Boeing Reels from Air Force Rejection

The U.S. aircraft maker feels misled after being passed over for Northrop/EADS to build refueling tankers. If it protests, it may lose government business

First it was Boeing (BA) vs. Northrop Grumman (NOC) and its European partner, EADS, fighting over one of the biggest aerospace contracts of the era. Now there's another kind of dogfight brewing: one between Boeing and one of its prime customers, the U.S. Air Force.

At a Citigroup investor conference in New York on Mar. 5, a Boeing executive talked tough, strongly suggesting the company had been misled as it offered to sell the U.S. a new, larger version of a refueling tanker, this one based on the 777 aircraft. "We offered an airplane more cost-effective and lower-risk," Jim Albaugh, chief of Boeing's defense unit, told investors. "We're so perplexed."

But Air Force officials in Washington stood firm on their rationale for selecting the European-American consortium over the U.S. aviation behemoth.

Boeing executives say they haven't decided whether to take their complaint to the next, formal level. That would involve an official protest of the contract award. First, they received a formal explanation from the Air Force Mar. 7 about why the Boeing team lost. A protest would be filed with the General Accountability Office within 10 days. A decision could take another 100 days.

Northrop a Better Performer

Meanwhile, on Capitol Hill, Air Force Secretary Michael Wynn confirmed the competition hadn't even been close, as Boeing executives had believed. "There were nine key performance parameters, and across that spectrum, all evaluated, the Northrop Grumman airplane was clearly a better performer," Wynn told a House Appropriations subcommittee on Mar. 5.

Albaugh complained to investors that there had been "a disconnect" between what Boeing was told the Air Force wanted and the Air Force's explanation for why it chose Northrop/EADS. The Air Force, Boeing sources said, wanted airborne refueling tankers fashioned around the 767, not the larger 777 aircraft. "Their requirements were pretty clear," one source said. Yet it's widely believed one of the main reasons the Air Force chose Northrop/EADS was that its plane, a version of the Airbus A330, has more fuel capacity—up to 250,000 lbs., vs. about 200,000 for the Boeing aircraft—as well as the ability to carry cargo.

Rep. Norman Dicks, a Democratic congressman from Washington, echoed Boeing sources who told BusinessWeek on Mar. 3 the company had been discouraged from proposing a tanker based on the 777 aircraft. Dicks said on Mar. 5, "Had Boeing known…the Air Force wanted more, it would have bid the 777," instead of the smaller 767.

Series of Setbacks

The stakes involve a $35 billion contract that has the potential, over many years, of reaching $100 billion. For Boeing, the defeat—despite widespread belief among its executives and many Wall Street analysts that it was the odds-on favorite—came as the latest in a series of setbacks on various programs, including late tanker deliveries to Italy and Japan. Still, because of the length of the contract, it is likely just to dent the company's financial picture. Albaugh says the contract would have added only about 1% to the company's revenues over the next five years. Of more immediate concern are problems with the commercial 787 Dreamliner, which have caused Boeing's stock to sag some 20% since the summer.

There's no guarantee executives, however frustrated, will pursue a protest of the tanker award. "We will only protest in the event we think there is an irregularity in the proposal phase," said Albaugh. "Any company that protests and makes protest a part of their capture strategy is doing a real disservice to the country and the military."

Waiting to Be Debriefed

Indeed, Boeing has to consider other big contracts it hopes to pursue with the federal government. While such huge contract opportunities are "limited," Albaugh said, the company has a shot this year at some major military awards for satellites and radio communications. Half of Boeing's total revenues, or $32 billion, comes from the defense business.

Boeing spokesman Daniel C. Beck said Boeing would wait until a few days after the Mar. 7 briefing by the Air Force to decide whether to formally protest. "We feel we had a very strong offering that directly addressed the Air Force requirements as put forth."

Many in Congress and elsewhere are troubled by what they see as the loss of many U.S. jobs overseas, even though the Northrop/EADS project involves a new plan and thousands of new jobs in Alabama. House Appropriations Committee Chairman John P. Murtha (D-Pa.) reminded Air Force officials Congress has the power of the purse strings and could pull the plug on the tanker deal. That could further delay the military's objective of replacing Eisenhower-era aircraft on which bomber and fighter pilots depend so they can refuel in midair and pursue missions without having to return to airfields or aircraft carriers.

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