Gates says Pentagon will reopen $35B tanker bid
Wednesday July 9, 1:36 pm ET
By Donna Borak, AP Business Writer
Gates says Pentagon will reopen $35 billion tanker bid, award winner by end of the year WASHINGTON (AP) -- Boeing Co. and Northrop Grumman Corp. will submit new offers for a disputed $35 billion Air Force tanker contract, and the Pentagon will pick a winner by the end of the year.Defense Secretary Robert Gates said Wednesday that his office -- not the Air Force -- will oversee the competition between Boeing and the team of Northrop and Airbus parent European Aeronautic Defence and Space Co.


The plan, which hands control to the Pentagon acquisition chief John Young and sets up a dedicated source-selection committee, shows that senior civilians at the Defense Department have lost confidence in the Air Force's ability to manage the contract."I think it's better," said Rep. Norm Dicks, D-Wash. "No one has any faith in the Air Force."

The Government Accountability Office last month detailed "significant errors" the Air Force made in the original award to the Northrop team. The GAO said Chicago-based Boeing might have won the contract had the service not made mistakes in evaluating the bids.

The Pentagon will conduct a limited rebid that looks only at eight issues where government auditors found problems in the initial process, Gates said.

Sen. Richard Shelby, a Republican from Alabama, where the Northrop Grumman team would assemble its plane, called it "the best of all options" that would address the "minor procedural flaws" the GAO cited.

Lawmakers from Washington state and Kansas, where Boeing employs thousands of workers, have put considerable pressure on the Air Force to reopen the bidding process and cancel the contract with the Northrop team.

The deal has emerged as the latest black eye for the service, which is trying to rebuild a tattered reputation after a procurement scandal in 2003 sent a top Air Force acquisition official to prison for conflict of interest and led to the collapse of an earlier tanker contract with Boeing.

The Air Force in February selected the Northrop team to replace 179 Eisenhower-era aerial refueling planes. Boeing filed its protest in March.

The deal -- one of the largest in Pentagon history -- is the first of three contracts worth up to $100 billion to replace nearly 600 refueling tankers over the next 30 years.

Shares of Boeing added 61 cents to $66.53 in afternoon trading, while Los Angeles-based Northrop Grumman fell 10 cents to $66.07.

Associated Press Writers Sam Hananel, Ben Evans, Anne Flaherty and Matthew Daly contributed to this report

Boeing Gets Another Shot at Tanker Deal

The Pentagon, citing errors in the Air Force's award to Northrop Grumman and EADS, reopens the $35 billion contract
by Avi Salzman

The U.S. Air Force will reopen the contracting process for 179 aerial refueling tankers after its initial bidding process was ruled by government investigators to be flawed, according to Senator Richard Shelby (R-Ala.), who was briefed by Pentagon officials. That leaves the contest between Boeing (BA) and Northrop Grumman (NOC) for the $35 billion contract up in the air.

Shelby is particularly interested in the outcome of the deal because Northrop Grumman and partner European Aeronautic Defence and Space (EAD.PA), or EADS, plan to build the tankers in his home state of Alabama. Shelby called the Air Force's decision "the best of all options." Although Shelby said he expects an "expedited recompetition" for the contract, one defense analyst said speeding up the process could be difficult given all the problems so far.

"Getting this contract awarded in the six months remaining in the Bush Administration is a very hard thing to do," said Loren Thompson, an analyst at the Lexington Institute in Arlington, Va. "There's a possibility that whoever loses will file another protest."


GAO Says Process Was Flawed
Pentagon officials are expected to hold a news conference later this afternoon to explain the decision. Boeing's stock price was up about 66¢, or 1%, to 66.58, on the news.

The Government Accountability Office, an investigative agency that works for Congress, ruled on June 18 that the Air Force's process for awarding the contract to Northrop and EADS was flawed (BusinessWeek.com, 6/25/08). The GAO urged the Air Force to amend its decision.

The July 9 news is just the latest twist in a bidding process that has gone awry numerous times over the past few years. The Air Force originally awarded a contract for leasing tankers to Boeing, but had to rescind it after it was revealed the company had received unfair advantages. Northrop Grumman won the bid on Feb. 29, but Boeing filed a formal complaint, claiming the Air Force changed the selection criteria without telling the company.

The GAO's decision was seen as an important win for Boeing, which has seen its stock price drop dramatically as increased fuel prices hamstring the airline industry. The company also has faced delays with its most important civilian program, the new 787 Dreamliner jet.


Keeping the Contract at Home?
Other considerations are also at play. Boeing's supporters argue that a large U.S. military contract shouldn't go to a company based overseas and that the contract would give EADS, which owns Airbus, too big a foothold in the U.S. market.

This contract is the first of three, worth about $100 billion, that the Air Force intends to award over the next 30 years to replace about 600 aging tanker planes. Whichever company wins the first contract is expected to have an edge on securing the other two.

The existing tankers are high-maintenance, Cold War-era machines. The planes are more than 40 years old and rapidly wear out due to the demands of faraway conflicts. The Air Force considers replacing them with more sophisticated aircraft its top weapons-purchasing priority.

Salzman is an intern at BusinessWeek.

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Pentagon Voids Northrop Air Tanker Win - Peter Spiegel, Los Angeles Times

The chronically troubled effort to build a new fleet of aerial refueling tankers for the Air Force was delayed yet again after Defense Secretary Robert M. Gates announced Wednesday that the competition that selected Northrop Grumman Corp. was flawed and would be opened for the third time in seven years. The decision is a blow to the Century City-based aerospace giant, which was the surprise winner of the $35-billion contract over archrival Boeing Co. in February. It's also a slap to the Air Force itself, which Gates said would be stripped of the authority to choose the airplane.

Thousands of Jobs Threatened - David Robertson, The Times

More than 11,000 British jobs were under threat last night after the Pentagon tore up the world’s biggest defence contract to allow an American company to rebid. Airbus stands to lose an £18 billion contract to build tankers for the US Air Force, awarded only four months ago, after aggressive lobbying by US politicians, including the presidential candidates John McCain and Barack Obama. Up to 14,000 other jobs are threatened by the move, mainly in the US, France and Germany.