A May 19 Business article misstated a National Defense University report's view on the modernization of the Air Force's fleet of refueling planes. The report took no position on whether the fleet needs to be upgraded. (Published 5/20/04)

The Air Force did not hold a true competition before beginning negotiations with Boeing Co. on a multibillion-dollar acquisition of refueling planes and bypassed the normal acquisition process when developing the program, according to a report by the National Defense University.

The report, which has not been released, reflects earlier criticism by the Defense Science Board, a Pentagon advisory panel, and the Defense Department's inspector general. The National Defense University is a military education center at Fort McNair, in Washington, under the direction of the chairman of the Joint Chiefs of Staff.

Defense Secretary Donald H. Rumsfeld requested the reports last year after Chicago-based Boeing fired a senior executive, Darleen A. Druyun, for secretly negotiating and then accepting a job with the company while she was still at the Air Force negotiating the tanker contract. Druyun has pleaded guilty to conspiracy and faces possible jail time. Boeing also fired its chief financial officer, Michael M. Sears, who recruited Druyun to the company, and chief executive Philip M. Condit resigned shortly afterward.

The debate centers on the Air Force's plan to lease and buy 100 tankers, which refuel planes in the air. Sen. John McCain (R-Ariz.) said the more expensive leasing option amounted to a bailout of Boeing during a period of slumping commercial airplane sales. Congress limited the number of planes that could be leased to 20 and said the Pentagon would have to buy the rest through the traditional procurement process. The tanker contract is vital to the survival of the production line that makes the 767 jet, which has faced dwindling commercial orders.

Rumsfeld was expected to decide on the $23.5 billion program this month, but defense officials have said he is now likely to wait until the end of the year. An Air Force spokesman could not be reached for comment. Boeing spokesman Douglas J. Kennett said the company has not seen the report but that "Boeing stands ready to resume discussions on how to expeditiously put new tankers in the war fighter's hands when the Pentagon gives the go-ahead."

The National Defense University report said modernizing the 40-year-old tanker fleet will take 30 years and "must begin now!" -- a key Air Force contention that the Defense Science Board took issue with -- but was critical of several aspects of how the Air Force perused the deal.

Normally, the military establishes the requirements of a new weapon or system, analyzes alternatives and then selects the best option, the report said. But in this case, Congress enacted legislation calling for the lease and purchase of tankers before the requirements were even articulated. The Air Force and Pentagon "bypassed many elements of the 'normal' acquisition system," the report said.

There appeared to be "only limited use of considerable government buying power and leverage to obtain maximum discounts," the report said. Cost and pricing guidelines were followed, it said, but were "liberally interpreted."

"In a sole source, monopoly commercial environment the government is not served well with very limited price data," the report said.

Boeing said the Air Force was given extensive information on how the company arrived at its price and there are several safeguards to ensure that the service gets a good deal, including a cap on profit, Kennett said. There is "unprecedented protection for the taxpayer," he said.

The report also challenges the Air Force's assertion that there was a competition before the agency began negotiating with Boeing. In February 2002, the Air Force issued a request for information to Boeing and rival Airbus, owned primarily by European Aeronautic Defense and Space Co., but that was not a competitive process, the report said.

There was "little expectation that Congress would allow leasing of Airbus aircraft," the report said. "It appears contractor selection was a foregone conclusion." Boeing supporters had said it would be unfair to give the contract to a foreign-owned company.

The two operational documents that usually guide Pentagon decisions on procurement programs were written specifically for Boeing's 767 tanker, the report said.

Boeing has repeatedly challenged contentions that it was handed the contract without competition. Airbus was eliminated from contention because it did not have the right technology, company officials have said. The Boeing proposal "was lower cost, lower risk, technologically superior and more flexible in basing and deployment," Kennett said.