No Early End in Sight for U.S. Tanker Dispute

By Reuters -  |  Posted 2008-06-17

By Andrea Shalal-Esa - Analysis

WASHINGTON (Reuters) - U.S. government auditors will rule this week on Boeing Co's (BA.N: Quote, Profile, Research, Stock Buzz) protest of a $35 billion airplane contract won by Northrop Grumman Corp (NOC.N: Quote, Profile, Research, Stock Buzz) and its European subcontractor EADS (EAD.PA: Quote, Profile, Research, Stock Buzz), but the trans-Atlantic "tanker war" will likely rage for some time.

News last week that the Air Force made mistakes when calculating the long-term costs of the competing bids raised the prospect that the nonpartisan Government Accountability Office could uphold at least part of Boeing's protest.

If that happens, the Air Force may be compelled to go back and redo its calculations or even reopen the competition, according to analysts and industry executives.

That, in turn, could cause a delay of months to a year, depending on the scope of the GAO recommendation and the willingness of newly-named Air Force leaders to lock in a tanker decision before the November presidential election.

"The Air Force is in a very touchy moment here," said Loren Thompson, a defense analyst with the Virginia-based Lexington Institute. Thompson said he nearly faced a congressional subpoena after he published detailed notes obtained from the Air Force on why Northrop won the deal -- before either of the two companies was briefed.

The contract to build 179 tankers that refuel Air Force planes in mid-air is one of the Pentagon's biggest prizes and comes amid contractors' worry that U.S. weapons spending may have peaked. Boeing built the aging tankers now in use.

Last week, successors were named for Air Force Secretary Michael Wynne and Chief of Staff Gen. Michael Moseley, who were forced out of their jobs for lax nuclear security.


"Sometimes people appointed for a short period of time are hesitant to make a decision that binds people coming in after them," said one senior Pentagon official, who asked not to be named. "It's going to be a real problem."

The GAO faces a Thursday deadline to issue its decision.

If it denies Boeing's protest, the Chicago-based company said it will review its options, which could include filing a second protest or taking the matter to federal court. Boeing is keeping all options open until it studies the GAO decision and would only pursue further action "if we had a strong case going forward," said Boeing tanker program manager Mark McGraw.

Some Boeing congressional backers, such as Rep. Norm Dicks, a Washington state Democrat, have already vowed to do all they can to stop the Northrop contract.

At issue, analysts agree, is more than just the Air Force tanker contract or potential follow-on sales. Boeing aims to stop EADS, the parent of archrival Airbus, from establishing an American production facility that would effectively make Airbus a second U.S.-based producer of large aircraft.

"That would be a huge blow to Boeing," said a second senior defense official, who asked not to be named. As the sole U.S. large aircraft maker, Boeing, he said, enjoyed some government support that could disappear if Airbus joined the club.

Los Angeles-based Northrop, meanwhile, has already invited the media to a June 28 groundbreaking ceremony at the Mobile, Alabama, site where it will modify Airbus A330s into the KC-45 tanker, if the GAO upholds the Air Force contract.

Some House lawmakers favor measures to protect American jobs, although Northrop argues that its tanker plan will create 48,000 U.S. jobs, 4,000 more than Boeing backers say will be supported by Boeing's plan.

The Senate is more likely to resist protectionist measures, heeding Pentagon warnings that such actions could trigger retaliation and dampen foreign demand for U.S. weapons.

Protectionist measures could harm Boeing, which relies on foreign suppliers to build its commercial aircraft. Even the Boeing 737 that forms the basis of the P-8A surveillance aircraft it is building for the Navy is built with parts from China, according to a company spokeswoman.

The Democratic party has already seized on the protectionist issue in the 2008 presidential election.

On Monday, the Democratic National Committee again accused Sen. John McCain, the presumptive Republican nominee, of helping to "steer a tanker contract to a European company for which his campaign advisors then lobbied, shipping tens of thousands of American jobs overseas."

McCain led a probe that ultimately resulted in the collapse of an earlier Air Force deal to lease Boeing tankers, a plan auditors said would have cost taxpayers $5 billion more than an outright purchase. A senior Air Force official and Boeing's former finance chief served prison time for the plan.

McCain wrote letters urging a fair and competitive bidding process, but insists that was the extent of his involvement.

Critics say the role of McCain's advisers raise an appearance of impropriety. They point to lobbyist Thomas Loeffler, a former Republican member of Congress from Texas who was McCain's campaign co-chairman but resigned from the campaign after reports showed he was also a lobbyist for EADS.

Congressional reaction to the GAO decision could also be fanned by recent criminal charges brought by various European governments against former Airbus officials for insider trading, said defense consultant Jim McAleese.

(Editing by Brian Moss)