By Dana Hedgpeth
Washington Post Staff Writer
Tuesday, March 9, 2010; A12
Defense giant Northrop Grumman said Monday that it is pulling out of the $40 billion competition to build aerial refueling tankers for the Air Force, a move that defense analysts and procurement specialists say leaves its rival Boeing as the likely winner.
Northrop's decision marked the latest twist in the nearly decade-long fight over one of the Pentagon's biggest and most controversial contracts and raised questions about the impact of procurement reforms proposed by the Obama administration.
In announcing its withdrawal, Northrop said that the government's requirements did not recognize the value of the larger refueling platform it had proposed and instead favored Boeing's proposal to build a smaller tanker using a prototype of its 767 aircraft.
Wes Bush, chief executive of Los Angeles-based Northrop, said that under those conditions, it no longer made financial sense to stay in the competition.
"We have a fiduciary responsibility to our shareholders to prudently invest our corporate resources," he said. "Investing further resources to submit a bid would not be acting responsibly."
Deputy Secretary of Defense William Lynn said in a statement that the Pentagon was "disappointed" that Northrop had pulled out of the competition, noting that it "competed well on both price" and other factors. "We strongly believe that the current competition is structured fairly and that both companies could compete effectively," Lynn said.
The government has been trying for years to award a contract to replace the Air Force's aging fleet of planes used for refueling military aircraft midflight, but the effort to build 179 new tankers has been marred by controversy.
Northrop had partnered with Airbus, which is owned by Paris-based European Aeronautic Defence & Space (EADS), to compete against Chicago-based Boeing. In 2004, Boeing lost the deal to build the tanker after an ethics scandal. In 2008, Northrop won the contract, but Boeing fought back and had the award nullified.
The Pentagon started another attempt to rebid the deal last September, but the Northrop team threatened in December that it would walk away unless the Air Force changed its proposal. Northrop said the Air Force's requirements favored Boeing's smaller 767 plane, instead of its larger Airbus A330.
Bush said Monday the company would not protest the contract, in effect handing a win to Boeing. Bush said that although Northrop thinks it had grounds to successfully protest the contract proposal, it would have led to another lengthy delay.
"America's servicemen and women have been forced to wait too long for new tankers," he said. "Taking actions that would further delay the introduction of this urgent capability would also not be acting responsibly."
Northrop executives and defense industry analysts have questioned how profitable the tanker contract would be, given the Pentagon's push for setting a fixed price for the contract before design and testing of the aircraft are completed.
Contracting and defense experts said Tuesday that Northrop's withdrawal raises questions about how far the Obama administration will be able to go with plans to reform procurement by pushing for more competition and accountability for cost overruns.
"It shows how acquisition reform can backfire," said Loren Thompson, a defense industry consultant at the Lexington Institute. "If you push a contractor too far, they don't have any incentive to bid because they don't expect to make any money. The lesson is, if you push contractors too far they'll lose interest."
Many defense analysts say it is unlikely that EADS would be able to put together a bid by the May 10 deadline and that it would be hard for the European defense giant to gain enough political support over Boeing.
For those who had pushed for a Boeing plane, Northrop's exit is considered a win.
"Northrop made a good decision," said Rep. Norm Dicks (D-Wash.). "We can now go forward."
But others were dismayed. Sen. Richard C. Shelby (R-Ala.), in whose state Northrop had planned to build an assembly plant for the tanker if it won the contract, said the Air Force "had a chance to deliver the most capable tanker possible to our war fighters and blew it."
He said that the "so-called competition" was "structured to produce the best outcome for Boeing" and that the Air Force's "refusal to make substantive changes to level the playing field shows that once again politics trumps the needs of our military."