March 11 (Bloomberg) -- Boeing Co. plans to file a formal protest today over the U.S. Air Force's award of a $35 billion aerial tanker program to rival Northrop Grumman Corp. and overseas partner European Aeronautic, Defence & Space Co.

The objection, which Chicago-based Boeing expects to file this afternoon with the Government Accountability Office in Washington, will automatically suspend the contract for as long as 100 days while the GAO conducts a review and hears a defense from the Air Force and winning bidders. Boeing would have to show that the decision violated Pentagon procedures or U.S. law.

``Once an option of last resort, protesting contracts is now a viable tactic for defense contractors,'' Richard Safran, an analyst at Goldman Sachs & Co. in New York, wrote in a note to clients. ``Losing even one major contract can inhibit a company's ability to compete in the future.''

Boeing's stand against the ruling is one of two fronts that may help the company, which trails EADS's Airbus SAS as the world's No. 2 commercial plane maker, regain the tanker work it has held since 1956. Some members of Congress said they will conduct a separate inquiry because of concern about U.S. jobs. Northrop and EADS plan to do about 40 percent of their work in Europe on the 179-plane order.

``There's a parallel path for Congress here,'' Representative Todd Tiahrt, a Republican whose Kansas district is home to one of Boeing's assembly plants, said in an interview. ``We have an obligation to make sure there's a fair and level playing field out there for any U.S. manufacturer.''

Appeal `Not Helpful'

While it's Boeing's right to file a protest, ``it's not helpful to the department or the warfighter,'' Pentagon Undersecretary for Acquisition John Young told reporters today on Capitol Hill. ``Boeing is going to have to put the best face on this. There is no question the Air Force can provide an abundance of facts and analysis'' for the review.

Young again defended the Air Force's decision, adding that the two proposals had ``substantial capability and cost differences.''

Analysts differed about whether Boeing's protest will be sustained.

The appeal ``should come as no surprise given the significance of the program to Boeing's long-term defense franchise,'' Myles Walton, an Oppenheimer & Co. analyst in Boston, wrote to clients today, adding that he expects Northrop to prevail. Walton rates Northrop as ``outperform'' and Boeing as ``market perform.''

Prospects

Safran, of Goldman Sachs, said Boeing may have a shot because of its contention that the Air Force made subjective decisions and changes to a model that benefited Northrop. He cited an example where the GAO upheld objections raised by Lockheed Martin Corp. and United Technologies Corp. to the loss of a search-and- rescue helicopter program. He rates Boeing as ``neutral'' and Northrop as ``sell/attractive.''

Boeing, which said after the close of U.S. markets yesterday that it would file the protest today, plans to give more details on a conference call at 2 p.m. New York time. The company spent three days deliberating what it called ``significant concerns'' after a March 7 debrief with Air Force officials.

``This was a very close competition,'' Mark McGraw, the head of Boeing's program, told Bloomberg Television yesterday. ``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.''

GAO Role

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. Boeing hasn't objected in this way to a government award in at least three decades, Boeing defense chief Jim Albaugh said March 5.

Los Angeles-based Northrop, which was briefed yesterday by the Air Force, said the competition ``underwent the most rigorous, fair and transparent acquisition process in Defense Department history.'' The company declined to make further comment until it reviewed Boeing's case.

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

Northrop said it won all categories except for risk, including in the areas of capability, price, aerial refueling assessment and past performance.

Tanker Parts

Boeing declined $1.51, or 2 percent, to $72.87 at 12:57 p.m. in New York Stock Exchange composite trading. The shares have fallen 20 percent in 12 months. Northrop rose 39 cents to $78.78.

Boeing estimates that its plan would support 44,000 jobs and 300 suppliers within the U.S. Northrop yesterday almost doubled its projected estimate to 48,000 from 25,000, saying the revised number was based on a different formula that increased the earlier ``conservative'' estimate.

EADS intends to make parts for its tanker in Europe, where it has factories for Airbus, which overtook Boeing in size in 2003. EADS today reported its first annual loss in five years following cost overruns caused by delays on the A380 superjumbo and A400M military-transport plane.

In the tanker program, EADS and Northrop plan to ship the parts to Mobile, Alabama, where they will build a plant to assemble both the military plane and the commercial freighter version. The companies 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.

New Aircraft

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

The Defense Department said acquisition law required officials to choose the best plane for the best value without considering issues such as politics and jobs.

Efforts to replace the 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 a company executive and an Air Force official that sent both to jail.

``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 yesterday. The Air Force ``dotted every `i' and crossed every `t' because they knew how politically charged the whole thing would be.''

To contact the reporters on this story: Gopal Ratnam in Washington at gratnam1@bloomberg.net; Susanna Ray in Chicago at sray7@bloomberg.net

Last Updated: March 11, 2008 13:12 EDT