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Boeing Loses Bid to Build Tankers to Its Rival

By Dana Hedgpeth
Washington Post Staff Writer
Saturday, March 1, 2008

The Pentagon yesterday passed over Boeing's bid for a $40 billion contract to build a fleet of refueling tankers for the Air Force, instead choosing a team that includes Boeing's European rival Airbus.

The team of Northrop Grumman and European Aeronautic Defence and Space (EADS), Airbus's parent company, will build an initial fleet of 179 tankers. The contract to supply the tankers had initially been awarded to Boeing, but was withdrawn in 2004 over a procurement scandal that resulted in officials from Boeing and the Air Force being sent to prison.

For EADS, Boeing's rival in the commercial aviation industry, winning means getting a foot in the door of the U.S. military aircraft business. For Boeing, losing means that its 767 line will probably be shut down at some point as commercial sales for the plane decline.

"It is a stunning upset in which the underdog won," said Loren B. Thompson, a defense consultant with the Lexington Institute, an Arlington think tank. "Everybody expected Boeing to win. Boeing has been doing this for half a century, and it was simply assumed they knew what the Air Force wanted better than other companies."

The design of the KC-45 tankers, which will refuel military aircraft in flight, will be based on the Airbus A330 passenger airliner. They will replace the Air Force's fleet of Boeing KC-135s, a design based on Boeing's 707.

Gen. Arthur J. Lichte, commander of the Air Mobility Command, said the Northrop-EADS plane was chosen because it could carry "more passengers, more cargo, more medical patients, could offload more fuel and had more flexibility, more dependability and more availability."

"Obviously we are very disappointed with this outcome," William A. Barksdale, Boeing's spokesman for the project, said in a written statement. "We believe that we offered the Air Force the best value and lowest risk tanker for its mission."

Sen. Patty Murray (D-Wash.), whose state is home to Boeing's largest plant, said: "We are outraged that this decision taps European Airbus and its foreign workers to provide a tanker to our American military. This is a blow to the American aerospace industry, American workers and America's men and women in uniform."

Under the new deal, the Northrop-EADS team initially will make 179 tankers for the Air Force. Replacing the roughly 500 tankers in the Air Force's fleet could be worth as much as $100 billion over several decades, analysts said.

Northrop plans to build a plant in Mobile, Ala., to assemble its planes, which it projects will create as many as 2,000 jobs.

The first of the new planes is due to be put into service in 2013.

The Air Force identified procurement of the new tankers as its top acquisition priority and crucial to maintaining its fleet. In addition, the service was focused on ensuring that competition for the contract was viewed as fair and open in the wake of the earlier scandal.

After awarding a $20 billion contract to Boeing to lease tankers, the Air Force's procurement chief at the time, Darleen A. Druyun, admitted that she favored Boeing while negotiating for a job with the company. Druyun and Boeing's former chief financial officer went to prison, and Boeing agreed with the Justice Department to pay $615 million -- the biggest penalty ever paid by a defense contractor -- to settle allegations of misconduct on the tanker deal and others.

The Air Force rebid the contract, setting up the battle between Boeing and the Northrop-EADS team. The competition was especially intense because there are few deals of this magnitude available for defense contractors these days. In the past few months, each team spent millions of dollars to make several presentations, buy newspaper ads and lobby Congress.

Philip Finnegan, a defense industry analyst at Teal Group in Fairfax, said that while "the general expectation was that Boeing was in the best position to win," Boeing's performance on some military and satellite programs, in which technology didn't work or projects went over budget may have hurt the company.

He said there also was "certainly sensitivity over the past close relationship between Boeing and the Air Force" with the Druyun scandal.

"Clearly the Air Force really bent over backward to make sure this was perceived as a fair competition," Finnegan said. "Part of that was coming out with a surprise in the end."

Sue C. Payton, assistant secretary of the Air Force for acquisition, said the selection put the Druyun-Boeing controversy in the past. "That was a half-decade ago," she said.

Payton said officials from the Office of the Secretary of Defense, the Government Accountability Office and the Defense Department inspector general's office helped to ensure the selection process was fair and open. "We've got it nailed," she said of the process. "I don't see any relationship as to what's gone on in the past at all."

The tanker competition has been closely scrutinized by contractors, industry analysts and Congress. The Air Force expected to award the deal last October but postponed it to be sure that its process was fair and thorough. Officials said they tried to make the competition a model for acquisitions by having more communication between the service and each bidding team.

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