Congress yesterday barred the Air Force from pursuing a $23 billion deal to lease and then buy tankers from Boeing Co. and raised the possibility that European rival Airbus SAS could compete to build the refueling planes.
The action ends a three-year-old defense program that spurred a federal investigation, the resignation of Boeing's chief executive and a nine-month prison sentence for a former Air Force official who admitted inflating the contract's price to help her job prospects at Boeing.
Under the 2005 defense authorization bill that won final House and Senate approval yesterday, the Air Force can buy as many as 100 of the refueling aircraft through a traditional purchase but not lease them initially, as had been planned. The measure sets aside $100 million to start the program and requires the Air Force to hold a competition for a $5 billion contract to maintain the aircraft. Boeing had been awarded the maintenance work without competition.
Even as they approved the conference report on the $422 billion defense bill, House and Senate members remained split on the outcome for Boeing. Senate members argued that the Air Force is now required to hold a competition to build the refueling planes, which would allow Airbus to compete for the work.
"Any program to acquire tankers must start from the beginning . . . on a traditional budget, procurement, and authorization track," Sen. John McCain (R-Ariz.), the chief critic of the lease-buy strategy, said in an exchange on the Senate floor with Sen. John W. Warner (R-Va.), chairman of the Senate Armed Services Committee. Warner said he agreed.
But House members, including Rep. Duncan Hunter (R-Calif.), chairman of the House Armed Services Committee, disagreed.
"The most important point is we don't have to go back and have another procurement, because if we did that it would take years and years before we would start getting the tankers," said Rep. Norman D. Dicks (D-Wash.), whose district includes thousands of Boeing workers. "And I believe it's the position of the Congress that this is going to be built by an American company."
The Air Force began pushing the program to modernize its fleet of more than 500 aging refueling planes in 2001, arguing had the 40-year-old aircraft were being used heavily in Iraq and Afghanistan and had corrosion problems. Leasing reconfigured 767 passenger planes from Boeing and then buying them at the end of the lease contracts would be more expensive overall but would cost less in the early years, Air Force officials said, and would allow the planes to be delivered quickly.
Critics have complained that the program was an expensive bailout for Boeing's 767 production line. And the merits of the program were overshadowed last year by controversy over improprieties.
Boeing fired former Air Force procurement officer Darleen A. Druyun for negotiating her job with the company while overseeing Boeing's work at the Air Force, including negotiating the tanker deal. Chief executive and chairman Philip M. Condit resigned after Druyun's dismissal.
On Oct. 1, Druyun was sentenced to nine months in prison after admitting that she inflated the price of the deal as a "parting gift" before her Pentagon retirement to ingratiate herself with Boeing.
Defense Secretary Donald H. Rumsfeld is not expected to decide how to modernize the tanker fleet until after the November election, when he is to receive several studies on whether the department should consider alternatives to the 767 tanker. "The Air Force will follow the direction of Congress when the FY 2005 Defense Authorization Bill becomes law," the Air Force said in a statement.
Doug Kennett, a spokesman for Boeing, said: "The need for new aerial refueling tankers is clear and the path forward is clear."
Boeing has been counting on the tanker deal to help sustain its 767 production line, which has faced slumping sales to airlines. Boeing has said it needs to decide whether to close the line by May 2005. If the Air Force decides not to buy the aircraft, the company has said it would take a $300 million charge.
Boeing's stock price fell 2 percent, or $1.22 a share, Friday to close at $50.10. Standard & Poor's lowered Boeing's debt rating to "stable" from "positive" Friday, citing the potential loss of the $5 billion contract to maintain the tanker fleet and the widening investigation after Druyun admitted favoring the company.
The tanker-leasing plan may have died, but the criticism and investigations it spurred are continuing. The Senate Armed Services Committee is still awaiting White House documents related to the deal, which some members have said could shed light on whether the Air Force acted improperly.
The contracting dispute counted another casualty last week. Air Force Gen. Gregory S. Martin withdrew his nomination as U.S. commander for the Pacific and East Asia after McCain indicated that he would bottle up his confirmation because of the contracting scandal.
The House approved the defense authorization measure, 359 to 14. The Senate approved the measure by voice vote.