Pentagon reopens tanker contest; credit for size

Reuters

August 06, 2008

• Original Reuters article: Pentagon reopens tanker contest; credit for size 

By Andrea Shalal-Esa

WASHINGTON (Reuters) - The Pentagon reopened a $35 billion refueling aircraft competition between Boeing Co and Northrop Grumman Corp on Wednesday, with changes that Boeing supporters feared would favor the larger Northrop plane.

Congressional aides and others said some of the Pentagon's modifications, including measuring costs over 40 years instead of 25, appeared to favor Boeing's smaller 767-based tanker.

But other changes, like the Pentagon's decision to give "positive consideration" for greater fuel delivery, looked to give an edge to Northrop and its bigger tanker based on the Airbus A330, made by European subcontractor EADS.

The Defense Department last month agreed to redo the competition to supply 179 new aerial tankers after government auditors found significant errors in the Air Force's handling of the last contest, which Northrop and EADS won in February.

It was the latest twist in a drawn out effort to replace the current fleet of KC-135 tankers, which are over 40 years old on average.

Congress in 2004 killed an earlier plan to lease and buy 100 Boeing 767s tankers after a former senior Air Force acquisition official was sent to prison for negotiating a job with Boeing while still overseeing the tanker deal.

Shay Assad, Pentagon director of defense procurement and acquisition policy, said Wednesday the Pentagon changed the competition guidelines to give the rival bidders "a clear and unambiguous understanding" of how their bids would be judged.

A final request for proposals (RFP) would be issued in mid-August after consultation with the companies, which would then have until October 1 to submit revised bids. Assad said the Pentagon was on track to announce a new winner around December 31.

Boeing spokesman Doug Kennett said his company was still reviewing the amendments and had not decided whether to offer its larger 777 aircraft. "Until we receive the final RFP it is too early to offer any details about Boeing's path forward."

Northrop shares closed 1.2 percent higher at $68.10 on Wednesday, while Boeing ended up 0.9 percent to $65.40, both on the New York Stock Exchange.

BOEING BACKERS CRITICAL

Boeing backers bristled at the Pentagon's ambitious timetable, saying it seemed designed to justify the earlier decision, and gave Boeing little time to adjust its offering.

Sen. Patty Murray, a Washington state Democrat, said the new documents raised some "red flags." They did not spell out how much extra credit companies would get for fuel offload capacity and the timetable for new submissions was "simply unrealistic."

Northrop would respond to the changes "in short order," said spokesman Randy Belote.

Assad told reporters the changes responded to criticisms by the Government Accountability Office, but did not amount to "a substantial modification" of the competition's original terms.

Congressional aides, briefed on the Pentagons revisions, said aerial refueling was top-rated on a 1 to 3 scale, while operational utility, survivability and airlift capability were overall rated a 2.

Boeing had argued after the February contract award that the Air Force wrongly gave Northrop credit for exceeding the fuel offload requirement after assuring Boeing officials that no extra credit would be given. Now the military is stating its wishes more clearly.

The changes "appear to favor a tanker larger than any real-world scenarios would require" while diminishing the greater life-cycle costs of buying a bigger airplane, said Rep. Norm Dicks, a Washington state Democrat and Boeing backer.

Boeing had considered offering the 777, but ultimately opted for the 767. Defense analysts said modifying the 777 into a tanker would have taken far longer and cost a lot more.

It may also be a moot point, given the Pentagon's accelerated timetable for the revamped bids, analysts said.

"If the solicitation favors a bigger plane but gives Boeing inadequate time to propose one, that it patently unfair," said defense analyst Loren Thompson of the Lexington Institute.

Rep. Jo Bonner, an Alabama Republican, said he hoped the revisions would maintain a level playing field for both competitors, but he remained convinced that Northrop had offered the "more modern, more capable aircraft."

Northrop and EADS had proposed building their KC-30 tanker in Alabama, while Boeing would build its 767 tanker in Washington state, and do military modifications in Kansas.

(Reporting by Andrea Shalal-Esa; Editing by Tim Dobbyn)

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