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US Air Force Tanker Contract

A Big Win for Boeing -- a Big Loss for EADS

By Keith Epstein

The Government Accountability Office sustains the US planemaker's complaint and calls for a review of the Air Force contract that went to rival Northrop Grumman and EADS.

In a significant boost to the prospects of Boeing, a US government arbiter has sustained the company's formal complaint that the US Air Force unfairly chose to order 179 aerial refueling tankers from prime contractor Northrop Grumman and its European partner EADS, rather than Boeing.

The strongly worded ruling, while not a guarantee that the contract award will be reversed, revives hopes that Boeing can land the $35 billion award. It is one of the most lucrative contracts in military history, and among the most sullied by delay and political controversy. The ruling stunned some analysts and also surprised some Boeing executives.

Citing "a number of significant errors" by Air Force officials that "could have affected the outcome" of the heated competition, the Government Accountability Office urged the Air Force to reassess its needs, reopen discussions with the companies, reevaluate their proposals -- and make a new decision. The Air Force has 60 days to say whether it will reopen the competition or make other changes.

'Misleading and Unequal Discussions'

The Air Force errors, according to the GAO, included failing to stick to the evaluation criteria it had announced in the original solicitation to bidders, and giving Northrop extra points for exceeding base requirements in the solicitation. That appeared to endorse Boeing complaints that the Air Force switched the requirements it was considering without telling the company.

Said the GAO, "The Air Force conducted misleading and unequal discussions with Boeing, by informing Boeing that it had fully satisfied a key performance parameter objective relating to operational utility, but later determined that Boeing had only partially met this objective, without advising Boeing of this change in the agency's assessment."

The accountability office also criticized the Air Force for miscalculating anticipated costs over the life of the planes being considered. Boeing offered a derivative of its 767 commercial airliner, while Northrop/EADS offered a derivative of the EADS-built Airbus A330. The GAO said that during testimony the Air Force "conceded that it made a number of errors…that, when corrected, result in Boeing displacing Northrop Grumman as the offerer with the lowest probable life-cycle cost."

Boeing Shares Jump on the News

Both Boeing and Northrop declined immediate comment on the findings, saying they first would review the decision. "We respect the GAO's work," said Northrop spokesperson Brandon "Randy" Belote. "We continue to believe that Northrop Grumman offered the most modern and capable tanker for our men and women in uniform."

Said Mark McGraw, a Boeing vice-president who heads the company's tanker program, "We look forward to working with the Air Force on next steps in this critical procurement for our warfighters." Boeing shares jumped after the announcement. As of 3 p.m., they were trading up 53¢, or slightly less than 1 percent, to 74.91. Northrop shares fell 69¢, or 1 percent, to 70.40.

The Air Force isn't bound by the GAO's ruling and could take a month or two to decide its course of action. A document obtained by BusinessWeek indicates Air Force officials feel they made the right choice, for the right reasons, and with minor exceptions, by following regulations. The choice of Northrop was "reasonable, lawful, and valid," Air Force lawyers wrote in the conclusion of a 154-page "Post-Hearing Brief" they filed May 16 after Boeing presented its case and the GAO heard testimony from witnesses.

The lawyers wrote that the Air Force had held a "transparent and unbiased" competition for the tanker contract, immune to the whims of politics or other outside considerations. "We have upheld the Jeffersonian ideal of silencing the complaints of our citizens, whether just or unjust, solely by the force of reason," they said.

Another competition, if it happens, might not occur until next February. Meanwhile, Boeing's backers are sure to use the GAO's findings to garner more support in Congress for financing a tanker program that includes Boeing. Sue C. Payton, the Air Force's top acquisition official, said the service would move swiftly. "The Air Force will do everything we can to rapidly move forward so America receives this urgently needed capability."