A Minor Victory

Boeing has scored a minor victory in its on-going battle to challenge the Air Force tanker contract, recently awarded to rival Northrop-Grumman and its European partner, EADS.

On Wednesday, the Government Accountability Office (GAO) denied dismissal motions filed by the Air Force and Northrop-Grumman, after Boeing submitted additional materials to support its protest.

In a press release, Northrop-Grumman claimed that Boeing had "streamlined" its objections, eliminating many of the elements that "were central to the Air Force and Northrop-Grumman motions." However, a Boeing spokesman told Reuters that the Northrop-Grumman claim was "pure spin," noting that his company added material to its original filing, instead of eliminating key objections.

The GAO's decision eliminates any hopes for a quick resolution of the protest. "This means we're going to go through the entire process," a senior Air Force official observed. The GAO is expected to rule on Boeing's protest by late June, although that deadline could be pushed back, if required.

In their motions to dismiss the protest, both the Air Force and Northrop-Grumman claimed that some of Boeing's objections should have been raised before the company submitted its final bid.

Boeing said it was encouraged by the GAO's decision.

Given the political tempest surrounding this contract, it's no surprise that the GAO refused to dismiss Boeing's protest. And while they won't admit it, neither the Air Force nor Northrop-Grumman was taken aback by yesterday's decision. Their efforts to dismiss the protest were almost a formality. With billions of dollars--and thousands of jobs--on the table, no one expected the GAO to summarily reject the Boeing protest, and give a green light to the Northrop-Grumman contract.

We'll also go out on a (short) limb and predict that the GAO's final decision may not be announced until the late summer or early fall. There's simply too much riding on this contract, giving the GAO more reason to fully scrutinize Boeing's protest.

Northrop Fights Back

Jen Dimascio at the Politico details the latest skirmish in the tanker war between Boeing and its rival, Northrop-Grumman. When the Air Force recently awarded a contract for new refueling planes to a team led by Northrop-Grumman and European defense consortium EADS, Boeing cried foul. It has filed a formal protest over the decision, and enlisted its allies in Congress to challenge the contract, worth an estimated $40 billion.

Now, Northrop-Grumman is fighting back, with a public relations offensive aimed at members of Congress and other influential officials across the country. Northrop took out a full-page ad in Monday’s Washington Post, and according to Ms. Dimascio, the defense contractor is planning “an outreach effort to all 535 members of Congress,” and will publish op-ed pieces in papers in Alabama and West Virginia. The media blitz is aimed at countering claims that the contract is a boon for Northrop’s European partner, EADS.

While key aircraft components would be built in Europe, Northrop is planning to assemble the tankers at a new plant near Mobile, Alabama. Refueling equipment for the aircraft will be built at a new factory in West Virginia, home of Senator Robert Byrd, the powerful chairman of the Senate Appropriations Committee.

Northrop claims that 60% of the new refueling plane will be American-made, noting that suppliers in 49 states will have a stake in the project.

As the Politico observes, Northrop’s p.r. campaign also creates some difficult lobbying choices for Boeing. While Congressional supporters of the aircraft giant have been touting the Northrop contract as a “foreign giveaway,” that positions creates problems for Boeing, which sells its products around the world—and sources thousands of components from foreign suppliers.

Not surprisingly, Boeing’s opposition to the tanker decision has been based on how the contract was awarded, rather than the "European connection" of the winning team. Boeing says it believed the Air Force wanted a “medium-sized” tanker, and offered a design based on its 767 jetliner. But Boeing claims that the service gave Northrop “extra credit” for offering a larger refueling platform, utilizing an Airbus A330.

That charge surfaced again Monday, at a House Armed Service sub-committee hearing on the tanker deal. Missouri Congressman Todd Arkin asked Sue Payton, the Air Force Undersecretary for Acquisition if the service “extra benefit to people who exceeded what was required?”

