War on the Hill

Congress and the Air Force are headed for a clash over a huge tanker contract. At stake: the fortunes of Boeing and Northrop Grumman

U.S. Air Force officials are standing their ground on a $20 billion competition to build part of a new fleet of 533 aerial refueling tankers—despite public criticism from bidder Northrop Grumman (NOC) and threats of congressional hearings from corporate allies on Capitol Hill.

The Air Force plans to publish on Jan. 30 the final details of its plan to replace its aging fleet of Boeing KC-135s without making any substantive changes to address Northrop's concerns that the competition has been unfairly biased toward Boeing, according to people who were briefed by the Air Force on the proposal. Boeing (BA) and Northrop will have up to 90 days to submit their proposals or withdraw from the bidding.

The tankers are used to refuel fighters, bombers, and other military airplanes while in flight. The release of the final request for proposal, which explains the specifications for the new Air Force tanker, is a major step forward for a program tainted earlier by scandal after influential government watchdog agencies criticized Boeing's proposal as wasteful and too costly.

Little Room to Maneuver

Northrop tried to prey on those weaknesses, complaining that the draft requirements favored Boeing's smaller KC-767 aerial tanker and failed to credit the capabilities of the larger Airbus A330 tanker, known as the KC-30. In a letter to the Air Force, Northrop threatened to withdraw from the competition and leave Boeing as the sole bidder for the richest Pentagon contract of this generation—a contract that ultimately could be worth more than $100 billion.

The Air Force, so far, has rejected Northrop's complaints, and it remains uncertain whether Northrop and its partner, Airbus parent European Aeronautic Defence & Space (EADSY), could still withdraw. "The Air Force feels that it gave everything it could to Northrop and EADS.…They received over 200 comments since the last draft RFP from industry and outside groups and they've accommodated a vast majority of them," says one person who was briefed on the plan. "That's as far as they're going to go, they're not going to change the actual requirements."

Even Boeing's toughest congressional critics acknowledge that the company and Air Force officials have been squeaky clean in their dealings this time around. That has left Northrop little room for political maneuvering, unlike when fiasco engulfed Boeing the first time it tried to make an end run around Pentagon procurement rules and essentially manage the outcome behind the scenes. Senator John McCain (R-Ariz.), who led the congressional investigation into the previous tanker scandal, told BusinessWeek last week that he plans to hold hearings on the matter but doesn't believe the Air Force skewed the competition to Boeing's favor. "We'll undergo the same oversight and hearings that any major acquisition goes through, and it's a major acquisition," McCain said.

Southern Support

Still, if Northrop and EADS decide to drop out, Boeing and the Air Force will face the wrath of congressional delegations from Alabama and Mississippi, where Northrop is planning to assemble the tankers and is dangling the promise of more than 1,000 high-skilled manufacturing jobs. "It will be detrimental to the nation if this is not an open competition," Senator Jeff Sessions (R-Ala.), told BusinessWeek last week. "Boeing has worked real hard to overcome the difficulties they've had. I don't criticize Boeing or the Air Force, although it does appear there was an effort to sole-source these aircraft." Boeing declined to comment until it has time to digest the voluminous tanker proposal.

Congressional opposition is not likely to significantly delay the contract, according to congressional aides, members of Congress, and industry analysts. If Northrop withdraws from the competition, the company forfeits its right to legally challenge the final award.

Members of Congress could try to delay the project's funding, but the appetite for that kind of fight on Capitol Hill is low. Most Pentagon and industry insiders expect Northrop to compete. There's just too much money at stake.

Northrop's earlier concern had hinged on one fundamental issue: frustration that the Air Force was ignoring the performance advantages that the larger and more fuel-efficient A330 had over the smaller and older Boeing 767 aircraft. Northrop argued that the selection criteria should more fairly weigh the airframe's ability to carry more troops and more cargo, in addition to hauling more fuel.

Size Matters

Northrop is offering the Air Force a plane that's about 33% more expensive at list prices than the option from Boeing, though Northrop's plane is larger and more fuel-efficient. "If the capabilities-to-cost evaluation metrics aren't included in the final [proposal], Northrop feels the KC-30 will be noncompetitive and we will no-bid," Northrop officials said (see BusinessWeek.com, 1/19/07, "Northrop Spurns Defense Prize").

But the Air Force concluded it doesn't need the bigger size of the A330, say people familiar with the matter. The issue for the Air Force isn't how much fuel it can carry but how many planes it can buy to cover the world. The smaller 767 tanker, which already operates for the Italian and Japanese military, seems to be a better fit. "The tanker argument for a bigger plane is not very strong," says Loren Thompson of the Lexington Institute, an influential defense policy think tank. "If you fly a big plane into some places where the Air Force operates, it will be harder to land, harder to move the planes on the ground, and take up too much space."

The other big issue comes down to cost. The larger A330 costs about $160 million per plane, vs. $120 million for the 767. Northrop couldn't close the cost gap enough and so tried to switch the debate and the criteria to focus more on the capabilities of the aircraft, where the Airbus model had a stronger case. "The Air Force's requirements aren't for the size of tanker [Northrop and Airbus] have to offer," says a congressional aide. "They simply have a need for a smaller, cheaper, more fuel-efficient tanker than Airbus can offer." Whether that's true will be known soon enough. Either way, strap on your seat belts. What is certain is that this is going to be a bumpy flight.

Before it's here, it's on the Bloomberg Terminal.