Boeing faces questions after tanker loss

NEW YORK (Reuters) - Boeing Co (BA.N) -- and its shareholders -- will be looking for answers this week as to how the plane maker and defense giant managed to lose a $35 billion tanker contract to smaller and less experienced Northrop Grumman Corp (NOC.N).

The loss won't seriously hurt Boeing's finances, but it does dent its revenue growth plans and is an embarrassing blow for a company that touted itself as the only serious option for building the U.S. Air Force's refueling fleet.

The setback comes on top of costly delays to the 787 Dreamliner jet, which have dragged down Boeing's stock by more than 20 percent since last summer, and mis-steps on other defense contracts.

"Any way you look at this, it is part of a gradual erosion in Boeing's defense operations," said Loren Thompson of the Lexington Institute, a Virginia-based think-tank with close ties to the Pentagon.

"Boeing is still coping with the aftermath of the procurement scandal earlier in the decade," he said. "It had great difficulty communicating with its Air Force customer and understanding how its customer was thinking."

In 2004, Congress killed a $23.5 billion Air Force plan to lease and then buy 100 modified Boeing 767 tankers after a Pentagon procurement scandal that put two Boeing officials behind bars.

Despite that, the Chicago-based company was still heavy favorite to win the recompeted contract. Its shares fell 3 percent after the surprise award to Northrop and its European partner EADS (EAD.PA) late on Friday afternoon.

The contract is initially worth $1.5 billion for four development planes, but should be worth $35 billion overall.

That's not a huge amount when spread out over the long life of the contract, but it's money Boeing wanted as it looks to eke out top-line growth in a defense market which may have peaked.

Boeing's defense unit, based in St. Louis, reported sales of $32 billion last year, but is forecasting no more than $33 billion this year.

"This is an important program for us to win," Jim Albaugh, Boeing's defense unit chief, told the St. Louis Post-Dispatch in January, a few weeks after Boeing submitted its final tanker proposal to the U.S. Air Force.

FRANCHISE LOSS