How Big Is Boeing's Big Win?

There's talk of a deal that splits the $35 billion Air Force order for refueling tankers with Northrop-EADS
Assembling a Boeing KC-767 tanker in Everett, Wash. Boeing

The dogfight is only going to get worse between the two aerospace titans vying for one of the 21st century's most lucrative, delayed, and politically contentious military contracts. But when it's over, both Boeing (BA) and rival Northrop Grumman (NOC) could emerge as winners.

Back on Feb. 29 the U.S. Air Force had awarded Northrop—teamed with the Franco-German European Aeronautic Defence & Space Co. (EADS)—the entire $35 billion order for 179 tankers capable of refueling fighter jets in the air. But Boeing protested, and on June 18 the Government Accountability Office, a congressional watchdog, backed its claim that the Air Force skewed the contest in favor of Northrop.

Even Northrop didn't expect a slam dunk. But the unexpectedly strong ruling lashed the Air Force for making "significant errors" that "could have affected the outcome" of the competition. The Air Force now has 60 days to decide whether it will stick with its original decision or reopen the competition.

Whichever way the Air Force goes, the GAO ruling gives Boeing and its backers powerful new ammunition in their bid to gain the contract. "We're going to the mat," vows Representative Norm Dicks (D-Wash.). Their quest: Round up enough congressional votes to stymie funding for the tankers unless Boeing gets the deal.

But there is another way. Behind the scenes on Capitol Hill, there's talk of a brokered deal that would split the contract—an idea first raised in 2007 by Northrop and the Air Force but rejected by Boeing. A day before the ruling, Boeing Vice-President Mark McGraw, who heads the tanker program, told BusinessWeek that if a deal were offered, "we'd certainly be in listening mode." Now? McGraw won't say.

For years, ongoing turbulence over the tankers has thwarted Air Force attempts to replace its aging fleet. Alaskan Ted Stevens, the top Republican on a U.S. Senate defense appropriations subcommittee, is quietly pushing to divvy up production between Boeing and Northrop to get the deal moving. The Air Force, too, could decide that compromise is the fastest way out of the current mess rather than letting the fight drag on. That could also ease political controversy over the deal, which has become a flashpoint in the coming election. Critics of the Northrop-EADS bid dispute the companies' claim that their deal would sustain more U.S. jobs.

The stakes go well beyond the initial contract. The winning manufacturer and its subcontractors are likely to have an edge in bidding for the $100 billion the U.S. will eventually spend to replace the entire aerial-refueling tanker fleet. A cut of the current deal would help Boeing stabilize its slipping military business; moreover, other nations probably won't buy Boeing tankers if the U.S. doesn't. And for EADS, half a deal would give it a U.S. foothold—better, perhaps, than continued skirmishing amid uncertainty. Would Northrop now be willing to split the difference? If so, it's keeping mum. All three companies say they'll study the ruling before deciding on their next steps.

Any perception abroad that the U.S. is bending rules for Boeing could hurt projects such as the F-35 Lightning II aircraft, which the U.S. is building with help from Britain and others. "It would have very negative consequences on international programs," warns Robbin Laird, president of Arlington (Va.) defense consultant International Communications & Strategic Assessments. "F-35 partners are already nervous."

— With assistance by Carol Matlack

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