June 14 (Bloomberg) -- Boeing Co., the second-biggest U.S. defense contractor, beat Lockheed Martin Corp. for a contract worth as much as $3.8 billion to replace the U.S. Navy's fleet of Lockheed-built submarine-hunting planes, people familiar with the award said.

Boeing will develop the Multimission Maritime Aircraft under an eight-year contract, with first delivery scheduled for 2012, said the people, who spoke on condition of anonymity. The Navy, which plans to buy 109 planes, will announce the award at 5 p.m. Washington time. It notified congressional offices earlier today.

Boeing Chief Executive Officer Harry Stonecipher, 68, is working to repair relations with the military and salvage a $23 billion contract to supply refueling tankers to the Air Force. That award was suspended after the company said its former chief financial officer had made a job offer to an Air Force procurement official during the negotiations. The Navy plane, like the tankers, is based on a civilian aircraft design.

The Navy contract is ``a feather in their cap and a blow to Lockheed's pride,'' Paul Nisbet, an analyst at stock-research firm JSA Research in Newport, Rhode Island, said before the award was announced.

The contract also demonstrates Boeing's ability to use civilian aircraft to win military contracts, said Richard Aboulafia, an analyst with Teal Group, an aerospace and defense consulting firm. The Navy plane is based on the 737 aircraft. The refueling tankers would be based on the 767.

``It's a really good opportunity to establish civil and military synergies they've emphasized for years,'' he said before the contract winner was disclosed.

Lieutenant Danny Hernandez, a Navy spokesman, declined to comment before the official announcement.

Prior Wins

The win marks the third time since 1999 that Boeing has beaten Lockheed Martin for follow-on contracts to systems originally built by Lockheed, the No. 1 defense contractor.

Boeing in September 1999 upset Lockheed, the nation's spy- satellite builder for 40 years, to win the contract for the Future Imagery Architecture constellation. Development and production is worth as much as $19.5 billion to Boeing through 2012, analysts have said.

Boeing also was chosen ahead of Lockheed in 2001 for a $3.8 billion program to upgrade electronics on Lockheed C-130 cargo transports.

The new Multimission Maritime Aircraft program may be worth $20 billion over the next two decades, according to Merrill Lynch analyst Byron Callan.

The Navy order may add sales of $700 million and profit of 5 cents a share in 2006 for Chicago-based Boeing, Schwab Soundview analyst Howard Rubel said.

Partners

Boeing's partners in the program include Northrop Grumman Corp. and Raytheon Co. CFM International, a joint venture of General Electric Co. and French-owned Snecma SA, will make the engines.

Development funds for the aircraft include $496 million proposed for the fiscal year that begins in October and $963 million the following year. Production of the first aircraft will be in 2009.

Boeing also produces the Navy's F-18 fighters, which bring in about $3 billion in annual sales, as well as F-15 fighters for the Air Force and C-17 cargo transports.

Lockheed Turboprop

Lockheed's proposed aircraft, the Orion21, is a modern version of its P-3 turboprop with the same airframe and an upgraded weapons system. It was to use Pratt & Whitney PW150 engines and Hamilton Sundstrand NP2000 propellers. Both are units of United Technologies Corp.

The P-3 Orion turboprop planes were produced by Lockheed, the top U.S. military contractor, from 1962 to 1990. The Navy's 196 P-3s, including active and reserve aircraft, have an average age of 26 years, Navy spokeswoman Joan Holland said.

Bethesda, Maryland-based Lockheed chose a turboprop engine because ``it optimizes antisubmarine warfare mission profile performance,'' Lockheed said in an April 5 statement.

Chicago-based Boeing is counting on its defense business to increase sales and profit and mitigate slowdowns in the commercial-aircraft industry. For the first time, Boeing last year got more revenue from weapons than from passenger planes. Airlines are struggling with a drop in passengers following the Sept. 11, 2001, terrorist attacks, as well as rising fuel costs.

Boeing last year had net income of $718 million, or 89 cents a share, on $50.5 billion in sales. That included $27.4 billion from the defense unit, which had an order backlog of $41.6 billion. The company in April raised its 2004 profit forecast by 30 cents to as much as $2.25 a share and its 2005 forecast by 25 cents to as much as $2.45.

Boeing is expected to have profit this year of $2.19 a share and $2.34 in 2005, the average estimates of 20 analysts surveyed by Thomson Financial.

Tanker Contract

Boeing was close to winning the $23 billion refueling tanker project until late last year, when Defense Secretary Donald Rumsfeld put the deal on hold to investigate allegations of impropriety related to how the contract was awarded.

The company fired Chief Financial Officer Michael Sears in November for discussing hiring Air Force negotiator Darleen Druyun while she was involved in the contract talks. Druyun was fired by Boeing the same day. Stonecipher took over in early December after Phil Condit quit as CEO, saying the company needed new management to recover.

Since then, Stonecipher has held meetings with government officials, seeking to mend the company's reputation. The tanker contract award will be delayed until at least November as the military considers alternatives to buying new planes. That may include refurbishing the existing fleet of KC-135 tankers, which are 43 years old on average.

Some of the Pentagon's biggest weapons programs, including Boeing's Future Combat Systems and Lockheed's Joint Strike Fighter, are benefiting as President George W. Bush seeks to boost the defense budget for a seventh straight year. Such spending accounts for almost 20 percent of Bush's proposed fiscal 2005 budget, compared with an average of 17 percent under Bill Clinton.

Lockheed last year had net income of $1.05 billion, or $2.34 a share, on $31.8 billion in sales and a backlog of $75.6 billion as of March 31. It raised its 2004 profit forecast in April to as much as $2.60 a share, from a January forecast of as much as $2.50.

To contact the reporters on this story: Tony Capaccio in Washington at acapaccio@bloomberg.net; Darrell Hassler in Chicago at dhassler@bloomberg.net.

Last Updated: June 14, 2004 16:42 EDT