Northrop Grumman won't bid on Air Force tanker contract

Mar 8, 2010 — The Seattle Times

By Dominic Gates

SEATTLE, Mar. 8, 2010 (McClatchy-Tribune News Service delivered by Newstex) -- Northrop Grumman (NYSE:NOC) has decided not to bid on the Air Force refueling tanker contract, leaving Boeing's (NYSE:BA) Everett, Wash.-built 767 as the sole airplane competing for the $40 billion program.

A person familiar with the details said Northrop will announce its decision after the market closes Monday. The person said that Northrop executives concluded the risk attached to a fixed-price contract precluded a low bid, without which they felt they could not win against Boeing.

"Northrop tried real hard to find a way of bidding that would allow them to make a reasonable profit without running inordinate risk," said defense industry analyst Loren Thompson of the Lexington Institute. "They simply couldn't find a solution."

The Pentagon issued the terms of the new competition on Feb. 24. Those terms were widely seen as favoring the 767 over the larger Airbus A330 offered by Northrop.

It is unlikely that Airbus parent company EADS could make a bid on its own without Northrop backing. EADS was delivering the basic airplane but it was Northrop that was set to install the military systems in the tanker.

"As a practical matter, there is not enough time for EADS to put together a proposal in which Northrop is not a bidder," Thompson said.

Final bids are due about two months from now.

A big factor in the Northrop decision is that the Air Force competition requires a fixed-price contract, unlike many military programs where contractors expect to have their costs covered with an additional profit margin added.

If the tanker program's costs escalate beyond the fixed price specified in the winning bid, the contractor will have to swallow the loss. Thompson said that risk made it difficult for Northrop to bid.

"The requirements for the plane tended to favor a smaller aircraft," meaning Boeing's 767, Thomson said. "To be price-competitive, (Northrop) would have had to set a very aggressive price."

Doing so, he said, Northrop would have risked "losing money, big money" some years down the road.

Thompson said Northrop's withdrawal puts Boeing in an awkward spot in deciding the financial terms of its bid.

"If the risk is as high as Northrop concluded, there must be some pressure on Boeing, in the absence of competition, to bid high," Thompson said. "The problem with that is it could provoke Congressional involvement."

"When you see a lot of risk, the logical thing to do is to bid higher," he said. "But not if it is going to get Congress mad at you."

___

Newstex ID: KRTN-0038-42681352