeal, government investigators issued a scathing critique of the Air Force's process for awarding the contract.

Secretary Gates said the Pentagon is aiming to complete the process, which "has already gone on far too long," by December. Pentagon officials said they will ask Boeing and Northrop for modified proposals and will particularly look to address the problems raised by the GAO. But analyst Thompson said the Pentagon's timetable was unrealistic.

"Getting this contract awarded in the six months remaining in the Bush Administration is a very hard thing to do," Thompson said. "There's a possibility that whoever loses will file another protest."

Northrop Grumman applauded the decision and the possibility of "quick closure," even though it took away the company's contract. EADS also praised the decision, because it expects the Pentagon to address "only those issues raised by the GAO." That assessment might be slightly too optimistic: Pentagon officials said that the companies could submit entirely new bids if they desired and also stressed that they would particularly be taking cost-effectiveness into account.

Boeing's stock price was initially up on the news, but amid a market rout ended the day down 33¢, or 0.5%, to 65.59. Northrop's shares ended the day down 90¢, or 1.4%, to 65.27.

The July 9 news is just the latest twist in a bidding process that has gone awry numerous times over the past few years. The Air Force originally awarded a contract for leasing tankers to Boeing in 2002, but had to rescind it under pressure from lawmakers, including Senator John McCain (R-Ariz.), who said the contracting process was irregular and the deal much too expensive. Under a new bidding process, Northrop Grumman won the contract on Feb. 29, but Boeing filed a formal complaint, claiming the Air Force changed the selection criteria without telling the company.

The Government Accountability Office, an investigative agency that works for Congress, ruled on June 18 that the Air Force's process for awarding the contract to Northrop and EADS was flawed (BusinessWeek.com, 6/25/08). The Air Force, for instance, told Boeing that making its plane bigger to increase fuel capacity wouldn't give it an edge, but then said greater fuel capacity was one of the reasons it awarded the contract to Northrop Grumman . The GAO urged the Air Force to amend its decision.

The Pentagon took the contracting process out of the Air Force's hands in the new bidding process, putting Undersecretary for Acquisition, Technology and Logistics John Young Jr. in charge. The GAO report "cast doubt on the Air Force's management of the overall process," said Michael Donley, the acting secretary of the Air Force.

The GAO's decision was seen as an important win for Boeing, which has seen its stock price drop dramatically as increased fuel prices hamstring the airline industry. The company also has faced delays with its most important civilian program, the new 787 Dreamliner jet.

The new deal will continue to receive considerable scrutiny both because of its sheer size and its strategic and political importance.

Senator Richard Shelby (R-Ala.), whose state could see thousands of new jobs if Northrop Grumman wins the contract, called the Air Force's decision "the best of all options."

Senator Patty Murray (D-Wash.) defended Boeing, saying "the Airbus tanker did not meet the Air Force's needs." Murray also agreed with the decision to shuffle the Pentagon's contract structure. "After getting this decision so wrong, Secretary Gates was right to put new personnel in charge," she said.

Other considerations are also at play. Boeing's supporters argue that a large U.S. military contract shouldn't go to a company based overseas and that the contract would give EADS, which owns Airbus, too big a foothold in the U.S. market.

This contract is the first of three, worth about $100 billion, that the Air Force intends to award over the next 30 years to replace about 600 aging tanker planes. Whichever company wins the first contract is expected to have an edge on securing the other two.

The existing tankers are high-maintenance, Cold War-era machines. The planes are more than 40 years old and rapidly wear out due to the demands of faraway conflicts. The Air Force considers replacing them with more sophisticated aircraft its top weapons-purchasing priority.


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