As reported by John Doyle of Aerospace Daily, Ms. Payton's response left little doubt that the "extra credit" provision was well-understood by all competitors:

“Now, it was also very clear that extra credit would be given to the offeror who exceeded that threshold,” Payton said. She explained that while the RFP made it “clear that we had no requirement for size — large or medium,” nonetheless, “we did have requirements to meet capabilities, and there would be extra credit given for exceeding that minimum threshold. And on three occasions we did debrief each of the offerors… exactly what they were getting credit for,” she said.

The tanker battle will likely intensify during the run-up to a Government Accountability Office ruling on Boeing’s protest. If the GAO upholds the Northrop contract (as some expect), then lawmakers aligned with Boeing may attempt to insert “Buy American” provisions into tanker funding bills, in an effort to dent or defeat the deal.

But, even those proposals face an uphill fight. While there is support for such measures in the House, they would encounter strong opposition in the Senate. In addition to Mr. Byrd (whose state would gain hundreds of jobs from the contract), Virginia Senator John Warner has also expressed support for Northrop-Grumman and its entry. Mr. Warner has accused Boeing supporters of “trying to put up a virtual fence around free trade.”

Did we mention that the largest private employer in John Warner’s home state is the giant shipyard in Newport News, owned by--you guessed it--Northrop-Grumman.

***

ADDENDUM: In yet another twist of the tanker battle, a number of retired Air Force generals have signed a letter, urging Defense Secretary Robert Gates to "stand up and defend" the tanker award to the Northrop-Grumman/EADS team. As the Seattle Post-Intelligencer reports, the 22 retired generals share something in common, other than their service affiliation. All are employees of Northrop-Grumman or EADS, or serve as consultants for those firms.

Among the signatories of the letter are General Michael Ryan, a former Air Force Chief of Staff, and General Chuck Horner, who led the air campaign during Operation Desert Storm.

H/T to Sean Meade at Aviation Week for the link on Northrop's strong letter of support--from its own executives and consultants.

Blame McCain

Last time we checked, Senator John McCain had barely secured enough delegates to win the GOP presidential nomination. The convention is still months away, as is the general election. And, if he manages to beat his Democratic opponent, McCain won't be sworn-in as Commander-in-Chief until January of next year.

Still, it's never too early to blame a presidential contender for a problem or issue, particularly if might reverberate with the electorate. Consider this headline from today's Financial Times:

Pelosi points finger at McCain on Boeing.

In other words, the House Speaker is blaming Mr. McCain for a recent Air Force decision on a new tanker contract. That decision, announced last Friday, awarded the $40 billion contract to a U.S.-European consortium, led by Northrop-Grumman. That ended a 50-year relationship between the service and Boeing, which has provided the bulk of the USAF tanker fleet since the early 1950s.

To be fair, Ms. Pelosi has a point. Largely through the efforts of Senator McCain, an Air Force plan to lease 767 tankers from Boeing was scuttled almost five years ago. McCain was an early critic of the deal, claiming that the lease would be more expensive than buying new refueling aircraft.

His criticism of the lease plan intensified after it was discovered that Boeing offered jobs to the Air Force's senior procurement official and two of her family members. That official--Darlene Druyun--eventually went to jail on corruption charges, as did Boeing's former Chief Financial Officer.

Revelations of wrong-doing forced the Air Force to cancel the lease deal, and re-open the tanker contract for new bids. The decision announced last week represented the culmination of that process, with the USAF opting for the Northrop-Grumman entrant, which is based on the Airbus A330 airliner.

In other words, John McCain opposed the tanker lease more than five years ago, and in hindsight, his efforts to block the deal were well-founded.

But, because his opposition blocked the contract for Boeing, McCain becomes a convenient target for "outsourcing" American jobs. Along with Nancy Pelosi, other politicians are weighing in, setting their sights squarely on Senator McCain. As the AP reports:

"I hope the voters of this state remember what John McCain has done to them and their jobs," said Rep. Norm Dicks, D-Wash., whose state would have been home to the tanker program and gained about 9,000 jobs.

