September 11, 2008 / 6:32 AM / 9 years ago

Pentagon hands tanker tangle to next president

<p>A KC-135 Stratotanker is seen in a file photo.USAF-Cedric H. Rudisill</p>

WASHINGTON (Reuters) - The U.S. Defence Department has ended for now a $35 billion (19.9 billion pound) transatlantic aerial-refuelling competition, handing a nagging seven-year headache to the next administration and boosting Boeing Co's (BA.N) hopes to keep Airbus planes out of the Air Force fleet.

Defence Secretary Robert Gates told Congress on Wednesday the Pentagon was dropping plans to pick between revised tanker proposals from Boeing and Northrop Grumman Corp (NOC.N) by January 20, when President George W. Bush leaves office.

The Air Force in February awarded the $35 billion, 179-plane program to a team of Northrop and Europe's EADS EAD.PA, parent of Boeing commercial archrival Airbus.

After Boeing protested its loss on procedural grounds, a congressional umpire found the Air Force made "significant errors" in evaluating the rival bids.

The Pentagon responded by preparing for a new round, spelling out more clearly the expanded fuel-carrying capabilities it was seeking, among other things.

Boeing, sole supplier of tankers to the U.S. Air Force for 50 years, is seeking to curb EADS' penetration of the rich U.S. military market. Also at stake are EADS plans to move production of A330 freighters from France to Alabama, partly to cash in on exchange rate fluctuations.

The tanker bidding has been complicated by lawmakers' efforts to bring home jobs and a renewed "Buy America" debate about protecting key aerospace manufacturing capabilities.

The Air Force calls acquiring new tankers its No. 1 acquisition priority. The new fleet would phase out Boeing-built KC-135 tankers, which have an average age of 47 years. Tankers are used to refuel other planes in mid-air, a critical component of projecting U.S. power around the globe.

Rather than hand over "an incomplete and possibly contested process," Gates said he wanted to give the next administration a free hand to determine the military requirements, funding levels and how to weigh the bids.

Presidential Politics

Democratic presidential candidate Sen. Barack Obama of Illinois, where Boeing is headquartered, believes the competition "will benefit from a fresh review," said Wendy Morigi, an Obama campaign spokeswoman.

Obama "will work to ensure that this review puts our national security and the American taxpayer first," she said in an e-mailed response. "Senator Obama is committed to getting this important contract right and to making sure that we are providing our men and women in uniform with the equipment and support they need."

Representatives of Republican presidential hopeful John McCain did not immediately respond to a request for comment.

As a member of the Senate Armed Services Committee, McCain led a drive in 2003 to kill an initial $23.5 billion Air Force plan to lease and buy 100 modified Boeing 767s as tankers.

McCain of Arizona denounced the original no-bid, sole-source plan as a taxpayer "ripoff" and sweetheart deal for Boeing, then reeling from drops in demand for commercial airliners after the September 11, 2001 attacks.

The proposed lease-purchase deal collapsed in 2004 amid a scandal that sent two Boeing executives, including the Air Force's one-time No. 2 arms buyer, to prison on conflict of interest charges.

Mistakes and Missteps

"Over the past seven years the process has become enormously complex and emotional -- in no small part because of mistakes and missteps along the way by the Department of Defence," Gates told the House Armed Services Committee while discussing the wars in Iraq and Afghanistan.

"It is my judgment that in the time remaining to us, we can no longer complete a competition that would be viewed as fair and objective in this highly charged environment," he said.

What Gates called a "cooling off" period was a big gain for Chicago-based Boeing. It had threatened to withdraw from the now-cancelled competition unless given six months to prepare a new bid. It said the Air Force had made clear it was now seeking a larger plane than the modified 767 it originally offered.

Boeing cheered Gates' decision, calling it in U.S. forces' best interest to give "the appropriate time for this important and complex procurement to be conducted in a thorough and open competition."

Northrop Grumman, on the other hand, said it was extremely disappointed, "especially on behalf of our men and women in uniform who will now be denied a critically needed new tanker for years."

EADS had no immediate comment. Northrop's tanker would use an Airbus A330 airframe that would be assembled in Mobile, Alabama.

Handicapping the Next Stage

The A330s are currently put together in Toulouse, France, using mainly French, German, British and Spanish parts. The Pentagon issued a stop-work order on Northrop's contract after Boeing challenged the choice. Boeing has been considering substituting its bigger 767-400 or even the 777 aircraft, in place of its 767-200ER model.

"Given McCain's history in regard to this program, one might handicap a slight advantage to Northrop/EADS should he be elected," said Harry Nourse of Bank of America Securities.

"If Obama wins, you could see some implementation of the 'Buy America' philosophy, which might favour Boeing," he said.

With additional reporting by Bill Rigby in New York and Tim Hepher in Paris; editing by Tim Dobbyn

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