Sept. 10 (Bloomberg) -- U.S. Defense Secretary Robert Gates delayed a $35 billion contest for aerial refueling tankers until the next presidential administration, a decision that may help Boeing Co.'s chances against Northrop Grumman Corp.

The companies were notified this morning, the department said in a statement. The request for bids was withdrawn because there isn't enough time left by the end of President George W. Bush's final term in January.

Boeing successfully protested the Air Force's Feb. 29 decision to award the contract to Northrop and partner European Aeronautic, Defence & Space Co. Since a draft of new bidding rules was released in August, the Chicago-based planemaker has argued it needs more time to develop a bid based on a larger aircraft than it first submitted. Both companies' allies in Congress have complained about fairness of the process.

``In the time remaining to us, we can no longer complete a competition that would be viewed as fair and objective in this highly charged environment,'' Gates said in the statement.

The delay in effect gives Boeing more time and tosses the decision into the administration of either Senator John McCain, an Arizona Republican whose complaints about an earlier tanker plan triggered a probe that sent Pentagon and Boeing officials to jail, or Senator Barack Obama, a Democrat from Boeing's headquarters state of Illinois. They are their respective parties' candidates to succeed Bush.

Company Responses

``We are extremely disappointed,'' Northrop spokesman Randy Belote said in a statement, adding that the delay may mean pilots are ``forced to fly tankers as old as 80 years of age'' before the current fleet is completely replaced.

EADS, parent of Boeing's bigger commercial rival, Toulouse, France-based Airbus SAS, also said it was disappointed. Chief Executive Officer Louis Gallois said in a statement the delay won't affect EADS sales or earnings before interest and taxes.

Boeing ``welcomes'' the decision, spokesman Dan Beck said in a statement. At a Morgan Stanley investor conference broadcast online today, Chief Financial Officer James Bell said that because of changes in the Air Force requests, ``we think there needs to be adequate time'' for both sides to submit new bids.

Boeing, the second-largest U.S. defense contractor, fell $2.31, or 3.6 percent, to $61.71 at 4:02 p.m. in New York Stock Exchange trading. Los Angeles-based Northrop, the third-biggest contractor, fell 80 cents, or 1.1 percent, to $69.99. Other defense companies were also lower.

Howard Rubel, an analyst with New York-based Jefferies & Co., said he considers the delay a ``modest plus'' for Boeing and ``modest disappointment'' for Northrop but likely not the cause of today's stock drop because the program wasn't yet factored into analysts' estimates. Boeing is in the midst of a strike.

Pentagon Priority

The Pentagon has said replacing its aging tankers, built by Boeing exclusively for more than 50 years, is a priority. Even so, the Pentagon said today the current fleet of 445 KC-135 planes, averaging over 40 years old, ``can be adequately maintained to satisfy Air Force missions for the near future.''

McCain raised questions and slowed congressional approval in 2003 of an original plan to lease and then buy up to 100 Boeing 767 tankers. That proposal collapsed in 2004 after a probe revealed ethical violations that sent a Boeing executive and an Air Force official to jail.

``Given McCain's history in regard to this program, one might handicap a slight advantage to Northrop/EADS should he be elected,'' New York-based Bank of America Securities analyst Harry Nourse said in a note today. If Obama wins, ``you could see some implementation of the `Buy America' philosophy, which might favor Boeing.''

`Significant Errors'

The Pentagon opened a new competition in January 2007 and Northrop won in February. The Government Accountability Office on June 19 upheld a protest by Boeing, saying that the Air Force made ``significant errors'' in the decision. Gates on July 9 said the contract would be rebid and that the Pentagon, not the Air Force, would lead the review.

After a draft of new requirements was released in August, Boeing threatened to pull out, saying that the 767-200 plane it offered more than a year ago is now too small to ``fit the bill'' after revised Air Force guidelines gave specific advantages to larger payloads. The Northrop-EADS entry, based on the Airbus A330 commercial jetliner, can carry 250,000 pounds of fuel, more than Boeing's 205,000.

``The process has become enormously complex and emotional -- in no small part because of mistakes and missteps along the way by the Department of Defense,'' Gates said today.

The $35 billion is the potential value of buying 179 aircraft in the first installment of a three-part competition to eventually replace more than 500 tankers. An additional $5 billion for unspecified long-term logistics costs may or may not benefit the winning contractor.

Political Environment

Boeing's allies in Congress have called the contest unfair and said it would cost the U.S. jobs because of the work being done by Airbus's parent. Northrop's backers say dragging out the decision hurts the U.S. military.

Today's Pentagon decision is ``unacceptable,'' U.S. Senator Richard Shelby said in a statement. The Republican's state of Alabama would benefit from a Northrop win because of new jobs.

``This misguided decision clearly places business interests above the interests of the warfighter,'' Shelby said.

Representative John Murtha, chairman of the House Appropriations Subcommittee on Defense, said Gates made the right decision. ``Our committee advised the Defense Department to ensure that there was enough time for legitimate competition,'' the Pennsylvania Democrat said in a statement. ``This decision will allow for that.''

To contact the reporter on this story: Tony Capaccio in Washington at acapaccio@bloomberg.net; Gopal Ratnam in Washington at gratnam1@bloomberg.net.

Last Updated: September 10, 2008 16:19 EDT