Pentagon will reopen $35 billion tanker bid

Thursday, July 10, 2008

WASHINGTON — Boeing Co. and Northrop Grumman Corp. will submit new offers for a disputed $35 billion Air Force tanker contract, and the Pentagon will pick a winner by the end of the year.

Defense Secretary Robert Gates said Wednesday that his office — not the Air Force — will oversee the competition between Boeing and the team of Northrop and Airbus parent European Aeronautic Defence and Space Co.

The plan, which hands control to Pentagon acquisition chief John Young and sets up a dedicated source-selection committee, is the latest illustration of senior Defense Department civilians lack of confidence in the Air Force's ability to manage the contract.

Many lawmakers embraced the action, but analysts questioned the Pentagon's aggressive timetable.

The Government Accountability Office last month detailed "significant errors" the Air Force made in the original award to the Northrop team. The GAO said Chicago-based Boeing, which protested the deal, might have won had the service not made mistakes in evaluating the bids.

The Pentagon now will conduct a limited rebid that looks only at eight issues where government auditors found problems in the initial process, Gates said.

Sen. Richard Shelby, a Republican from Alabama, where the Northrop team would assemble its plane, called it "the best of all options" that would address the "minor procedural flaws" the GAO cited.

Presumptive Republican presidential nominee Sen. John McCain said Gates' plan reflected "careful consideration of the GAO's decision." McCain helped block a scandal-marred tanker contract with Boeing in 2004 and pressed the Pentagon in 2006 to change proposed bidding procedures opposed by Northrop and Airbus.

Northrop spokesman Randy Belote said the company will review the latest Pentagon decision to make sure the re-competition provides a fair opportunity to present its proposal.

Boeing remains concerned the Pentagon's revised request may not "significantly alter the selection criteria" beyond what was initially asked for by the Air Force, said company spokesman Dan Beck.

The Pentagon is expected to issue a draft of the revised bid request to the companies by early August. But the competition will proceed as key events in the process are completed, not by a definite timetable, Young said.

Richard Aboulafia, a defense analyst for the Virginia-based Teal Group, said it would be unprecedented to finish a re-compete as quickly as the Pentagon has outlined. It is unlikely the deal will be completed ahead of the next administration, he added.

Even with a fresh start, the company that loses the second contract will be able to protest the award, causing further delays, Aboulafia said.

Gates said the Pentagon will ensure the process is transparent and will have an open dialogue with both companies to prevent any "surprises" once a decision has been made. The government will not award deals to both companies, a compromise some have suggested, because it would result in higher costs, as well as complex logistics, training and operations, Pentagon officials said.

Lawmakers from Washington state and Kansas, where Boeing employs thousands of workers, have put considerable pressure on the Air Force to reopen the bidding process and cancel the contract with the Northrop team.

"The GAO report made it impossible for Secretary Gates to make any other decision," said Sen. Maria Cantwell, D-Wash. "The American people and the American warfighter cannot afford the same Defense procurement team to make the same mistakes."

The deal has emerged as the latest black eye for the service, which is trying to rebuild a tattered reputation after a procurement scandal in 2003 sent a top Air Force acquisition official to prison for conflict of interest and led to the collapse of the earlier tanker contract with Boeing. More recently, the service's two top officials were ousted last month over mistaken nuclear shipments.

The Air Force in February selected the Northrop team to replace 179 Eisenhower-era aerial refueling planes. Boeing filed its protest in March.

In a letter to lawmakers, Gates admitted there were "deficiencies in the process" of awarding the contract, but called some of the criticism of the department's handling of it "inaccurate and misleading."

Acting Air Force Secretary Michael Donley called the Pentagon action an "appropriate and necessary step."

The deal — one of the largest in Pentagon history — is the first of three contracts worth up to $100 billion to replace nearly 600 refueling tankers over the next 30 years. On Thursday, Young and senior GAO officials are scheduled to testify before a House Armed Services subcommittee on the contract.

Shares of Boeing fell 33 cents to $65.59 Wednesday, while Los Angeles-based Northrop Grumman fell 90 cents to $65.27.

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Associated Press Writers Sam Hananel, Ben Evans, Anne Flaherty and Matthew Daly contributed to this report.

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