Clear-Cut Tanker Decision Promised for Boeing, Airbus


The Pentagon outlines the revised bid process and vows the eventual preference for either Boeing or the Northrop Grumman/Airbus alliance will be "crystal clear"

European subsidies for Airbus won't influence the decision on a new air-refueling tanker, Defense Dept. officials said Sept. 24, while stressing that the revamped competition will be far clearer about what the military needs in the winning design. Officials said at a Pentagon briefing that the contract for a new fleet of 179 tanker aircraft will be awarded in the summer of 2010, some six years after the Air Force began trying to replace its aging KC-135 fleet. The Air Force plans to formally release its request for the new tanker on Sept. 25.

Each bidder must meet 373 mandatory requirements for the new tanker, as specified by the Pentagon, to qualify for the bidding process. Prior solicitations for the project had more than 800 requirements, which caused confusion among potential bidders as to what the Air Force most valued. "This time we are??being very precise about what the offerers need to do to win, and it will be crystal clear when a winner is picked why they won and the other offer did not win," said Ashton Carter, Under Secretary of Defense for Acquisition, Technology & Logistics.

Boeing (BA) and a joint bid by Northrop Grumman (NOC) and Airbus parent European Aeronautic Defence & Space are vying to win the tanker contract, which is valued at $35 billion for the initial phase but could reach as high as $100 billion by 2030, when all the planes are to be delivered. The Air Force is to receive the first new refueling tanker in 2015.

Fixed-Price Contract

On Sept. 4, the World Trade Organization ruled that European governments improperly awarded government subsidies to Airbus. That ruling heartened Boeing supporters, who contend the subsidies should be factored into the tanker contest. Indeed, on Thursday, Representative Jay Inslee (D-Wash.) said he and others will insist that the Air Force consider the subsidies and what he called Airbus' "conviction" at the WTO. However, Pentagon officials said the subsidies will not affect the contract award, in part because a final resolution of that matter at the WTO will take many years, Carter said.

Another new feature of the process announced by officials is the implementation of a fixed-price contract as opposed to a cost-plus contract, which is designed to discourage the contractor from enhancing revenues by adding costs. Deputy Defense Secretary William Lynn called that change a "step forward in terms of acquisition reform" and an important element in avoiding cost overruns. The refueling tanker project "is not the Manhattan Project where you don't know exactly what's going to come out the other end," Carter said.

The battle is being fought not only by companies, but by politicians looking to score lucrative manufacturing contracts for their home states. Lawmakers from Washington State and Kansas have been lining up behind Boeing while several Southern politicians back the Northrop-EADS team. Northrop and EADS plan to build the tanker in Alabama if they are successful.

How the Winning Bid Will Be Determined

Lynn said the new competition would be fair and transparent and reiterated that while the Air Force would have the selection authority, the Pentagon will continue to monitor the competition. That is in line with Defense Secretary Robert Gates' recent comments that his office would retain a "robust oversight role" throughout the process, due to the history of problems in awarding the project.

The competition will be a "best value" comparison, with the winning bid determined using both price and nonprice factors, such as estimated day-to-day maintenance costs, overall cost of ownership, and war-fighting effectiveness. "Price will be very important but not the whole picture," Lynn said. Officials will add these nonprice factors to the initial price tags supplied (which will cover the mandatory requirements) to determine an adjusted price. If the adjusted prices in each bid are within 1% of each another, officials will then explore how many nonmandatory requirements??ach assigned a number of points based on its value??re offered by each bid. A bidder will win if it trumps the other by more than one point. In the event of a tie, the lowest-priced bid, even if it differs by less than 1%, will win.

Air Force Secretary Michael Donley stressed the importance of reaching a conclusion quickly, as the current reserve fleet the Air Force uses is aging rapidly. He noted that the youngest KC-135 was delivered in 1964.

Anonymous Decision-Maker

A senior career Air Force official, who will not be publicly identified by the Pentagon so as to shield him from undue outside influence, will be responsible for executing the bidding process and will make the ultimate decision about the winning bid. He will be helped by a senior advisory team and separate teams that will conduct evaluations of proposals and provide results to the advisory council. The Pentagon also will establish an independent oversight panel to monitor the bid process.

Once the "request for proposal" (RFP) is made public on Sept. 25, bidders and members of Congress will have 60 days to comment. After all comments are reviewed, officials said, the final RFP will be released and offerers required to submit their proposals 60 days after that. The government will then take up to four months to review the proposals, leading to a contract award by next summer. "This is a lot of money and this is a lot of jobs," said Lynn. "We want to make sure we get this right."

Deprez is a reporter for BusinessWeek.

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