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Tanker Deal Contractors: Split O.K.

Boeing, in a long-running tussle with Northrop/EADS over the $35 billion deal, says it would accept a split contract

While Defense Secretary Robert Gates is calling for a new winner-takes-all competition to build a new airborne refueling tanker for the U.S. Air Force, the two ferocious competitors are for the first time publicly indicating a willingness to split the purchase.

Such a compromise—a "split buy" in military parlance—could ease the way politically for the Air Force finally to obtain an aircraft it has needed for years, and rebuild its antiquated refueling tanker fleet more quickly. But such an arrangement also could drive up the overall cost, something likely to displease Gates, who says he is trying to cut waste in acquisition programs.

At this point, neither Boeing (BA) nor rival Northrop Grumman (NOC) may be giving up dreams of securing the entire $35 billion prize. But Boeing now indicates it would accept a split contract, if it comes to that. Northrop Grumman executives have made similar statements, and on Apr. 17 Northrop's partner, European Aeronautic Defence & Space (EAD.PA), said it would be amenable to a split contract.

Not Clear How Split Would Work

Boeing spokesman Dan Beck said Wednesday that the company has never been opposed to a split contract, but just has not taken a position one way or the other. "We will do whatever our customer, the Air Force and the [Defense Dept.], want to do," Beck said. "We've just been waiting for the competition to restart and, if it starts as a winner-take-all competition, that is how we will approach it…. If DoD and the Air Force decide they want to go down the path toward dual procurement, we will certainly design a proposal that meets the requirements under the RFP [request for proposal]," Beck said.

Beck suggested that it's not clear what exactly a split buy would entail, though it's believed to involve the government buying some aircraft from Boeing and some from Northrop-EADS rather than asking the companies to work together to produce single planes, splitting up the components in effect. It's not clear how many planes would come from one contractor and how many from the other.

The idea of a split contract has been tossed around behind the scenes on Capitol Hill since the middle of last year. In February,2008, the Air Force had awarded Northrop—teamed with EADS—the entire $35 billion order for 179 tankers capable of refueling fighter jets in the air. But Boeing protested, and last June the Government Accountability Office, a congressional watchdog, backed Boeing's claim that the Air Force skewed the contest in favor of Northrop. The contest was reopened, but Gates, in a surprise September 2008 announcement, scrapped the intense competition because it had become so controversial, leaving the decision to the incoming administration.

Gates Favors a Single Entity Any move towards a split contract would have to overcome Gates' preference for a single-entity deal. Earlier this month, in a speech laying out his defense budget priorities, Gates explicitly rejected a split buy between Boeing and Northrop, as "not the best deal for the taxpayer." He noted it had been discussed only because of the challenge of getting support on Capitol Hill for one contractor or the other. The correct approach, he said, was to "do this right"—ask the competitors to bid in a process that adheres closely to Pentagon acquisition rules, so that no formal protest by the losing bidder could prevail.

The tanker issue has been tinged with politics and emotion, with factions in Congress and in different parts of the country feuding over jobs and perceptions of unfairness throughout. Over five years, the acquisition had been scrapped three different times.

Epstein is a correspondent in BusinessWeek's Washington bureau. Joseph Weber is BusinessWeek's chief of correspondents, based in Chicago.

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