Boeing, Northrop Brace for Ruling on Big Air Force Contract

By Dana Hedgpeth
Washington Post Staff Writer
Wednesday, June 18, 2008

In the four months since the Air Force awarded a $40 billion contract to replace its aging fleet of refueling tankers, there has been an unusually public war between the project winner, Northrop Grumman, and the loser, Boeing. After a tit-for-tat ad campaign, intense lobbying of Congress and the marshaling of trade and industry groups on one side or the other, the companies are bracing for a report due tomorrow from the Government Accountability Office on the fairness of the outcome.

On Feb. 29, the Air Force -- in a move that surprised both companies -- awarded the deal to build 179 refueling tankers, essentially gas stations in the sky, to Northrop and its partner, Airbus parent European Aeronautic Defence and Space, Boeing's biggest rival in the aircraft business. Boeing formally protested the award with the GAO, saying its aircraft, which is based on the 767 jetliner, was judged unfairly and that the Air Force changed the rules.

Boeing has spent millions, although it won't say how much, running full-page color advertisements in major newspapers across the country. Northrop has fired back with its own ads, daily e-mail blasts and criticisms, saying its tanker gave the Air Force an overall better value. In one of its latest e-mails it teased Boeing, saying, "They've run out of gas," because Boeing was re-running some of its ads.

The GAO is expected to decide by tomorrow whether Boeing's protest of the award has merits and it will likely make a recommendation to the Air Force's acquisition officials.

Boeing, which built the Air Force's current tanker, wants Northrop's contract canceled and the deal to be reconsidered. Northrop wants the GAO to say the Air Force's acquisition process was fair and that Northrop simply had the better tanker. Some congressional leaders, including those from Kansas and Washington state, where Boeing has a large presence, have said Congress could withhold funds if the decision is not resolved.

At stake is not just the $40 billion deal, which could grow to as much as $100 billion over the next two decades, but also a major inside track on future military aircraft sales and even an advantage in commercial airline business. Northrop and EADS plan to build a major plant in Mobile, Ala., while Boeing will likely shut down its 767 line without the tanker contract.

An earlier deal for the Air Force to lease tankers from Boeing was canceled after a top Air Force acquisition official admitted that she favored Boeing while negotiating for a job at the company. That official served jail time, as did a former top Boeing executive.

Heidi Wood, a senior defense analyst with Morgan Stanley, said Boeing's military aircraft production is dwindling, as it lost a major deal to build the F-35 fighter plane to Lockheed Martin and is left with cargo planes, bombers and tanker aircraft. "This is a meaningful decision on the future of Boeing's military aircraft business," Wood said.

After the Feb. 29 award, the Air Force talked to the teams about their proposals.

"We went into the debrief fully expecting to walk out with our tail between our legs," said John A. Lockard, Boeing's chief operating officer of its integrated defense systems. "How could an airplane that was designed to meet the requirements fall so far off the mark? But the more we heard, the less we could pull out of them why we lost. That drove us to ask, 'Were we treated fairly?' "

Last week, Boeing said the Air Force made a mistake in analyzing the costs of operating the Boeing design over the life of the jets. Northrop acknowledged the Air Force made a mistake but said its tanker, based on the Airbus A330, offered "significant capability advantages, better combat performance in detailed simulations, and a contractor in which the Service had more confidence, and cost advantages."

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