Boeing wins $35 billion contract to supply new aerial refueling tankers

By Karen DeYoung and Walter Pincus
Washington Post Staff Writers
Friday, February 25, 2011; 12:42 AM

The Pentagon awarded Boeing a $35 billion contract Thursday for a new-generation aerial refueling tanker, after a decade-long battle between the U.S.-based aircraft manufacturer and Europe's largest aerospace company.

The weapons contract, which will provide an estimated 50,000 jobs, is one of the biggest in history and by far the largest likely to be awarded under the Obama administration.

The long-awaited decision followed years of contentious jockeying and millions of dollars spent on advertising and lobbying by the two companies. Boeing and European Aeronautic Defence and Space (EADS), manufacturer of the Airbus, each had won the award once before, only to see it pulled back amid allegations of impropriety in the contracting process.

In the meantime, the Air Force's 500-strong tanker fleet has become dangerously decrepit. Many of the aircraft, refitted Boeing 707s from a half-century ago, are among the oldest jets still flying.

"Boeing was a clear winner," Deputy Defense Secretary William J. Lynn III said at a brief Pentagon news conference announcing the decision. The first 18 of 179 planes, to be called KC-46A tankers, are to be delivered by 2017.

Considerations in the award, Lynn said, were "warfighting requirements, price and life-cycle costs." He and Air Force Secretary Michael Donley emphasized that both manufacturers had demonstrated they could deliver on 372 requirements specified in the contract.

"What that means is that, in the end, Boeing won on price," said Loren B. Thompson, a defense policy analyst for the Arlington-based Lexington Institute. "Price consists of the cost of producing the plane, plus the cost of operating it over 30 years. The Airbus plane is so much bigger and burned over a ton more fuel per flight hour.

"Multiply that by 179 planes, times 30 years of service life and it becomes very big," Thompson said.

"These are fixed-price contracts," Donley said. The decision "reflects our efforts to deliver better value to the warfighter . . . in a budget process that we realize is not going to give us more money every year."

The Air Force has set the tankers as its highest procurement priority. Most of the aircraft operating in the Afghanistan war zone depend on extensive aerial refueling, and "without a large tanker fleet, it is very hard for U.S. military aircraft to get to many parts of the world," Thompson said.

The entire refueling fleet is expected to be replaced over the next 10 to 20 years through second and third contracts for a total of up to $100 billion. Some defense experts have doubts that many planes currently in operation can last that long.

An Air Force deal to lease new tankers from Boeing fell apart in 2003, after a procurement scandal that sent a Defense Department official and a Boeing executive to prison. EADS, with a design based on its A330, won a second round in 2008 in partnership with a U.S. company, Northrop Grumman. But that decision was withdrawn after the Government Accountability Office upheld Boeing's objections that the contracting process was biased against its offer of remodeled Boeing 767 aircraft.

Northrop Grumman subsequently dropped out, and EADS decided to bid alone, promising that it would match Boeing's promised number of U.S. jobs by manufacturing the plane in a factory it planned to build in Mobile, Ala., and buying parts from U.S. companies.

Many defense experts had projected EADS as the likely winner, based on its victory in the last round, and expressed surprise at the decision.

EADS has the right to challenge the new award. "This is certainly a disappointing turn of events, and we look forward to discussing with the Air Force how it arrived at this conclusion," EADS North America Chairman Ralph D. Crosby Jr. said in a statement. "There are more than 48,000 Americans who are eager to build [the aircraft for EADS] here in the U.S., and we owe it to them to conduct a thorough analysis."

But Lynn and Donley made clear that they thought the Pentagon had gotten it right this time and that they did not anticipate a challenge. "We think we've established a clear, transparent and open process . . . and this will not yield to a protest," Lynn said.

Last fall, the Pentagon inadvertently provided Chicago-based Boeing and Netherlands-based EADS proprietary data on each other's bid. The Pentagon's inspector general last week told lawmakers concerned with the project that the contest was not irreparably harmed by the mix-up.

"I suspect EADS will not protest," Thompson said. "We know the two planes rated equally on performance. All they could protest is whether the price of the plane was correctly calculated."

At the request of the Air Force, the two aerospace giants submitted revised final bids Feb. 10 and fired a last round of salvos at each other. Crosby said last week that his firm had lowered its final bid to a "very competitive price proposal." Boeing chief executive Jim McNerney described its bid as an "aggressive" attempt to beat its "subsidized" European rival.

In June, the World Trade Organization ruled that European governments gave the Airbus illegal subsidies in its efforts to overtake Boeing as the world's largest aircraft manufacturer. The European Union, meanwhile, filed a complaint alleging that Boeing has improperly benefited from billions in subsidies from its military business and tax breaks.

The contract dispute was marked by fierce lobbying by both sides, with advertising expenditures rivaling those of political campaigns. The issue became a political football among lawmakers seeking jobs for their states - in Washington state and Kansas for Boeing and in Alabama for EADS.

Despite EADS's promise to provide an equal number of U.S. jobs, Boeing proponents insisted that it was a "Buy America" issue during a time of high unemployment.

At a visit to a veterans center in Everett, Wash., on Tuesday, Sen. Patty Murray (D-Wash.) said she was nearly sick with concern about the contract award, the Everett Herald reported. "I can't believe our country would make a decision to go with a company based in a foreign country," Murray said. "I won't tolerate it."

deyoungk@washpost.com pincusw@washpost.com

Staff writer William Branigin contributed to this report.

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