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Originally published February 24, 2011 at 11:30 AM | Page modified February 25, 2011 at 12:50 PM

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Tanker shocker: Boeing 'clear winner'

The Air Force awarded its $35 billion air-refueling-tanker contract Thursday to Boeing.

Seattle Times aerospace reporter

The 10-year-long Air Force tanker competition finally came down to price.

But even some of Boeing's most ardent supporters were shocked and relieved to learn Thursday that the company's bid for the $35 billion contract to build air-refueling tankers was lower than the rival offer from Airbus parent company EADS.

"Boeing was a clear winner," Deputy Secretary of Defense William Lynn told a Pentagon news conference.

U.S. Rep. Norm Dicks, D- Bremerton, a key Boeing ally on the House Defense Appropriations subcommittee, couldn't hide his delight.

"I'm thrilled," said Dicks. "I was prepared for the worst and instead got the best news in my professional career. This is a big deal."

Winning the tanker contract secures what Boeing says are 11,000 direct and indirect jobs in Washington state. That figure includes not only projected jobs at Boeing and at its in-state suppliers, but also at any kind of business — from bars to bakeries — serving the aerospace work force.

Jim Albaugh, head of the commercial-airplanes division, heard the news as he stepped onto a plane in Dallas, en route to Seattle. Albaugh has steered Boeing's tanker bid for nine years, including through the last round in 2008, which Boeing lost, then successfully protested.

"I wasn't as certain we were going to win as I was last time, when we lost," said Albaugh in an interview soon after he touched down at Boeing Field. "But I knew we had a good shot."

The win is timely for engineers working Boeing's two major new commercial-jet programs — the 787 Dreamliner and the 747-8 jumbo jet. The first deliveries of those airplanes are due this year, so the programs' engineering needs are winding down as the focus shifts to production.

"As we start rolling people off the 787 and 747-8, we're really pleased to have the tanker so we can take those experienced engineers and put them on this program," said Albaugh.

In addition to the tanker, Boeing plans to develop in the coming decade a slew of new commercial jets, including the next model of the Dreamliner, the 787-9, then the 737 replacement and the next major enhancement to the 777.

In a teleconference, Dennis Muilenburg, head of Boeing's defense division, said he's not concerned engineering resources may be stretched too thin.

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Muilenburg said Boeing will use engineers from across the company, not only in the Puget Sound region.

"We're bringing all of our talent to bear," he said. "We've got the engineering horsepower and capacity to do the job. We're ready to go."

The contract means Boeing will initially build 179 of its 767-based tankers to replace the Air Force KC-135 tankers.

Boeing must design, develop, manufacture and deliver the first 18 combat-ready airplanes by 2017. The first tanker should fly in 2015.

How Boeing won

The Pentagon's Lynn said both Boeing and EADS satisfied all 372 mandatory performance requirements in their offers.

That left price as the deciding factor.

A change in how the Air Force assessed the rival planes' fuel-consumption costs may have been critical, said Dicks. Muilenburg agreed that was "a key criterion."

The EADS tanker, based on an Airbus A330 airliner, is much bigger and burns about 24 percent more fuel than the 767. The initial Air Force proposal would have assessed the total fuel-burn costs of the two planes over 25 years, but Dicks successfully pushed for that to be changed to 40 years.

"The difference was billions of dollars," Dicks said.

Another key to Boeing's winning price tag was the revamp of its 767 line in Everett. Forced to move it to a back bay to make room for a 787 production line, Boeing took the opportunity to remake the line on lean manufacturing principles.

"We had to get down to the price to win," said Albaugh.

Boeing CEO Jim McNerney had said the company would bid aggressively on the fixed-priced contract but wouldn't build the tankers at a loss.

A newly opened Everett assembly line will build the tankers, including all the military modifications to the airframe, alongside commercial 767 airliners.

Boeing pioneered the production of military and commercial variants of one airplane at a single plant with its 737-based Poseidon anti-submarine jet for the Navy, built in Renton.

The tanker win confirms that this so-called "One Boeing" approach is the way of the future for the company's military airplane contracts. That's good news for Washington state, as it broadens the role of the Puget Sound region work force.

Boeing and EADS both spent lavishly on political lobbying in advance of the decision.

Advocates for Boeing had spent months carping that European government subsidies to EADS would give that company an insurmountable price advantage. EADS' allies, mostly from the states around its planned tanker- assembly plant in Mobile, Ala., countered that their plane was a better value.

According to OpenSecrets.org, a website that tracks the influence of money on U.S. politics, Boeing spent more than $17.8 million on all its lobbying expenditures in 2010, more than any other military-aerospace company. In the same year, EADS spent $3.2 million.

Boeing also outspent EADS in political campaign contributions to supporters in Congress.

Still, the company's victory evidently surprised both politicians and investors. Boeing stock rose $2.54, or 3.6 percent, to $73.30 in after-hours trading Thursday.

EADS has three days to ask for a debriefing as to why exactly it lost. That debriefing must take place within five days, after which EADS has another five days to decide if it wants to formally protest the decision.

But the Pentagon is hopeful there won't be any contesting of this result. "We think we've put together a process that was fair, open and transparent and does not provide grounds for a protest," said Lynn.

Ralph Crosby, chairman of EADS North America, recently told the Press-Register newspaper in Mobile that absent "some egregious process error," his company was unlikely to contest a Boeing win.

After the decision was announced, Crosby issued a statement expressing disappointment.

Careful EADS review

"We look forward to discussing with the Air Force how it arrived at this conclusion," said Crosby. "With a program of such complexity, our review of today's decision will take some time."

Boeing was originally awarded a tanker contract in 2001, but that deal, which was never open to competitors, was swamped in controversy. It was canceled after a procurement scandal that sent Boeing's then-chief financial officer to jail.

In 2008, after an open competition, the contract was awarded to a joint bid from Northrop Grumman and EADS. The award was canceled after Boeing challenged the procedures leading to the decision and the Government Accountability Office concurred.

This time around, Northrop withdrew and it was a head-to-head contest between Boeing and EADS.

Though the Air Force award will draw the ire of politicians in Southern states that would have benefited from an EADS win, the decision may finally bring the decadelong saga to a close.

For EADS, the outcome is a bitter disappointment.

The European plane maker had hoped to establish itself as a peer with U.S. companies in bidding for major defense contracts in the future.

It had also wanted a manufacturing facility in the U.S. that would have increased the percentage of its costs paid in dollars — beneficial as the euro rises against the dollar.

Based on expectations that Airbus could price its plane lower than Boeing, and on leaks suggesting the EADS A330 had outscored the Boeing 767 on a key mission evaluation that was part of the Air Force assessment, analysts had recently been predicting an EADS win.

With the outcome reversed, the happiest man at Boeing may be commercial-airplanes chief Albaugh.

Albaugh took over the defense side of the company in 2002 and closely shepherded Boeing's tanker bid afterward.

Having switched roles to head Boeing's commercial-jet division in fall 2009, he'll now get to oversee the building of the tanker. "This feels pretty good," said Albaugh.

In Mobile, by contrast, the outcome cut the other way.

"There's no way to say we haven't had the breath knocked out of us," said Bill Sisson, executive director of the Mobile Airport Authority.

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

The Associated Press contributed to this report.

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