March 10 (Bloomberg) -- Boeing Co. said it will protest the U.S. Air Force's decision to award a $35 billion aerial refueling tanker program to Northrop Grumman Corp. and partner European Aeronautic, Defence & Space Co.

``Our team has taken a very close look at the tanker decision and found serious flaws in the process that we believe warrant appeal,'' Jim McNerney, chairman and chief executive officer of the Chicago-based company, said in a statement today.

Concern about U.S. job losses amid an economic slowdown led some lawmakers to threaten to block funding for the contract awarded Feb. 29 to Northrop and EADS, the parent of Boeing rival Airbus SAS. The partners plan to do about 40 percent of their work in Europe on the 179-plane order. The protest, to be filed tomorrow to the U.S. Government Accountability Office, will trigger a 100-day suspension of the contract during the review.

``I don't think their chances are good'' in getting the award overturned, Jon Kutler, head of Los Angeles-based investment firm Admiralty Partners Inc., said in an interview. The Air Force ``dotted every `i' and crossed every `t' because they knew how politically charged the whole thing would be.''

Spokeswoman Lieutenant Colonel Jennifer Cassidy said the Air Force had no immediate comment. The GAO, the investigative arm of Congress, has seen the number of protests it reviews increase 16 percent to 335 over four years while the number it sustained almost doubled to 90 from 51.

``This was a very close competition,'' Mark McGraw, the head of Boeing's program, told Bloomberg Television. ``One little error in the process one way or the other may have swung the decision. We feel it's critical we go in and make sure the process was followed like it should have been.''

Briefing

Boeing has been deliberating ``significant concerns'' since its March 7 meeting with Air Force officials about the process. The company hasn't protested a government award in at least three decades, Boeing defense chief Jim Albaugh said March 5.

Northrop said today the competition ``underwent the most rigorous, fair and transparent acquisition process in Defense Department history.'' The Los Angeles-based company declined further comment until it reviews Boeing's protest.

Boeing earlier today said it scored the same as the rival team on three of the five categories weighed by the Air Force and beat them on one factor. Boeing said the service ``modified the Northrop Grumman analytical model'' after the bids were requested that allowed a larger aircraft to compete.

Larger Plane

Northrop, which was briefed by the Air Force today on its award, said it won all categories except for risk, including in the areas of capability, price, aerial refueling assessment and past performance.

Northrop's larger plane, modeled after the Airbus A330, had more space for fuel, cargo and passengers. Albaugh claimed Boeing, which based its proposal on the 767, was discouraged from using its bigger 777 as a platform because the Air Force said it needed better access to more remote runways that don't support heavier planes.

``There were changes made, frankly, to keep Northrop in the competition because the Air Force had to have competition, but over time that really skewed it in their favor,'' McGraw told Bloomberg Television. ``We don't think that was fair to us.''

Revenue Effect

The $35 billion program is valued at more than last year's revenue for Boeing's defense unit, Integrated Defense Systems, which posted 2007 sales of $32.1 billion. The division has an order backlog of $72 billion after winning nine of 11 contracts it competed for last year.

Boeing has downplayed the loss of the tanker deal and said the program would have provided revenue of just $700 million a year for the next five years, amounting to only 1 percent of the company's overall sales forecast for that period.

The rejection still dealt a ``medium blow'' to Boeing's defense unit, ``especially when you've got a flat defense budget and foreign competition arriving on your home turf,'' Richard Aboulafia, an aerospace consultant with Teal Group in Fairfax, Virginia, said in an interview before Boeing's announcement.

Boeing had been considered the favorite since it has supplied the U.S.'s tankers for more than half a century, building more than 500 of the planes for the Air Force. The winner of this program has an advantage in the two contests yet to come for contracts to replace the rest of the fleet, which could exceed $100 billion over 40 years, according to analyst Loren Thompson of the Lexington Institute in Arlington, Virginia.

Boeing declined $2.22, or 2.9 percent, to $74.38 at 6:40 p.m. in New York Stock Exchange composite trading. The shares have fallen 16 percent in 12 months. Northrop declined 62 cents to $78.39.

Job Estimates

Boeing estimates its plan would support 44,000 U.S. jobs. Northrop today almost doubled its projection for U.S. employment to 48,000, saying it revised the formula that had produced the earlier ``conservative'' estimate of 25,000.

EADS intends to make parts for its tanker in Europe, where it has factories for Airbus, which overtook Boeing in 2003 to become the world's largest commercial planemaker. EADS and Northrop plan to ship the components to Mobile, Alabama, where they'll construct an assembly plant for both the military and commercial-freighter versions. The consortium will produce 10 to 15 tankers annually over about 10 years, and total deliveries may reach 179 aircraft, Airbus CEO Tom Enders said last week.

Boeing planned to do the main tanker work at its facilities in Everett, Washington, and Wichita, Kansas.

Lawmakers including Representative John Murtha, a Pennsylvania Democrat and head of the House Appropriations Committee's defense panel, threatened to cancel funding if the Air Force didn't explain why much of the work was given to a foreign company.

Efforts to replace the tanker fleet have been held up since 2004, when a $23 billion plan to lease and buy 100 new aircraft from Boeing collapsed amid ethical violations by an executive and an Air Force official that sent both to jail.

``The initial reason this was not awarded to Boeing was Boeing's fault,'' Kutler said. ``There's very little upside for Boeing in doing this. They're just calling attention to the initial problems.''

To contact the reporter on this story: Susanna Ray in Chicago at sray7@bloomberg.net

Last Updated: March 10, 2008 20:41 EDT