June 19, 2008

Boeing Could Get New Shot at Tanker

By Tim Logan and Philip Dine, St. Louis Post-Dispatch

Jun. 19--The tanker wars will continue.

Government auditors Wednesday gave Boeing Co. new life in its fight to build a new fleet of aerial refueling tankers, with a stinging rebuke of the process that led the Air Force to award the $35 billion job to two Boeing rivals.

It's a rebuke so stinging that it "virtually guarantees" the contract will be rebid, industry watchers say.

The Government Accountability Office upheld seven major points of Boeing's protest of the decision -- everything from how the Air Force measured costs to "misleading and unequal discussions" it held with Boeing on a key point -- and recommended that the contract be reopened and a new decision made.

"Our review of the record led us to conclude that the Air Force had made a number of significant errors that could have affected the outcome of what was a close competition between Boeing and Northrop Grumman," said Michael Golden, a top procurement lawyer for the GAO, in a statement. "We therefore sustained Boeing's protest."

It's the result of a highly charged appeal process that began in March, two weeks after the Air Force gave the lucrative tanker job to Northrop and its partner, Airbus parent European Aeronautic Defence & Space Co.

Boeing, which has its defense unit headquartered in St. Louis, accused the Air Force of erring in several key areas and asked the GAO to review the contract. Meanwhile its labor unions and allies in Congress blasted the decision to give such a big military contract to a foreign company.


While many observers thought the GAO might find some small fault with the process, few expected the scope, or severity, of the audit's findings.

"Only one in four GAO protests get upheld, and of those, very few get language like this," said Richard Aboulafia, a defense analyst with the Teal Group in Fairfax, Va. "This virtually guarantees a re-compete."

The decision comes 10 days before Northrop was to break ground on its tanker factory in Mobile, Ala. In a statement, spokesman Randy Belote said the company "respects the GAO's work" but continues to believe that it offered the better plane.

Boeing praised the "professionalism and diligence" of the GAO review, and said it welcomed the ruling.

"We look forward to working with the Air Force on next steps in this critical procurement for our war fighters," said Mark McGraw, the company's vice president for tanker programs.

The Air Force has 60 days to decide how it will respond to the GAO, and what, if any, "next steps" it might take.

On Wednesday, the Air Force said it will review the GAO's findings and then decide whether to restart the contract process.

"The Air Force will do everything we can to rapidly move forward so America receives this urgently needed capability," said chief weapons buyer Sue Payton.

The GAO's ruling is purely advisory -- the Air Force could choose to ignore it -- but given all the scrutiny on this contract, the decisive nature of the ruling and the fact that GAO protest decisions are typically followed, ignoring it will be very hard to do, analysts said.

"I don't think the Air Force has any choice but to put this out for rebid," said Scott Hamilton, a Seattle aerospace analyst who has closely followed the tanker contract.


Boeing supporters on Capitol Hill quickly cheered the decision Wednesday.

"It seems that common sense has been vindicated," said Rep. Todd Akin, R-Town and Country, who said the ruling was a victory for "mom-and-pop suppliers," machine shops and workers across the U.S. "We're very encouraged that we're back on track to have an American solution to the choice of a tanker."

Several lawmakers, including Christopher "Kit" Bond, a Missouri senator and key defense appropriator, said the ruling speaks to broader problems with Pentagon weapons-buying. Bond said he wasn't surprised by the findings, "based on the acquisition problems the Pentagon has encountered over many years now in managing costly and large contracts and the egregious flaws in this acquisition."

Boeing's unions hailed the ruling, too.

"Today's announcement by GAO confirms what Boeing workers have suspected for months -- that the Air Force failed miserably to practice due diligence to the taxpayers of our country by awarding this important defense contract to EADS," said Paul Shearon, secretary-treasurer of the International Federation of Professional and Technical Engineers. If the Air Force doesn't withdraw its award to Northrop, Shearon said, Congress should refuse to fund the tanker and "force" a rebid.


Rebidding the contract probably would take months, perhaps years, prolonging a process that has twisted and turned through much of the decade.

In 2003, Boeing won a $20 billion deal to lease tankers to the Air Force, a deal that was scuttled the next year after a scandal that sent top company and Air Force officials to prison. The contract went back out for bid, and Northrop and EADS teamed up to offer a modified Airbus A330. They were considered heavy underdogs but won the contract in late February. Boeing protested to the GAO.

Now, while most observers agree that it will be hard for the Air Force and Northrop to continue under the contract awarded in February, few will predict who will wind up building tankers in the end.

"This is not a rejection of the Northrop Grumman plane. It's a rejection of the Air Force process," said Loren Thompson, a defense analyst with the Lexington Group. "It's an opportunity for Boeing to come back and be treated fairly, but it's not a guarantee they will win."

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