By Dana Hedgpeth
Washington Post Staff Writer
Friday, February 29, 2008 5:35 PM
The Pentagon today chose Northrop Grumman and the makers of Airbus airliners to build a new fleet of refueling tankers for the Air Force, a $40 billion deal that is one of the Defense Department's most important, expensive and controversial since a 2004 scandal that tarnished the service and Boeing Co., which had also sought the tanker contract.
Under the new deal, the team of Northrop and European Aeronautic Defence and Space, Airbus's parent company, initially will make 179 tankers for the Air Force. The deal to replace the roughly 500 tankers in the Air Force's fleet ultimately could be worth as much as $100 billion over the next several decades, analysts said.
The contract award gives EADS, Boeing's rival in the commercial aviation industry, a foot in the door for making U.S. military aircraft, an area that Boeing now dominates.
The design of the new tankers, which refuel military aircraft in flight, will be based on the Airbus A330 passenger liner. They will replace the Air Force's aging fleet of Boeing KC-135s, a design based on Boeing's 707.
Northrop plans to build a plant in Mobile, Ala., to assemble its planes, which will create 5,000 new jobs there and another 20,000 in other states where parts of the plane will be made.
The first of the new planes are due to be put into service in 2013.
The Air Force has identified procurement of the new tankers as its top acquisition priority and crucial to maintaining its fleet. In addition, the service was intensely focused on ensuring that competition for the contract was viewed as fair and open. An earlier contract to replace the service's tanker fleet had to be canceled in 2004 after it erupted into a major scandal that rocked both the Air Force and Boeing.
After awarding a $20 billion contract to Boeing to lease tankers, the Air Force's procurement chief at the time, Darleen Druyun, admitted she had favored Boeing while negotiating for a job with the company. Druyun and Boeing's chief financial officer went to prison, and Boeing agreed with the Justice Department to pay $615 million -- the biggest penalty paid by a defense contractor -- to settle allegations of misconduct on the tanker deal and others.
The Air Force canceled Boeing's deal and rebid the contract, setting up a battle between Boeing and the Northrop-EADS team. The competition has been intense because there are few deals of this magnitude available for defense contractors these days. In the last few months, the two teams had held numerous presentations to try to sell their aircraft as being the best.
Boeing took out full-page color ads in trade magazines and newspapers, including the Washington Post and USA Today, to tout its proposed tanker based on the 767 jetliner. In some of the ads it boasted of having recently delivered a tanker to Japan. Northrop struck back with brochures comparing the two planes and criticizing Boeing for being a year late in delivering tankers to Japan and three years late in delivering an order to Italy.
The procurement of the tankers has been closely scrutinized by contractors, industry analysts and Congress. The Air Force had expected to award the deal last October but postponed it to be sure its process was fair and thorough. Officials said they tried to make the tanker competition a model for acquisitions by having more communication between the service and each bidding team.
The Air Force made painstaking efforts in the last few weeks to review the details of the deal before making its announcement. The service presented its selection Monday to a top-level acquisition panel chaired by John Young, the Pentagon's top weapons buyer.
"This is the most careful, deliberative selection of a major weapons system that the Air Force has undertaken in modern times," said Loren Thompson, a defense industry analyst at the Lexington Institute. "They really don't want to mess this up."
Ken Miller, a former top Navy official hired by the secretary of the Air Force two years ago to improve the transparency of its acquisition process, said he had more than 100 meetings in the past year with congressional leaders to update them on the process. Officials have taken extra precautions with the tanker procurement process in part because they know there is likely to be a protest of the award from the losing team, according to defense industry analysts.
The award of the tanker deal comes as the Air Force is trying to persuade Congress that it needs more money to buy new aircraft and advanced technology, including F-22 fighter jets and C-17 cargo planes. The fiscal 2009 budget has set aside $894 million for the tanker program.
Boeing and the Air Force have faced scrutiny on other procurement contracts. A $15 billion deal to build search-and-rescue helicopters is being rebid after two competitors protested the award to Boeing. Competitors have complained about a $4 billion deal that went to Boeing to design, build and install new electronic kits for C-130 cargo planes. The service has also faced criticism that it had improper communication with Boeing about a multibillion-dollar purchase of its C-17 aircraft.