Trade Spat Snares Tanker Bids

An international trade dispute between Boeing Co. and Airbus SAS has begun affecting the politics of a multibillion-dollar competition to build the Air Force's next fleet of refueling tankers.

Deputy Defense Secretary Gordon England decided that companies competing to build the new tanker would be asked about the potential impact an aircraft trade dispute now before the World Trade Organization might have on their bid. The United States and the European Union have accused each other of illegally subsidizing their flagship aircraft manufacturers, Boeing and Airbus.

The measure could prove troublesome for a team that includes European Aeronautic Defence and Space Co., which owns Airbus and has announced plans to compete against Boeing for the work tanker project. EADS has been attempting to keep the military contract separate from the international dispute; Boeing supporters have argued that the pending WTO case shouldn't be ignored.

The dispute broke into the open yesterday after Sen. John McCain (R-Ariz.), the vice chairman of the Senate Armed Services Committee, called England's position "unprecedented" and said it could limit competition for the tanker.

Replacement of the Air Force's aging fleet of tankers, which refuel fighters and other planes in mid-air, has become a three-year-long saga for the defense industry.

The Air Force originally chose Boeing of Chicago without a competition under a $20 billion program to lease-then-buy 100 of the planes. The program was dropped after complaints about its cost and criticism surrounding Boeing's illegal hiring of a former Air Force official who worked on the program.

That forced the Air Force to restart the program, this time with a competition between Boeing and Northrop Grumman Corp. emerging and prompting a new dispute. Northrop is teaming with EADS and plans to use the European company's Airbus A330 for the competition.

The Air Force says it will release a draft version of its request for a proposal, which would officially launch the competition, by the end of the month.

England said that the WTO issue needed to be addressed by the bidders.

The "painful history of this program clearly necessitates the need for an unambiguous and non-controversial [request for proposal] if this program is to reach production," England said in a letter to McCain, dated Sept. 15.

In the letter, England said that the WTO provision was added at his request. "This competition has the attention of many divergent interests in the Congress, and any lingering issues could easily disrupt [the] contract award," the letter said.

But McCain argues that the Air Force isn't able to judge such issues. In one letter listing a series of 13 questions, McCain asked what legal authority there is for bringing the WTO case into the competition, and whether future acquisitions will have such provisions. It "needlessly and, in my view, improperly injects into what should be a full and open competition an element of arbitrariness and capriciousness," McCain said.

It is unclear when the WTO dispute could be resolved. Air Force plans call for a winner of the tanker competition to be announced next year.

Northrop and EADS declined to comment, and Boeing said it would follow whatever rules are issued by the Defense Department for the competition.