Boeing Will Get Tanker Contract, Analysts Say -- But Northrop Will Fight

February 4th, 2008  
Team Infidel

Topic: Boeing Will Get Tanker Contract, Analysts Say -- But Northrop Will Fight

Seattle Post-Intelligencer
February 4, 2008 By Edmond Lococo and James Gunsalus, Bloomberg News
The Boeing Co., which is at least eight months behind schedule on delivering the Dreamliner commercial jet, may get a lift by beating Northrop Grumman Corp. on a $40 billion U.S. Air Force aerial refueling tanker purchase.
The planemaker has built the KC-135 tankers flown by the Air Force since 1956. A replacement contract, which may be announced this month, would run for 15 years and could add 20 cents to Boeing's consensus earnings estimate of $7.92 a share in 2010, said Paul Nisbet, an analyst with JSA Research Inc. in Newport, R.I.
Boeing's KC-767 is predicted to win the order, according to all 10 respondents in a Bloomberg survey of industry analysts.
"The preferred supplier is Boeing," said Eric Hugel, a New York-based analyst who follows Northrop for Stephens Inc. and rates the stock "equal weight." The award "is Boeing's to lose, and Boeing would have to do something really stupid to lose it."
Air Force and Pentagon acquisition officials are scheduled to review the process for assessing bids on Feb. 13. A winner may be announced by the end of the month.
The order for 179 tankers could grow into the Pentagon's second-largest program, exceeding $100 billion, as the Air Force replaces its entire fleet over 40 years, said Loren Thompson, an analyst with the Lexington Institute in Arlington, Va.
Los Angeles-based Northrop and partner European Aeronautic Defense and Space Co. of Paris and Munich, parent of Airbus, aren't expected to remain silent if their competing KC-30 tanker, which is based on the civilian A330 plane, should lose.
Nine of the 10 respondents to the Bloomberg survey said Northrop would protest any Boeing victory. Five said a protest might result in a split award.
"We certainly have an extraordinarily competitive airplane," Northrop Chief Executive Ronald Sugar said in a Jan. 24 interview. "It's a more capable aircraft. It's larger and carries more fuel."
A Boeing decision would be closely examined because of the ethical breaches that led to the current contest, Thompson said. Air Force official Darleen Druyun was sentenced to nine months in prison after pleading guilty to conflict-of-interest charges for discussing a job offer from the Chicago-based plane maker while negotiating the original tanker order, which collapsed in 2004.
Boeing "is under such scrutiny after the procurement scandal," said Thompson, who projects it will win the contest and face a protest.
Even Boeing's program manager, Mark McGraw, acknowledges the likelihood of a challenge.
"Do we expect a protest if we win? Probably so," McGraw said in a Jan. 21 interview. "One of the negatives of protest is it delays things. They are going to be forced to use old equipment longer."
The KC-135 is based on the four-engine 707 jetliner. The last tanker will be 80 years old when it's retired under the current plan, said Lt. Col. Jennifer Cassidy, an Air Force spokeswoman.
Boeing's replacement is based on the two-engine 767 aircraft. It has an 80 percent chance of winning the order, said Joseph Nadol, a New York-based analyst with J.P. Morgan Securities Inc. He sees a 20 percent likelihood Northrop could force a split purchase.
If the Air Force awards "even a part" of the contract to Northrop's team, "there could be significant implications," Nadol wrote in a Jan. 10 note. "The tanker would be a major strategic win for EADS, positioning the company as a bigger player in the U.S."
"There are so few multibillion competitions out there for new weapons that every one is being fought tooth-and-nail," Nisbet said. He predicts Boeing will win.
The number of protests ruled on by the U.S. Government Accountability Office rose 16 percent to 335 in the past four years, while the number sustained jumped to 91, from 50. That doesn't imply a protest will occur in any particular contest, said Michael Golden, the GAO's managing associate general counsel for procurement law.
"We look at them individually," Golden said.
Whatever the service decides, it's unlikely to be the end of the story, Thompson said.
"When the Air Force makes its choice, we're only in the fifth inning of a nine-inning game," he said. "Then the real political struggle begins."

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