Northrop threatens not to bid on tanker, as saga grinds on

Northrop Grumman warned the Department of Defense on Tuesday it won't bid against Boeing for the massive Air Force refueling-tanker program unless the Pentagon's draft request for proposals is rewritten.

The move drew a sharp response from the government. A Pentagon official, in an e-mailed statement, said, "The Department cannot and will not change the warfighter requirements for the tanker to give advantage to either competitor."

Northrop is teamed with Airbus parent European Aeronautic Defence & Space (EADS) in competing for the on-again, off-again contract, and they've offered a modified Airbus A330 that would be assembled in Alabama.

If Northrop pulls out, Boeing will have a clear field to submit its tanker for the contract's first phase of 179 airplanes, valued at about $35 billion.

Boeing's entry would likely be based on the Everett-built 767, and the company has said preserving that fading production line would maintain as many as 9,000 jobs in the state.

But a leading defense-industry analyst sees Northrop's move as the beginning of a heavily politicized debate that could drag out the procurement program even further.

"This is not the last inning of the ballgame," said David Berteau, director of the Defense Industry Group at the Center for Strategic and International Studies. "I think we'll see a lot of movement. The next two innings are going to be played up on Capitol Hill."

In a letter to Pentagon acquisition chief Ashton Carter, Northrop CEO Wes Bush said the draft request for proposals (RFP), which sets out how the tanker competition will be decided, exhibits a "clear preference for a smaller aircraft with limited multirole capability."

"I must regrettably inform you that, absent a responsive set of changes in the final RFP, Northrop Grumman has determined that it cannot submit a bid," Bush wrote.

Boeing declined to comment on Northrop's move.

Elaborating on Northrop's thinking, company spokesman Randy Belote said the rules outlined in the draft RFP would require only that both airplanes meet the baseline tanker requirements, after which the least expensive would be selected.

Boeing's 767 is cheaper. The Airbus A330 would get little or no extra credit for its ability to deliver more fuel in a single flight and its greater capacity to carry cargo, troops and medical evacuees.

"In effect, what you get is the lowest-cost solution ... a smaller tanker aircraft with less capability," said Belote.

Bush's letter also criticized "contractual and financial burdens" built into the competition process, an apparent reference to the Pentagon's requirement for a fixed-price bid.

Northrop has publicly criticized this aspect of the competition as too risky in a military-development program covering an 18-year initial delivery period.

Defense companies have often been granted "cost-plus" contracts, meaning they get their costs covered, plus a guaranteed profit margin. Industry observers believe Boeing also objects to the fixed-price aspect of the contract, though it has done so only privately.

Bush's letter says the Pentagon's responses to previous Northrop complaints "suggest that the department is not planning to substantially address our concerns in the final release of the RFP."

The threat to pull out worked once before for Northrop.

In January 2007, in an earlier round of the lengthy tanker saga, Northrop sent a similar letter to the Air Force threatening not to bid if the competition rules were not amended to give its larger airplane extra credit for its extra capability.

The Air Force amended the rules by introducing a computer model that scored the competing planes on their capabilities in various real-world war scenarios.

That led to the selection of the Airbus A330 as the winner in February 2008, which was later canceled after a protest from Boeing and a critical report from the Government Accountability Office.

Northrop's Belote said the Pentagon, "if it wants a full competition, will modify its approach" before issuing the final RFP.

This time, however, the response from the Department of Defense appears less flexible.

"The Department regrets that Northrop Grumman and Airbus have taken themselves out of the tanker competition and hope they will return when the final request for proposals is issued," said the Pentagon statement.

"The Department wants competition but cannot compel the two airplane makers to compete."

The official said the Pentagon probably will issue the final RFP next month.

Berteau said both of Northrop's objections have some validity.

Defense companies typically spend billions of dollars on development costs and expect the government to carry the risk of costs going up.

"If there's a fixed price, the company has to absorb the risk instead of the government," he said.

As for the objection the current rules favor Boeing's plane, he said, "I think Northrop's probably right."

Berteau said both planes will meet the baseline criteria used in the competition. With that kind of scoring, he said, "it's not hard for two bidders to be found roughly equal in technical grounds. Then the discriminator becomes simply the price."

However, he said it would be difficult for the Pentagon to simply accede to Northrop's request to change the scoring system, as this would invite another protest from Boeing.

And yet the tanker saga is certainly not over, he said.

Berteau said he's heard the Pentagon is setting up face-to-face discussions with both Northrop and Boeing. One option for the Defense Department, he said, is to enter discussions with both competitors and take their time about modifying the RFP.

He expects that congressional debate will heat up. The politicians clearly think so too.

Sen. Patty Murray, D-Wash., a big champion of Boeing's tanker, issued a statement Tuesday calling on the government to ignore Northrop's threat to drop out.

"Airbus is up to its same old tricks," said Murray.

Dominic Gates: 206-464-2963 or dgates@seattletimes.com