Team Infidel
Forum Spin Doctor
This is will leave a mark.
Wall Street Journal
March 1, 2008
Pg. 1
Northrop, European Firm to Make Tanker For Refueling; Value Is Up to $40 Billion
By August Cole
In a surprise, Northrop Grumman Corp. and the parent company of Europe's Airbus won a contract worth up to $40 billion to build the U.S. Air Force's next fleet of refueling tankers.
The Air Force's decision deals a major blow to Boeing Co., while giving Europe's largest aerospace company a landmark foothold in the U.S. military market.
Boeing was heavily favored to win the contract. It had been on the verge of sewing up a similar tanker deal in 2001, only to see it unravel after the revelation that a top Boeing official had conducted illegal job negotiations with an Air Force acquisition official who later joined the company. That thrust Boeing into a years-long ethics scandal, and the U.S. put the contract up for rebidding.
Besides being a strategic coup for Los Angeles-based Northrop, the victory is a personal vindication for Ronald Sugar, Northrop's chairman and chief executive. Mr. Sugar agonized for a long time before teaming up with European Aeronautic Defence & Space Co., which owns Airbus. Northrop officials worried that the unprecedented alliance with a foreign company could antagonize officials inside the Pentagon and at other major U.S. defense contractors. Northrop is a big supplier to other U.S. aerospace firms.
From the beginning, EADS and Northrop officials felt they were underdogs in the competition. Some had said they hoped, at best, that the government would split its purchase between Boeing and Northrop. Even in the last few days, some of them tried to play down the chances of a win, talking instead about long-term opportunities to compete for a later batch of orders.
Boeing's backers in Congress immediately went on the offensive. "I am frustrated, angry and shocked at this announcement today," said Sen. Patty Murray, a Democrat from Washington state. She said she had just been talking to Boeing workers on the 767 tanker line in her state when the bad news came.
Air Force acquisitions official Sue Payton told a news conference that "Northrop Grumman clearly provided the best value to the government." Ms. Payton cited the Northrop-EADS plane's aerial refueling capabilities, its ability to haul cargo and its cost. She declined to go into details about why Boeing's proposal didn't win, but said "there was absolutely no bias in this award."
Under the contract, Northrop and EADS will build up to 179 tankers based on the Airbus A330 jetliner. The first planes are expected to enter service in 2013, replacing aircraft in the Air Force's aging fleet of KC-135 tankers, many of which have been in service for more than 40 years. Eventually, the government expects to spend billions more dollars to replace more than 500 tankers.
At Boeing, the world's largest aerospace company, executives now must figure out why it lost one of the Air Force's premier contracts and how it will defend the rest of its military business. Boeing's top defense executive, Jim Albaugh, oversaw the company's bid.
Boeing said in a statement it was "very disappointed." After studying the move, the company "will make a decision concerning our possible options," the statement said.
The loss could hasten the shutdown of the Boeing 767 jetliner production line in Everett, Wash. After years of losing out in commercial competitions to the larger Airbus A330, Boeing decided to replace the 767 with the 787 Dreamliner, which is now in development and has received 857 orders. Although the company has received a few orders in the last few years from customers desperate for widebody planes, the backlog of unfilled orders for the 767 stands at 51, which equates to roughly two years of production at current rates. Meanwhile, problems with the 787 have made that program nine months late.
Few in the defense industry expect Friday's Air Force decision to stand without protest. Over the last couple of years, companies losing out on big contracts have increasingly filed protests, leading to delays as government officials review every aspect of the deals.
Lockheed Martin Corp. and United Technologies Corp.'s Sikorsky helicopter unit twice protested the Air Force's November 2006 decision to award Boeing a more than $10 billion contract to build search-and-rescue helicopters. After the Government Accountability Office sustained the protests, the Air Force in October asked for new bids. A winner is expected this summer.
A refueling tanker is an aircraft modified to carry large quantities of fuel that can be transferred in flight to smaller airplanes such as fighters, either through a pipe from the tail or from hoses that trail from pods on the tanker's wings.
The Northrop/EADS plane can carry 37,000 gallons of fuel, 7,000 more than Boeing's jet, as well as 220 people, 30 more than Boeing's. Northrop is the prime contractor on the plane, while EADS is the principal subcontractor.
Air Force officials said they have tried to minimize the chance of a successful protest by conducting the tanker competition as openly as possible and meeting on a regular basis with both competitors to eliminate surprises. "I can't stress enough what an incredibly open and transparent and rigorous source selection we have gone through," Ms. Payton said, adding that both competitors knew where they stood with the Pentagon at all times.
Northrop's Mr. Sugar said his tie-up with a European company shows that "this is in fact a global aerospace and defense industrial base."
The government had earlier planned to give Boeing a $23 billion contract for at least 100 tankers. That plan was shelved after the discovery of the illegal job negotiations by Darleen Druyun, then an Air Force acquisitions official with oversight over billions of dollars of Boeing contracts. Ms. Druyun and Boeing's former chief financial officer, Michael Sears, served time in federal prison.
Boeing's reputation was damaged further when the Pentagon learned that some Boeing employees improperly obtained thousands of proprietary documents from Lockheed Martin Corp. relating to a rocket contract. Boeing agreed to pay an unprecedented $615 million fine in May 2006 as part of a global settlement.
Sen. Murray told a gathering of Boeing suppliers in October that it would be a "huge mistake to select a foreign company for this contract," citing European government subsidies for EADS and Airbus. "The tanker contract isn't just one defense contract -- it's a key piece of our national and economic security," she said.
The Northrop and EADS team called attention to their plane's U.S. assembly and the ensuing jobs. The two companies promised that Airbus jets would be produced in Alabama if they won the contract, and they forecast that the Airbus jet would save taxpayers $55 billion over the life of the program.
"Any attempt by a contractor to wrap itself in the American flag during a competition today is disingenuous and condescending," wrote Alabama lawmakers Sen. Richard Shelby, Sen. Jeff Sessions and Rep. Jo Bonner in an October letter.
Sen. John McCain, the probable Republican presidential nominee, led a lengthy battle that derailed Boeing's tanker-leasing proposal years ago. On the stump, Sen. McCain has been mentioning his efforts to personally block Boeing's improper efforts to rush through a questionable lease deal for tankers. He said the Pentagon could save money if it put the contract up for rebidding -- a stance supported by the Air Force's decision Friday.
--Andy Pasztor contributed to this article.
