Tanker Wars: Northrop No-Bid Threat Is Real

Northrop Grumman President Wes Bush sent a letter to Pentagon acquisition chief Ashton Carter yesterday threatening to withdraw his team from the next round of competition in the Air Force’s future tanker program if changes were not made to the acquisition strategy. The letter stated that the draft request for proposals was structured in a fashion that favored a smaller tanker being offered by the rival Boeing team, and imposed unacceptably heavy risk on both offerors. Bush’s letter raises the possibility that the government’s $40 billion competition for a next-generation aerial refueling plane will collapse, resulting in a sole-source award to the only remaining qualified bidder — Boeing.

The letter was greeted by Boeing supporters with skepticism, because they remember how a similar no-bid threat by Northrop in the initial round of competition elicited major concessions from the Air Force customer. However, there is good reason to believe that Northrop actually will pull out if its concerns are not satisfied. First, the draft solicitation really does impose huge risks on offerors by requiring fixed-price bids on items stretching 18 years into the future. Second, the proposed criteria for picking the future tanker are radically different from those used in the initial round of competition, in ways that make the solicitation significantly less favorable to Northrop’s bigger aircraft. Third, Northrop knows it has less political leverage to compel changes today than it did in the previous competition, because the Republican backers of its plane are now in the minority on Capitol Hill.

And then there is Wes Bush, the Northrop Grumman executive who signed the letter. Bush is slated to succeed CEO Ron Sugar at the end of the year, and he has never been as big a fan of the tanker bid as Sugar was. The Air Force’s release of its revised solicitation terms earlier this year undoubtedly renewed his concerns about the downside of bidding a European-designed airframe for the tanker mission, because it added major financial uncertainties to a program where there already were significant political drawbacks. People who don’t know Bush often are misled by his youthful enthusiasm for the defense business. But beneath that engaging exterior lies a hard-edged businessman who is nobody’s fool and runs his business by the numbers. He thinks the terms the government is offering don’t add up to a good opportunity for Northrop, and he is quite willing to walk away. After all, the tanker bid wasn’t his idea in the first place.

His counterparts on the Boeing team are bemused by Bush’s move, because although they suspect a trick they too find the government’s proposed terms quite unappealing. That won’t deter them from bidding — or accepting a sole-source contract — but they know they could lose big money on the tanker program if their planning assumptions prove too optimistic. The track record on fixed-price development contracts is not good for contractors or their government customers, because it is so difficult to anticipate what problems might arise at the beginning of a program. Bush understands, and Boeing does too, that signing up to difficult terms might one day make the winner envy the loser.