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U.S. auditors bash Air Force over refueling tanker
WASHINGTON (Reuters) - U.S. auditors urged the Air Force Wednesday to rerun its competition for a $35 billion refueling-aircraft order, upholding a protest by losing bidder Boeing Co (BA.N) and breathing life into a Pentagon fiasco.
The Government Accountability Office found the Air Force made "a number of significant errors that could have affected the outcome of what was a close competition."
The contract was awarded on February 29 to a team made up of Northrop Grumman Corp (NOC.N) and Europe's EADS (EAD.PA), corporate parent of Boeing's passenger-jet maker rival Airbus.
GAO, a nonpartisan arm of Congress that reviews federal contract bidding disputes, faulted the Air Force for seven specific reasons, including "misleading and unequal discussions with Boeing."
The GAO's ruling is a recommendation to the Air Force, which has 60 days to respond. It was an uncommonly harsh rebuke to the service, which lists the tanker as its top acquisition priority.
Sue Payton, the Air Force's top weapons buyer, said the service was reviewing the decision and would spell out its response as soon as possible.
"The Air Force will do everything we can to rapidly move forward so America receives this urgently needed capability," she said in a statement. "The Air Force will select the best value tanker for our nation's defense, while being good stewards of the taxpayer dollar."
The GAO criticism may give Boeing another chance at what is likely to be one of the biggest contracts in Pentagon history, potentially swelling to $100 billion with follow-on orders.
The $35 billion deal was to build 179 midair refuelers over the next 15 years to replace its current fleet of Boeing KC-135 tankers, which average 47 years old.
The issue could become a hot potato for Sen. John McCain, the presumptive Republican presidential nominee who helped shape the competition.
As a member of the Senate Armed Services Committee, McCain led an effort to kill what turned out to have been a corrupt Air Force plan to lease and then buy 100 modified Boeing 767s as tankers without the benefit of competition.
"I'm still proud that the first time around I saved the taxpayers $6.2 billion," McCain of Arizona said on a campaign swing through Springfield, Missouri. In a written statement after the GAO ruling, he added: "My paramount concern on the tanker replacement program has always been that the Air Force buy the most capable aerial refueling tankers at the most reasonable cost."
McCain's drive to preserve competition "put pressure on the Air Force to keep Northrop engaged," said Loren Thompson of the Lexington Institute, an Arlington, Virginia-based research group.
"The resulting concessions apparently skewed the selection process against Boeing," said Thompson, a defense industry consultant with close ties to the Pentagon.
"Much of the way that this contract was decided was heavily influenced by McCain," added Richard Aboulafia of Fairfax, Virginia-based Teal Group, an aerospace consultancy.
Democratic presidential candidate Barack Obama of Illinois, where Boeing is based, hailed the GAO recommendation, saying the contract had "enormous implications for our national security and economy" and should be re-opened.
The ruling also may cause shockwaves in Europe, where political leaders had cheered the Northrop-EADS victory as a breakthrough into the world's richest market for arms makers.
Boeing and Airbus are already embroiled in World Trade Organization cases, accusing each other of unfairly using government subsidies as they vie for commercial sales worldwide.
Senate Armed Services Committee Chairman Carl Levin, a Michigan Democrat, jumped on the Air Force to stage a new competition in light of the GAO's ruling.
For an Air Force already reeling from the firing of its top civilian and military leaders on June 5, Levin also urged "a thorough review of -- and accountability for -- the process that produced such a flawed result."
Defense Secretary Robert Gates simultaneously fired Air Force Secretary Michael Wynne and Air Force Chief of Staff Gen. Michael Moseley after a series of nuclear and missile safety mishaps.
As recently as Tuesday, a Pentagon spokesman, Geoff Morrell, defended the Air Force tanker acquisition effort as "fair and transparent." The tankers are used for midair refueling of warplanes, critical to U.S. military efforts.
Pentagon spokesman Bryan Whitman said the department would review the GAO decision and recommendations to determine the best way forward.
Boeing shares soared to an intraday high of $76.34 on the news before closing at $74.65 per share, up 0.4 percent for the session on the New York Stock Exchange. Northrop dipped as low as $69.40 before closing at $70.01, a 1.5 percent drop.
Mark McGraw, the head of Boeing's tanker program, said, "We look forward to working with the Air Force on next steps in this critical procurement for our war fighters."
Randy Belote, a Northrop spokesman, said, "We continue to believe that Northrop Grumman offered the most modern and capable tanker."
EADS Chief Executive Louis Gallois told Reuters in Paris that if bids were reopened, EADS would be a "quality competitor."
The GAO said its decision should not be read as reflecting any view of the 767 offered by Boeing versus the Northrop offer, a modified Airbus A330.
The GAO faulted the Air Force for, among other things, failing to assess the relative merits of the competing offers in line with its stated criteria.
The Air Force also failed to take into account that Boeing offered to satisfy more technical "requirements" than Northrop even though the bidding rules explicitly asked the rivals to meet as many as possible, GAO said.
Lawmakers from Washington State, where Boeing has manufacturing plants, and Kansas, where it planned to complete assembly of its tanker, urged Gates to overturn the Northrop contract.
Political support for both Boeing, the Pentagon's No. 2 supplier after Lockheed Martin (LMT.N), and Northrop, No. 3, is entrenched, analysts pointed out.
"We would not be surprised if the (Department of Defense) ultimately buys both Airbus and Boeing tankers," Rob Stallard of Macquarie Research Equities, said in a note to investors.
The abortive, post-September 11, Air Force plan to lease Boeing 767s as tankers led to prison terms for two Boeing employees. They were convicted of holding illegal job talks while one of them, Darleen Druyan, was still the Air Force's No. 2 arms buyer, overseeing billions in Boeing contracts.
(Additional reporting by Bill Rigby in New York, Richard Cowan and John Crawley in Washington; Jeff Mason in Springfield, Missouri; and Marie Maitre in Paris; Editing by Leslie Gevirtz, Gary Hill)
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