Having made sure that Iraq gets new schools, roads, bridges and dams that we deny America, now we are making sure that France gets the jobs that Americans used to have," said Rep. Rahm Emanuel, D-Ill. "We are sending the jobs overseas, all because John McCain demanded it."

Boeing's Republican supporters have been equally vocal in denouncing McCain:

"John McCain will be the nominee and I will support him, but if John McCain believes that Airbus or EADS is the company for our Air Force tanker program he's flat-out wrong - and I'll tell him that to his face," said Rep. Dave Reichert, R-Wash.

Rep. Todd Tiahrt, a Kansas Republican whose district includes a Boeing plant that could have gained hundreds of new jobs from the tanker program, said McCain's role in killing the earlier deal is likely to become an election issue. Both of the leading Democratic candidates for president, Barack Obama and Hillary Clinton, have criticized the Air Force decision.

"I think we absolutely will hear more about it," Tiahrt said. "We'll hear it mostly from the Democrats and they have every right to be concerned."

And, speaking of Mrs. Clinton, she offered similar thoughts on the campaign trail last week. Over to you, Senator Obama.

But the Boeing issue may prove to be a double-edged sword, assuming the McCain campaign is willing to exploit it. By siding with Boeing, Pelosi, Emanuel, Dicks (and other politicians) are aligning themselves with a corrupt deal and corrupt officials. It wouldn't be very hard to create a campaign ad, juxtaposing video of Darlene Druyun in prison garb, and shots of Boeing's Democratic friends. Close with the reminder that McCain's actions (purportedly) saved the taxpayer $6 billion, by taking on "special interests." Sounds like a winner to us.

Obviously, McCain's record in defense matters is far from perfect. Still, given the tanker deal's sordid history, the Arizona Senator clearly occupies the political and moral high ground. His actions may not win friends in Boeing's executive suite, or votes in the Puget Sound region. But with a little effective counter-punching, McCain can put the Democrats (and other members of the Boeing lobby) on the defensive.

Someone ought to ask Ms. Pelosi why she supports a company that paid a record, $600-million fine for the corrupt tanker deal--and why the same firm should have the inside track for the "replacement" contract.

A Few Thoughts on the Tanker Deal

The KC-30, which will serve as the Air Force's next-generation tanker (Northrop-Grumman photo)

Aviation circles and Wall Street are still abuzz over the Air Force's decision to award a $40-billion contract for new aerial tankers to a Northrop-Grumman/Airbus consortium. Announcement of that choice represented a major blow to rival Boeing, which had supplied most of the service's aerial refuelers for the past 50 years.

Defense and business analysts are rightly hailing Friday's announcement as a major win for Northrop-Grumman and its European partner EADS, the military division of Airbus. Not only did the U.S.-European team secure a deal for 179 new tankers, they also positioned their firm to capture billions in follow-on contracts.

Both the USAF and U.S. Navy operate a variety of surveillance, command-and-control and intelligence collection platforms built on the venerable Boeing 707 design--the same airframe used in the older KC-135s that will be replaced by the new tanker. As the older C2, surveillance and spy aircraft reach the end of their service life, those missions could easily be transferred to the same Northrop-Grumman/EADS platform, based on the Airbus A330.

Justifying its decision, the Air Force noted that the European jet beat the Boeing design (a variant of the 767 jetliner) in four of five categories, including fuel offload--the most important consideration for any aerial tanker--cargo capacity, troop hauling, and aeromedical evacuation.

But those arguments are something of a red herring; aerial tankers--as their name implies--are designed primarily to refuel other aircraft in flight. Their abilities as cargo haulers, troop haulers and air ambulances pale in comparison to platforms like the C-17, which were specifically designed for that mission.

Moreover, tankers like the KC-135, KC-10 and the KC-45 (the Air Force designation for the new refueler) need special equipment to load or unload cargo, and they can't accommodate oversized equipment. We're also reminded that virtually all troops heading to a war zone now travel on charter jets, so the "troop carrier" role is a relatively minor consideration, to boot.

