Second Chance for Boeing as Defense Department Reopens Bidding on $35 Billion Contract

By Jennifer Yousfi
Managing Editor

The Boeing Co. (BA) got some hard won good news yesterday (Wednesday) when Secretary of Defense Robert Gates announced the U.S. Air Force would reopen bidding on a disputed $35 billion contract based on findings of the Government Accountability Office.

"I've concluded the contract cannot be awarded at present" because of flaws found by the Government Accountability Office, Gates said at a press conference at the Pentagon yesterday, Bloomberg News reported. The new bidding process will reexamine eight of Boeing's complaints that were upheld by the GAO, out of more than 100 concerns it had initially raised, by seeking "revised proposals from the industry," he said.

Last month, the Government Accountability Office backed a petition brought by Boeing that the U.S. Air Force altered the auction for a $35 billion aerial-tanker contract - a bid that went to a joint-venture of rivals Northrop Grumman Corp. (NOC) and Europe's EADS NV (PINK: EADSY), and in turn, helped push Boeing's stock down more than 11% at the time.

Boeing filed the complaint in early March, claiming that the Air Force misled the company and modified its specifications to accommodate models made by Northrop and Airbus S.A.S.

The GAO found that there were discrepancies in the bidding process and recommended the Air Force re-conduct the bidding. However, GAO rulings are only advisory in nature, and the Air Force did not have to comply.

The Air Force was given 60 days to respond to the GAO's ruling, and the speedy decision is seen as a good sign for Boeing.

With an initial contract value of $35 billion that could easily grow to $100 billion or more over time, both sides have fiercely contested the bidding process.

"EADs feels very raw over this," Alexandra Ashbourne, who heads Ashbourne Strategic Consulting in London, an aerospace analysis firm, told The New York Times. "There was a lot of effort expended for no return. You cannot underestimate how raw and burnt they feel as a result of all this."

But its partner, Northrop Grumman, remains confident of eventual success, despite the delays.

Northrop Grumman is "reviewing the decision to ensure the re-competition will provide both companies a fair opportunity," company spokesman Randy Belote said in a statement, Bloomberg News reported.

"The United States Air Force has already picked the best tanker, and we are confident that it will do so again," Belote added.

[Editors Note: To read a related story on Boeing's recent prediction that aircraft sales will exceed $3.2 trillion over the next 20 years, click here.]

News and Related Story Links:

• The New York Times:
  U.S. Reopens Bidding on Flawed Tanker Contract

• Bloomberg News:
  Boeing to Get New Shot at Tanker Award, Gates Says

• Money Morning:
  Boeing's Air Force Petition Sustained, Back in Running for $35 Billion Contract

• Money Morning:
  Boeing Not Going Down Without a Fight, Files Grievance Over Lost Contract