July 10, 2008

Boeing Wins 2nd Chance at Air Force Contract

CHICAGO _ Boeing Co. has to hope the third time is the charm as it again prepares to bid for a controversy-racked $35 billion contract to provide aerial tankers to the U.S. Air Force.

Pentagon officials on Wednesday said they will reopen the competition, acknowledging flaws in the process that led the Air Force to select a consortium led by Northrop Grumman Corp. and the France-based parent of Airbus SAS, a rival planemaker to Chicago-based Boeing.

The announcement guarantees yet more drama in the long-running tanker saga, which has seen key players land in jail and inspired trans-Atlantic jousting over jobs and trade subsidies.

The Pentagon was widely expected to seek another round of tanker bids after the Government Accountability Office, an investigative arm of Congress, last month strongly criticized the way the Air Force reached its decision this year to go with Northrop over Boeing.

"I've concluded that the contract cannot be awarded at present because of significant issues pointed out by the Government Accountability Office," Secretary of Defense Robert Gates told reporters Wednesday.

The Pentagon decision not only delays the start to a critical defense program but also raises questions about the Pentagon's ability to clearly evaluate complex contracts. The GAO also had found significant flaws in an earlier Air Force decision to award a $13 billion search-and-rescue helicopter contract to Boeing, forcing that competition to be reopened.

Responding to questions of bias in the tanker decision that were first raised by Boeing and echoed by the GAO, Gates said the Defense Department, rather than the Air Force, would take control of the selection process.

In a scathing report, the GAO said the contract award "was undermined by a number of prejudicial errors" related to judging whether Northrop Grumman's proposal was technically acceptable and had technical advantages over the Boeing bid.

The Air Force's missteps included bungling how it calculated production and operating costs of Boeing's smaller 767-based tanker against Northrop's modified A330 and using a computer simulation model to evaluate the plans that didn't mirror real-world conditions.

John Young, the Defense Department's top purchasing official, told reporters he will send new requests for proposals to Boeing and Northrop by early August that are intended to address some of the problem areas identified by the GAO, with the goal of awarding a new contract by the end of the year.

But some observers were skeptical that the Defense Department could condense a complex competition into just four months without skewing the results in the favor of the last winner.

"This looks like a second fiasco in the making," said Loren Thompson, defense analyst with the Lexington Institute, a public policy think tank. "First of all, this administration does not have the time to fix the egregious problems that the GAO identified. Secondly, there is no expertise among Gates' advisers to pick a tanker, so they will have to go back to the original cast of characters who made mistakes in the first place."

Boeing, in a prepared statement, welcomed Gates' decision to reopen the competition but said it remained concerned about the criteria used to select a winner.

Northrop spokesman Randy Belote, in a statement, applauded Gates and Young for putting the process "on a path toward quick closure."

The Air Force's February decision to award the tanker to Northrop was a stinging blow to Boeing, which has built most of the tankers in the Air Force fleet and was widely considered the front-runner for the contract, among the three largest ever awarded by the Pentagon.

Boeing had won an earlier version of the contest, only to be stripped of its prize in 2004 amid an ethics scandal when the Air Force purchasing official who had overseen that process wound up on Boeing's payroll. Both Darleen Druyun, the official, and Boeing chief financial officer Michael Sears, were convicted on corruption charges and sentenced to prison.

By landing the contest to supply the first 179 aerial tankers in the government's fleet, Northrop and European Aeronautic Defense and Space Co appeared primed to win two subsequent contracts, potentially worth more than $100 billion, to replace all of the Air Force's 500-odd Eisenhower-era tankers.

Boeing protested the deal to the GAO, a tactic it has rarely employed, claiming that the contest was extremely close and that the outcome might have swung in its favor had Air Force evaluators closely followed their own guidelines.

The GAO agreed, finding eight flaws in the contracting process. Among the most flagrant: Air Force contracting staff told Boeing it had met a key performance measure but failed to notify the Chicago firm when staffers subsequently determined it had fallen short, even while updating Northrop of its status.

As in that earlier competition, the Pentagon's decision will hinge on whether Boeing's 767, which consumes less fuel, is more economical than the A330, which can haul more passengers and cargo but may be too large to operate on smaller air strips close to frontline fighters.

Some members of Congress, who stand to gain jobs in their districts depending on where the tanker is built, have lined up in support of either Northrop or Boeing. The contract also is politically charged because of the presence of a European partner on Northrop's team, and some analysts see the risk of trade friction and more questions about handing part of a defense contractor to a French company as the bid competition heats up.

"They're both going to go at it again," said aerospace analyst Howard Rubel of Jefferies Research Inc. He predicted a protracted battle over the contract.

"We've wasted more ink on this than the value of the airplanes."


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