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Boeing Bid Beats Europe for Tanker

The Pentagon awarded Boeing Co. a contract worth more than $30 billion for aerial refueling tankers, closing a chapter in a tortured bidding contest, but potentially launching a fresh trans-Atlantic political controversy.

The award preserves Boeing’s decades-long position as supplier of refueling aircraft to the Air Force, and shores up its standing as a U.S. national champion. The Pentagon’s move is also likely to feed perceptions in European capitals that the U.S. defense market—the biggest in the world—remains largely closed to European defense suppliers. The losing bidder was EADS North America, a unit of European Aeronautic Defence & Space Co.

Past efforts by the Air Force to replace its tankers have been upended by scandal, and industry observers said a protest could stall delivery of the aircraft. Ahead of the announcement, the governors of Alabama, Mississippi and Louisiana sent a letter to President Barack Obama in support of the bid by EADS, which proposed building its tanker at a new facility in Mobile, Ala.

In a written statement after the news broke, Sen. Richard Shelby (R., Ala.), said he was “disappointed but not surprised,” blaming “Chicago politics” for tipping the scales in favor of Boeing, which is headquartered in the Windy City.

EADS North America Chairman Ralph Crosby called the news “certainly a disappointing turn of events, and we look forward to discussing with the Air Force how it arrived at this conclusion.” Pentagon officials said that both firms would have to wait for a formal debriefing before any protest could be filed with the Government Accountability Office.

In announcing the award, Deputy Secretary of Defense William Lynn emphasized the Pentagon’s new focus on cost savings. The contract, he said, “favored no one but the taxpayer and the war fighter.”

The Defense Department said the first phase of the deal, worth $3.5 billion, calls for delivery of 18 aircraft by 2017. Overall, the contract is worth more than $30 billion, according to Air Force Secretary Michael Donley.

EADS’s proposal is built around the Airbus A330 jet. Boeing forwarded a design built around its 767 commercial aircraft.

Boeing’s victory promises to breathe new life into its 767 wide-body aircraft, which entered service in 1982 but has seen commercial orders dwindle in recent years. Boeing has 50 orders remaining for the twin-engine jet, a long-haul workhorse for airlines around the world. The tanker win lets Boeing keep building the jets at its huge Everett, Wash., factory and could help the company attract new commercial orders.

Thousands of U.S. manufacturing jobs are at stake. Boeing proposed to build its tanker at existing facilities in Washington and Kansas, and said the program would support around 50,000 total U.S. jobs and hundreds of suppliers around the country. EADS said its tanker would keep 48,000 Americans employed, and bring jobs to the depressed Gulf Coast region.

The KC-X refueling tanker is an effort to replace the Air Force’s aging fleet of KC-135 tankers, which began flying under President Dwight Eisenhower. But the KC-X came to symbolize a highly politicized military procurement process. Previous efforts to pick a winner collapsed amid protests and procurement scandals. This latest award marks the Air Force’s third major attempt to replace its tanker fleet.

Plans to replace the KC-135 began nearly a decade ago, when the Air Force initially considered leasing a fleet of Boeing 767s. That deal was blocked in part by Sen. John McCain (R., Ariz.), who unearthed evidence of inappropriate dealings between Boeing and Air Force procurement officials. That led to the conviction of a senior Air Force official and a top Boeing executive for violating federal conflict-of-interest laws, and the lease plan was ultimately scrapped.

The Air Force subsequently launched a competitive procurement process, awarding a contract in 2008 to a Northrop Grumman Corp. and EADS team. Boeing appealed to the GAO, which overturned the award, citing “significant errors” in the management of the acquisition.

After the Pentagon restarted the bidding, Northrop and EADS complained the guidelines favored Boeing’s smaller aircraft. Northrop ultimately withdrew last year.

The current contest was also marred by a bureaucratic snafu, which might provide grounds for an appeal. Last year, the Air Force disclosed that procurement officials mistakenly sent discs with information from the scoring process to both Boeing and EADS. The Air Force dismissed two officials over the mistake, but said the clerical error didn’t compromise the contest. The service said there was no pricing data on the discs.

Representatives of both firms said during the competition the Air Force had labored to conduct the competition by the book.

This latest round of bidding sparked a price shoot-out that saw both Boeing and EADS submitting what they described as extremely competitive bids.

“While we will view the win as positive for whichever company is the victor, enthusiasm about a win [or concern about a loss] should be tempered by the fact that we expect pricing to be tight in a fixed-price contract for which each competitor is bidding aggressively,” said Wall Street research firm Sanford C. Bernstein & Co. in a recent report. “In addition, the competition may well not be over, given the likelihood of a protest and political challenges still to come.”

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