Defense Dept. Puts Tanker Contest on Hold

The U.S. Defense Dept., saying it has run out of time to conduct one of the largest, most politically contentious acquisitions in military history, announced on Sept. 10 that it would end the competition for $35 billion in new aerial refueling tanker aircraft. The contract, initially won by Northrop Grumman (NOC) and European Aeronautic Defense & Space (EAD.PA), and successfully contested by Boeing (BA), will now be decided by a new President and Congress next year.

Defense Secretary Robert Gates, noting the level of politicization, emotions, and complexities that include the potential for continuing legal and political challenges, called for a "cooling off" period. He also acknowledged the military's own mishandling of the contract. He asserted that the delay would not impair the military's ability to do its job, due to continuing upgrading and maintenance of the existing tanker fleet, some of which dates to the Cold War era and the Air Force sought to replace—as a top priority—years ago.

"We can no longer complete a competition that would be viewed as fair and objective in this highly charged environment," Gates said in a prepared statement.

It was Boeing, however, that threw the latest wrench in the works, by asking for more time to submit a bid involving a larger aircraft, which the Air Force had favored. Boeing had threatened to pull out of the competition if it didn't receive a six-month extension to develop such an aircraft, a move that would not have gone over well in Congress and the Pentagon, where leaders are determined to have a competition.

Canceling the competition now, though, may well cost taxpayers millions of dollars. Within hours of the decision, Northrop began the task of estimating what it will bill the Air Force. Among the costs the contractors are entitled to recoup: Part-ownership of an Airbus aircraft set aside for the tanker program that has been sitting, unused, on a runway in Germany, as well as the cost of keeping it in operating condition. Northrop spokesman Randy Belote declined to provide an estimate of how much the company will bill the government for, or to comment on whether the company would challenge the cancellation. "We are starting the process to determine the costs," he said. In Paris, EADS chief executive Louis Gallois vowed to "seek an appropriate conclusion to that contract."

Out of Time

Analysts and Defense Dept. officials told BusinessWeek the Pentagon simply has run out of time to handle all the complexities of seeking a re-bid and choosing a winner by year's end. There's also a bit of a political calculation involved: Even a selection by the Bush Administration would have triggered further attempts to kill the deal on the Hill.

Supporters of Boeing were buoyed by the news, while Northrop backers were upset.

"They didn't have enough time to do it right," Representative Norman Dicks (D-Wash.), a Boeing supporter, said in an interview with the Associated Press. Dicks blamed the extensive changes made by the Pentagon in its revised request for bids, saying it forced Boeing to ask for additional time or else be forced to bail out of the contest.

Senator Richard Shelby (R-Ala), who has backed the Northrop team because its assembly plant would be in Mobile, Ala., told the AP the Pentagon's decision was "unacceptable."

"This misguided decision clearly places business interests above the interests of the warfighter," he said. "We are a nation at war, sending our pilots into battle on planes that are largely older than they are. This approach is irresponsible, shortsighted, and harmful to both the warfighter and the nation."

Shares of Chicago-based Boeing fell $1.75, to $62.27, in morning trading, while Los Angeles-based Northrop dipped 89, to $69.90.

A Fresh Start for Boeing

At Boeing, the mood is upbeat. After seeming down for the count earlier this summer, it has now won two victories: first, a successful administrative appeal over the award to Northrop, and now cancellation of the contract entirely and a fresh start next year. The company says it welcomes the decision and "believes that it will best serve the warfighter in allowing the appropriate time for this important and complex procurement to be conducted in a thorough and open competition."

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