Boeing Threatens to Pull Out of $35 Billion Air Force Tanker Program

By William Patalon III
Executive Editor

Money Morning/The Money Map Report

The Boeing Co. (BA) doesn’t believe it can win the controversial competition for a $35 billion U.S Air Force tanker contract without a six-month extension, and now has threatened to pull out of the competition altogether.

The Chicago-based Boeing said it wants the extension to incorporate what the aerospace giant contends are essentially new requirements calling for a bigger tanker with a larger fuel-carrying capacity. The Pentagon has told the bidders it will grant two months for the bidders to assemble and submit their new proposals, a Boeing official told the Atlanta Business Chronicle.

“If we’re unable to secure sufficient time to prepare a competitive proposal, there’s little option for Boeing other than not to submit a bid,” Boeing spokesman Dan Beck told the Georgia-based business journal.

This latest development in the politically charged competition for the aerial refueling tankers could push out the delivery date for the much-needed aircraft by another year. But it is also expected to give Boeing more time to build up political support for its new bid, reported.

Back in February – in what some industry experts viewed as a surprise decision – Boeing lost the initial contract to a partnership of the Los Angeles-based Northrop Grumman Corp. (NOC) and Airbus SAS, Boeing’s arch-rival in the commercial jetliner business and a subsidiary of the European Aeronautic Defense and Space Co. NV (EADS).

Boeing had offered the Air Force a militarized version of its 767-200ER jetliner platform, but the Air Force opted for Northrop Grumman's larger Airbus A330 model instead. The bidding process was subsequently reopened when Boeing won a protest with a government watchdog agency after government auditors found “significant errors” in the Air Force's decision, reported.

Since that time, the Air Force has repeated it prefers an aircraft that can hold more fuel and cargo such as the A330 – essentially leaving the contract open for Northrop to grab as Boeing is forced to scramble to find a replacement aircraft it can use as the basis for an aerial tanker. Boeing’s 777 model is likely too costly because of the high demand from commercial airlines, while its 767-400 would require improvements in both flight range and endurance, said Teal Group analyst Richard L. Aboulafia.

By threatening to pull out of the bidding process, Boeing has established a basis for another protest, Lexington Institute defense-industry expert Loren Thompson told MarketWatch.

“Boeing's real point here is that the government has changed its requirements for a tanker, so the company needs more time to modify its proposal,” Thompson said. “By putting it the way they have, they have set it up for a formal protest. [After all, why would the company want to] spend millions of dollars on ads and lawyers and question their customer's decision if they just intended to drop out?”

The tanker contract is a pivotal one for both the military and the defense industry.

The Air Force is desperate to begin replacing its KC-135 Stratotankers, which date back to the Eisenhower-era, are literally falling apart, and have become prohibitively expensive to keep operating. As weapons systems go, the aerial tanker isn’t a luxury: Through the use of aerial refueling, Air Force fighters and bombers can remain aloft for long periods, and can make long-range flights from U.S. bases to hot spots anywhere in the world. The tanker fleet provides a particular advantage when geopolitical flare-ups occur in regions where the U.S. military has no nearby operational bases.

The Boeing and Northrop Grumman/Airbus teams are each desperate to win the tanker deal because – in an era of fiscal uncertainty – it’s one of the last really large aircraft contracts that’s even visible on the horizon. Although the deal’s initial value is $35 billion, some analysts estimate the ultimate value could end up closer to the $100 billion mark if all the needed tankers are eventually built.

Whether it’s through a delay via protest, or by gaining six more months to revise its proposal, some analysts say that Boeing is also pushing out the contract to be awarded under a possibly more friendly Democratic administration whose appointees might be more sympathetic to its cause.

Washington state – where Boeing does much of its U.S. production work – is a Democratic state, while Alabama, where the Northrop Grumman tankers would be assembled, is largely Republican.

That’s an assessment that defense-policy analyst Lawrence Korb just doesn’t buy.

“A new administration won't change anything because [procurement] rules are rules," Korb, an analyst with the Center for American Progress, told MarketWatch. “Politics only enters in after you award the contract.”

There’s also the issue of foreign competitiveness.

At a time when the U.S. defense-industrial base is consolidating and contracting, there are also concerns that a foreign aerospace company could be such a large beneficiary from this defense deal: That’s especially true since those benefits will clearly bolster the civilian jetliner business that’s operated by Airbus – which competes directly with Boeing’s commercial airliner business – at a time when long-term global growth is expected to generate billions of dollars in new orders for commercial jetliners.

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About the Author

Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning at Money Map Press.

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