Northrop Grumman won't bid against Boeing for tanker contract

Mar 8, 2010 — The Seattle Times

Dominic Gates

Mar. 8, 2010 (McClatchy-Tribune Regional News 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-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.

Norm Dicks (D -- Bremerton), who was confirmed last week as the chairman of the powerful Defense Appropriations Subcommittee, said Northrop called him to tell him that the announcement will come at 1 p.m. Pacific time.

"I'm feeling very positive," said Dicks. "This been a real battle but it looks like we are finally there."

The capability provided by air refueling tankers to project U.S. air power across the globe is, he said, "one of the things that makes us a super power."

"I think it's good that this thing [will] be built in the U.S. by a U.S. company we can count on," Dicks said.

"And we need the jobs," he added. "This is a very difficult economic time. It's important to protect those 767 jobs in Everett and keep the production line going."

The long-running tanker saga began in the aftermath of the 9/11 attacks in 2001, when the Air Force first proposed, without a competition, to lease 100 Boeing767 tankers.

The initial contract fell through amidst a procurement scandal. A second round, won by Northrop, was canceled in 2008 following a Boeing protest over missteps in the selection process.

Defense industry analyst Loren Thompson of the Lexington Institute said Northrop exectuives told him they "tried real hard to find a way of bidding that would allow them to make a reasonable profit without running inordinate risk."

"They simply couldn't find a solution," Thompson said they told him.

The Pentagon issued the terms of the new competition 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.

Congressman Dicks agreed.

"I don't see how EADS does that," said Dicks. "Northrop Grumman put the American face on this."

Final bids are due in just over 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."

But Dicks insisted that "the government can negotiate a good deal." He pointed out that under the law the government can apply rules requiring greater transparency in a sole source competition to avoid a single bidder gouging the taxpayer.

"Both (Defense Secretary) Bob Gates and (Air Force Secretary) Mike Donley have said if there is only one bidder, they are going to go ahead," said Dicks. "As chairman, I feel that we need these tankers, and I'm going to do everything I can once we get into production to accelerate the program."

Dominic Gates: 206-464-2963 or dgates@seattletimes.com

Newstex ID: KRTB-0181-42687301