Still, the Northrop-Grumman/EADS tanker offers a clear advantage in the tanker mission and that alone was enough to justify the Air Force's decision. Boeing and its Congressional backers are clearly upset, but in hindsight, it seems clear that the aviation giant made critical errors in pitching the KC-767 as the next-generation tanker.

First, as posters on this (and other) forums have observed, the Boeing's decision to offer the 767 seems based, in part, on corporate desires to sustain production of that airframe. Without an Air Force tanker order, Boeing was looking at a short-term end for 767 production. Building more airframes for the Air Force would allow the company to keep the assembly line open for years to come, and generate more orders in the process.

At a "per unit" cost of $25-30 million less than the A330, Boeing believed the 767's pricetag would provide a strong selling point, as would its smaller "footprint" and the ready availability's of spare parts, based on the large number of airframes already in service.

Oddly enough, Boeing elected not to offer a tanker version of its hot-selling 777 wide-body jetliner, or innovative 787 "Dreamliner." The 787 was still in development when the Air Force asked for bids on a new tanker, so it wasn't a realistic contender for the contract.

As for the 777, Boeing has never fully explained its rationale for excluding that airframe. However, production of a military 777 would strain the company's production capabilities, and possibly slow deliveries to commercial customers. Still, a tanker variant of the "Triple-7" would have more than matched the A330's off-load and transport capabilities, and the wide-body is surprisingly fuel efficient, one reason it has become a favorite of long-haul airlines.

But Boeing's biggest blunder was, arguably, it's initial plan to lease 767 tankers to the Air Force. First approved in 2003, the deal was later abrogated when it was learned that the aircraft manufacturer had offered jobs to the service's senior civilian contracting official and two members of her family. The contracting official, Darlene Druyun, later served a 9-month prison sentence and two Boeing executives were convicted as well.

Not only did the tanker lease result in a huge fine, it also made Boeing "radioactive" in terms of future, big-ticket contracts. With an already-tight procurement budget, the Air Force did not want a rehash of the tanker lease controversy. And, with Northrop-Grumman offering more capability (at a slightly higher price), the service found it easy to justify the KC-30, heading off potential criticism that would come with a new Boeing deal.

Obviously, Boeing still rakes in billions of defense contracting dollars each year. But there is no question that the company's ability to win new Pentagon deals has been impacted by the ill-fated tanker lease. When Boeing received an Air Force contract for new search-and-rescue helicopters in 2006, competitors immediately cried foul, and the deal was re-opened for bidding.

At last report, a final decision on the helicopter program (better known as CSAR-X) has been delayed until later this year. A few months ago, most industry insiders still believed that Boeing would still win the contract. In the wake of last week's tanker announcement, some analysts now believe that Sikorsky or another U.S.-European team--led by Lockheed-Martin--may wind up with the contract. That would represent another body blow for Boeing, already reeling from the tanker decision and production woes with the Dreamliner.

So far, no one's erecting billboards around the Boeing plants in Seattle, St. Louis or Wichita, asking "The Last Person Out of (City's Name), to "Please Turn Out the Lights." Those were the signs that appeared in Everett, Washington in the late 1960s, before the 747 jetliner arrived and literally secured Boeing's future. Almost 40 years later, the aircraft manufacturer is a much more diversified--and financially secure--company. But it's also clear that Boeing's military division is facing tough times ahead, and many of the company's problems are clearly self-inflicted.

And the Winner Is....

The Northrop-Grumman/EADS has been selected as winner of the Air Force KC-X contract, supplying the next generation of refueling tankers for the service. Based on an Airbus jetliner, the KC-45 will be the first tanker built on a foreign design. The new aircraft will be assembled at a plant in Alabama.

Huge blow to Boeing, whose entry was based on its 767 airliner.

Protests over today's decision are almost inevitable.