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Originally published Wednesday, March 12, 2008 at 12:00 AM

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Tanker protest now faces GAO review

Boeing officially protested a U.S. Air Force award of a $40 billion aerial-refueling tanker program to Northrop Grumman and the parent...

Bloomberg News

Boeing officially protested a U.S. Air Force award of a $40 billion aerial-refueling tanker program to Northrop Grumman and the parent of Airbus, saying that changes made midstream in the contest unfairly favored its European rival.

"This competition was seriously flawed and resulted in the selection of the wrong airplane for the warfighter," Mark McGraw, the head of Boeing's tanker program, said Tuesday.

The filing with the Government Accountability Office in Washington suspends the contract for as long as 100 days while the GAO conducts a review and hears a defense from the Air Force and winning bidders.

Boeing will have to show the choice of Northrop and partner European Aeronautic, Defence & Space (EADS) violated Pentagon procedures or U.S. law.

"Once an option of last resort, protesting contracts is now a viable tactic for defense contractors," Richard Safran, an analyst at Goldman Sachs in New York, wrote in a note to clients. "Losing even one major contract can inhibit a company's ability to compete in the future."

Boeing was the only stock among the 30 Dow Jones industrials that fell Tuesday, sinking 82 cents, or 1.3 percent, to $73.40.

The formal challenge is one of two fronts that may help Boeing regain the tanker work it has held since 1956. Some members of Congress said they'll conduct a separate inquiry and seek to block funds in the meantime, out of concern over U.S. jobs.

Northrop and EADS plan to do about 40 percent of their work in Europe on the 179-plane order, with final assembly in Mobile, Ala.

"We have an obligation to make sure there's a fair and level playing field out there for any U.S. manufacturer," said Rep. Todd Tiahrt, a Republican whose Kansas district is home to one of Boeing's assembly plants.

Air Force Secretary Michael Wynne asked members of the House Appropriations defense subcommittee Tuesday to keep open minds even as several suggested that the tanker contract be scrapped and a new competition held.

"I urge you to go back and start over," said Rep. Norm Dicks, D-Bremerton. "You made a big mistake. You didn't do this right."

While it's Boeing's right to file a protest, "it's not helpful to the department or the warfighter" because it delays the replacement of the aging planes, Pentagon Undersecretary for Acquisition John Young told reporters Monday on Capitol Hill. Young defended the Air Force's decision, saying the proposals had "substantial capability and cost differences."

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Northrop said Monday the competition "underwent the most rigorous, fair and transparent acquisition process in Defense Department history." The company said its plan supports more U.S. jobs than Boeing's.

Efforts to replace the fleet of more than 500 tankers have been held up since 2004, when a $23 billion plan to lease and buy 100 aircraft from Boeing collapsed amid ethical violations by an executive and an Air Force official that sent both to jail.

"I don't think their chances are good" in getting the award overturned, Jon Kutler, head of Los Angeles investment firm Admiralty Partners, said Monday. The Air Force "dotted every 'i' and crossed every 't' because they knew how politically charged the whole thing would be."

Goldman Sachs' Safran said Boeing still may have a shot because of its contention the Air Force made subjective decisions and changes to a model that benefited Northrop.

Boeing spent three days deliberating what it called "significant concerns" after a Friday debriefing with Air Force officials before deciding Monday to challenge the decision.

The Air Force gave "very positive feedback" in that meeting, "highlighting numerous strengths" of Boeing's losing bid, McGraw said on a conference call Tuesday.

Some aspects Boeing had thought were important to the Air Force, such as the amount of fuel used or the number of bases required for missions, "were not considered or were really downplayed," McGraw said. "In the end, it seemed to be about extra capacity," although he noted the Air Force had indicated it wouldn't consider size as long as requirements were met.

The Airbus A330 that EADS used for its winning proposal is bigger than the 767 Boeing used for its offer.

The Air Force made changes to some program requirements without telling Boeing "to keep Northrop in the competition" and improperly evaluated some areas, McGraw said.

Information from McClatchy News Service is included in this report.

Copyright © 2008 The Seattle Times Company

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