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Boeing wins protest of $35b aerial tanker contract

Northrop Grumman won the aerial tanker pact in February. The Air Force program has been run by Boeing for more than half a century. Northrop Grumman won the aerial tanker pact in February. The Air Force program has been run by Boeing for more than half a century. (Northrop Grumman Corp. rendering via Associated Press/File)
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Bloomberg News / June 19, 2008

Boeing Co. deserves another chance to bid on the $35 billion US Air Force aerial tanker contract won by rival Northrop Grumman Corp., a government agency said.

"The Air Force had made a number of significant errors that could have affected the outcome of what was a close competition," the Government Accountability Office said yesterday in Washington. "We therefore sustained Boeing's protest."

Boeing appealed to the GAO after Northrop and partner European Aeronautic, Defence & Space Co. won the contract Feb. 29, snaring a program that had been Boeing's for more than half a century. Chicago's Boeing claimed changes the Air Force made during the competition favored Northrop.

While the GAO ruling isn't binding, "the outcome here now is obvious," Loren Thompson, an analyst at Lexington Institute, an Arlington, Va.-based public policy research group, said in an interview. "The Air Force will have to revisit the competition and start over."

Mark McGraw, Boeing's tanker program chief, said in a statement that "we welcome and support today's ruling by the GAO fully supporting the grounds of our protest." Pentagon spokesman Chris Isleib said officials "are aware of the report but have not fully reviewed it."

Boeing and Northrop shares have both declined 12 percent since the February decision. Yesterday, Boeing rose 27 cents to $74.65 in New York Stock Exchange trading, while Los Angeles-based Northrop fell $1.08 to $70.01.

The GAO announcement is an evaluation of the selection process, not of the merits of the aircraft, EADS chief executive Louis Gallois said in a statement.

"We will support our partner Northrop Grumman and remain confident that the KC-35 is the aircraft best suited to meet the Air Force's critical missions needs," Gallois said.

Boeing beat the odds in winning support from the GAO, the investigative arm of Congress that sustains only one in four protests. Winning the protest also helps Boeing keep its main commercial aircraft rival, EADS' unit Airbus SAS, from getting a foothold in the US defense industry. Airbus took the number one commercial plane position away from Boeing in 2003.

While the Air Force isn't required to follow the GAO's recommendation, it has to explain to Congress if it chooses to ignore the advice. The Air Force must respond within 60 days with a course of action based on the GAO findings.

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