Boeing Fears Pentagon Is Shaping Tanker Contest To Favor France, Threatens To Pull Out

Remember two months ago when Northrop Grumman announced it was pulling out of a partnership with Franco-German aerospace giant EADS to supply the Air Force’s next aerial-refueling tanker? The reason Northrop executives gave for withdrawing was that the government’s request for proposals favored the rival Boeing tanker team. Well, things have changed. Now Boeing thinks the Pentagon is trying to rewrite the selection criteria to favor a team led by EADS, and Boeing too is considering pulling out. Boeing’s top defense executive, Dennis Muilenburg, raised the possibility of a pull-out with company insiders last week, and then over the weekend a different Boeing executive told Defense News the company was rethinking its plan to bid.

Before you jump to the conclusion that Boeing is just posturing, remember that people said Northrop was just posturing when it first threatened to withdraw. But several months later it confounded critics by making good on that threat, and gave its stock price a sizable boost in the bargain. Oddly enough, investors aren’t impressed by multi-billion-dollar contracts that look like they might tie up capital without producing profits. That same worry has weighed on Boeing, but what has it really riled up at the moment is that Pentagon policymakers have gone silent on its concerns about the pending contest while talking repeatedly to EADS. EADS decided to bid on the tanker without Northrop’s help, and now some Boeing execs are convinced the solicitation is being massaged to favor a Franco-German solution.

The Boeing execs are probably being paranoid. No competitive procurement is a sure thing, and the framework for comparisons still seems to favor the smaller, cheaper Boeing plane. If both teams meet all of the mandatory performance requirements, then the contest becomes a cost shootout, and according to Defense News Boeing’s 767 lists for $60 million less than the competing EADS Airbus A330. Granted that’s before modification into a tanker, but the price of the Airbus tanker will be adjusted upward to reflect a higher fuel burn and construction expenditures required so it can use Air Force bases. Given all that, EADS would have to offer about $10 billion in concessions to achieve price parity with Boeing, so why should the U.S. company worry?

One reason Boeing insiders say they are worried is that the Air Force is making changes to the solicitation terms that seem to help EADS — changes Boeing says it was assured would not be made. Meanwhile, Boeing has not gotten any response from the Pentagon or the White House to its own repeated expressions of concern about some features of the solicitation. So now Boeing thinks it smells a rat — or maybe a French ferret, since the shift in official attitudes seemed to come right after President Nicolas Sarkozy visited the White House. Boeing wouldn’t be so apprehensive had it not lost the first, flawed round in the tanker competition after agreeing to a series of changes that enabled the Northrop-EADS team to participate. This time around, it’s not trusting anyone.

Personally, I don’t understand why a country that is running a billion-dollar-per-day trade deficit is even considering a foreign source for its future tankers — especially when the World Trade Organization has said the plane being offered by that source would never have been developed without subsidies now deemed illegal. Federal purchases of fixed-wing aircraft are exempted from WTO rules concerning government procurements, and France hasn’t exactly had a voracious appetite for America’s own military exports. However, it’s a little early to be jumping to the conclusion that one visit from Sarkozy would be enough to change the entire competitive landscape for the future tanker. What policymakers are probably trying to do is give EADS an adequate incentive to stay engaged, but they know that if they go too far in helping the Europeans, the next round of tanker competition will be stillborn.