Boeing Wins Chance for a Do-Over on $35 Billion Tanker Contract

June 19, 2008
US Air Force to review 'significant errors' in tanker deal.

The US Air Force said Wednesday it would review criticisms of its award of a $35 billion aerial refueling tanker contract to EADS and Northrop Grumman after congressional investigators said there were "significant errors" in the deal.

In a major advance in its attempt to win back the contract, the Government Accountability Office backed Boeing's complaint that it had lost the deal to Northrop and European giant EADS in a flawed process, and recommended the Air Force review the decision.

"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," the GAO said.

The Air Force said in a statement it was "reviewing the GAO's decision that sustained portions of Boeing's protest. Once the review is complete, the Air Force will be in a position to determine the best course of action."

The decision could wrest the $35 billion contract from Northrop and its European partner EADS in a battle fraught with protectionist overtones. The 179 new aircraft are to replace the Air Force's fleet of aging tankers made by Boeing, up to now the sole supplier of air refueling planes to the US military.

The GAO said the Air Force conducted "misleading" discussions with Boeing about its compliance with requirements and gave too much slack to Northrop Grumman on some points. It also said the Air Force made "unreasonable" cost calculations that, when corrected, made Boeing the lower bidder over the life of the contract.

"We recommended that the Air Force reopen discussions ... obtain revised proposals, re-evaluate the revised proposals, and make a new source selection decision, consistent with our decision," the GAO said.

The recommendations of the congressional investigative arm, although non-binding, are usually heeded, and industry analysts said it was likely to mean the contract is re-bid. "In theory, the air force has 60 days to answer. But in reality, it's obvious they're going to have to start over," said Loren Thompson, a military affairs specialist at the Lexington Institute.

The GAO report marks a new twist in a process that in 2003 saw Boeing awarded the contract, only to have it canceled in a procurement fraud scandal. On February 29, Northrop Grumman and the European Aeronautic Defence and Space Company (EADS), parent of Boeing's archrival Airbus, were awarded the contract for the 179 tankers. Boeing filed a protest March 11, effectively freezing the contract and sparking the GAO review.

The contract is for the initial phase of a fleet replacement project worth some 100 billion dollars over the next 30 years.

"We welcome and support today's ruling by the GAO fully sustaining the grounds of our protest," Mark McGraw, vice president of Boeing Tanker Programs, said in a statement. "We look forward to working with the Air Force on next steps in this critical procurement for our warfighters."

Northrop Grumman vice president Randy Belote said the company would review the GAO findings and insisted it had "offered the most modern and capable tanker."

EADS chief executive Louis Gallois said that "though we're disappointed, it's important to recognize that the ... announcement is an evaluation of the selection process, not the merits of the aircraft."

The politically charged battle over the tanker pits the KC-45, a militarized version of Airbus's 330, and the KC-767, a new version of the Boeing 767. The choice of EADS raised protectionist hackles in Congress, with lawmakers citing security concerns and job losses to Europe at a time when the economy is struggling.

Representative Norm Dicks, a Democrat from Washington state, home to Boeing factories, embraced the news. "I believe the Air Force should set aside the agreement it improperly reached with EADS/Northrop Grumman and we should proceed expeditiously to build the best aircraft -- the Boeing KC-767 -- here at home," he said.

Copyright 2008 Agence France-Presse

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