Feb. 29 (Bloomberg) -- Northrop Grumman Corp. won a U.S. Air Force program valued at as much as $35 billion to build 179 aerial refueling tankers with partner European Aeronautic Defence & Space Co. in a surprise decision that breaks Boeing Co.'s half-century hold on the business.

Northrop, based in Los Angeles, and its team won an initial contract of $1.5 billion for development and design of four test aircraft and five options valued at $10.6 billion to build 64 aircraft, the Air Force said in a statement today. Boeing was the unanimous pick to win in a Bloomberg News analyst survey this month.

The new aircraft, to be named the KC-45A, will replace Boeing-built KC-135 tankers flown by the Air Force since 1956. If all contract options are fully funded, the tanker program would become the largest Pentagon project since 2001 when Lockheed Martin Corp. was chosen to build the Joint Strike Fighter.

``This was definitely a surprise win,'' said Peter Arment, an analyst with Greenwich, Connecticut-based American Technology Research, who has a ``sell'' rating on Boeing stock. ``Northrop had a plane with more capability for cargo and fuel capacity and those capabilities made it very compelling. The Air Force decided that was the direction they wanted to go in.''

The announcement came after the close of U.S. markets. Northrop, the third-largest U.S. defense contractor, rose $4.19, or 5.3 percent, to $82.80 at 5:58 p.m. in after-market trading. Boeing shares fell $2.69, or 3.2 percent, to $80.10 at 6 p.m.

Boeing said it hasn't decided whether to protest the decision.

`Possible Options'

``Our next step is to request and receive a debrief from the Air Force,'' the company said in a statement. ``Once we have reviewed the details behind the award, we will make a decision concerning our possible options, keeping in mind at all times the impact to the warfighter and our nation.''

Because of the high stakes involved, nine of the respondents in the Bloomberg survey said they expect the losing bidder to file a protest against today's award.

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

Today's order is the first step to replacing more than 500 KC-135 aircraft. Two more competitions will be held to replace the rest of the fleet. The first 179 aircraft would be built through 2018, the Air Force said today.

`Tireless Work'

``These tankers will provide the air-bridge for the United States to defend our national interests and assist our friends anywhere on the planet,'' Secretary of the Air Force Michael Wynne said in a statement announcing Northrop's win. ``Today's announcement is the culmination of years of tireless work.''

The two bidders took different approaches to the contest, with Northrop and EADS offering a larger plane to carry more fuel, cargo or passengers, and Boeing offering an aircraft closer in size to the current fleet.

Northrop's 192-foot-long KC-30 carries 250,000 pounds of fuel, 24 percent more than the 202,000 pounds that Boeing's 159- foot KC-767 can haul. The current tanker is 136 feet long and carries 200,000 pounds of fuel.

EADS gets two thirds of its revenue from Toulouse, France- based Airbus SAS, and aircraft industry purchases are written in dollars, while most of Airbus's costs are in euros. The dollar fell 11 percent versus the euro in 2007, reducing revenue converted into the European Union common currency.

Weak Dollar

Both EADS Chief Executive Officer Louis Gallois and Airbus Chief Executive Tom Enders have said Airbus's best shot at living with a weak dollar calls for moving jobs to the U.S. or to countries with lower costs than Europe. Paris- and Munich- based EADS has been building its position in the U.S., where it had little presence in the military area until two years ago.

Northrop and EADS ``put an enormous amount of effort and brainpower'' into thinking through the bid, Northrop Chief Executive Officer Ronald Sugar said in an interview.

``We took our best shot at it and apparently they thought it was a good one,'' he said.

EADS promised to build an assembly plant in Mobile, Alabama, for the tankers and freighter aircraft if its team won the contract. The company already has an engineering center there. The facility will employ 1,000 workers to assemble tanker sections and at least 300 more to build the commercial freighter planes, EADS said on Jan. 14.

`The Greatest Day'

``This is the greatest day I've had, and this community has had, since I've been in office, and that's about 22 years,'' Mobile Mayor Samuel Jones said in a telephone interview, with shouts and cheers in the background as he stood on the site where Airbus's new plant will be built.

EADS North America Chairman and CEO Ralph D. Crosby Jr. said in a statement that his company has already ``begun the work necessary to expand our U.S. industrial footprint in support of this important program.''

For General Electric Co., which will make the engines, some systems, spare parts and services for the Northrop entry, the contract win is valued at about $6 billion over the life of the program, said spokesman Rick Kennedy.

Pratt & Whitney, a unit of United Technologies Corp., was to provide the engine for Boeing's entry.

``We are disappointed by the USAF's selection,'' said Pratt & Whitney spokeswoman Jennifer Whitlow. The company felt its entry ``met all requirements.''

Boeing, the second-largest U.S. defense contractor, will be debriefed on the award on March 12, Pentagon officials said. Lockheed Martin is the largest U.S. defense contractor.

To contact the reporters on this story: Edmond Lococo in Boston at elococo@bloomberg.net; Tony Capaccio at acapaccio@bloomberg.net.

Last Updated: February 29, 2008 19:50 EST