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Originally published March 4, 2011 at 1:21 PM | Page modified March 4, 2011 at 11:48 PM

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Rival knocks Boeing's 'lowball' tanker bid

Boeing won the long-disputed Air Force refueling-tanker competition by offering a total cost of $31.5 billion spread over 17 years, according to losing bidder EADS.

Seattle Times aerospace reporter

Boeing bids 10 percent lower than EADS on tanker

Bids offered: From Boeing, $31.5 billion; from EADS,

$35.1 billion. Both to be paid over 17 years.

Present value of bids: From Boeing, $21.4 billion; from EADS, $23.4 billion.

Adjusted present value: From Boeing, $20.6 billion; from EADS, $22.6 billion (after $800 million in adjustments for each).

Source: EADS figures, based on its bid, and Air Force

information on Boeing's bid

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After 10 years of agonized wrangling, the Air Force tanker competition is finally over, with Boeing the undisputed winner.

Ralph Crosby, chairman of defeated rival EADS North America, termed the winning Boeing proposal "very, very, very aggressive" and "much lower than we would have gone."

EADS, the parent company of Airbus, announced Friday it will not formally protest the Pentagon's Feb. 24 decision and provided detailed bid data that shows Boeing prevailed with a bid 10 percent below that of its European rival.

Crosby asserted there's a high risk that Boeing will lose money if there are any setbacks in developing and building the 179 tankers under the fixed-price contract, and he called for "vigilant oversight" by the Pentagon to ensure Boeing keeps to its commitments.

Boeing insists that its bid is financially sound and based on improved efficiency at its Everett plant.

According to EADS, Boeing's bid of about $31.5 billion, paid over 17 years of production, was $3.6 billion less than the EADS bid. And it was fully $7 billion lower than the figure that won the previous 2008 round of the competition for EADS.

Boeing would not comment on the EADS figures.

Crosby said the Air Force fairly enforced the terms of the competition, so there are no grounds for a protest.

"It's time to put the interest of the warfighter first and we're stepping aside," Crosby said at a news conference.

Boeing has already posted the initial job openings for engineers and planning analysts to work on the tanker program.

And the tanker win looks like it may quickly bear commercial fruit, too.

The Flightblogger website of the trade magazine Flight International reported this week that airfreight giant FedEx is talking to Boeing about buying a cargo version of the 767-400, which suggests that Boeing may develop this new commercial freighter jet as a spinoff of the tanker program.

That could secure even more than the 11,000 direct and indirect Washington state jobs promised by the tanker itself.

Friday, the focus was on how Boeing pulled off its unexpected victory.

Crosby accused Boeing of making "an extremely lowball offer ... to keep their competitor off the shores of the United States in the production of large commercial aircraft."

If EADS had won, it promised to establish a wide-body jet plant in Alabama that would have produced A330 commercial freighters as well as tankers.

"This wasn't about cost. It was about price," Crosby said. "When you are in a fixed-price game and the other guy decides to win at any cost, there's probably not a lot that could be done."

But Boeing Commercial Airplanes Chief Executive Jim Albaugh, in an interview after the Air Force decision, said his 767 tanker team won with a determined push to shave costs.

"We worked really hard on what we thought 'the price to win' was," said Albaugh. "We established 'the price to win' and then we went off and attacked the cost basis of this airplane."

Tom Wroblewski, president of the Machinists union District 751, said Friday that Boeing's production workers and engineers worked closely with management to establish the new, more-efficient 767 production line at the rear of the Everett factory to enable the lower bid.

"We now know that was a crucial factor in the decision," said Wroblewski.

Loren Thompson, a defense analyst with the Lexington Institute who supported Boeing, said the company's board of directors ultimately decided how low the company would go without risking a loss on the contract.

But he agreed with Crosby, of EADS, that "Boeing's bid was informed by its decision to keep Airbus out of its domestic market."

"Boeing bid relatively thin margins in order to win that it will now have to live with," Thompson said.

On Friday, EADS executives provided a detailed breakdown of their own bid as well as corresponding detail on Boeing's bid deduced from an Air Force debriefing this week.

To convince EADS of the fairness of the outcome so that it wouldn't protest, the Air Force gave EADS the final bottom-line figures for both the Boeing 767 and the Airbus A330 airplanes. Along with additional information in the debriefing, EADS officials were able to work the few steps backward to the original Boeing bid.

The EADS figures show the present value of the two bids in today's dollars was calculated as $21.4 billion for Boeing and $23.4 billion for EADS.

The Air Force then made complex adjustments to those figures that in the final analysis evened out. According to EADS, Boeing's figure was reduced by $800 million to allow for the relatively lower airfield and hangar construction costs and the lower total fuel burn of its smaller aircraft over a 40-year life span.

That was offset by an equal reduction of $800 million for EADS because its more capable plane scored higher in a computer model measuring mission effectiveness.

The EADS data also showed the effect of a change in the tanker-competition rules that was forced through in 2008 by U.S. Rep. Norm Dicks, D-Bremerton. That change required the Air Force to calculate the tanker fleet's fuel consumption over a realistic 40 years of flying, instead of the 25 years stipulated in the previous round. The shift favored Boeing's smaller plane, which burns less fuel.

Boeing's bid got an advantage of about $500 million from that — a significant but not decisive factor, given the $2 billion bottom-line difference in the bids.

One outcome of the 10 years of painful twists and turns in the tanker saga is that Air Force pilots are today flying some really old tankers, some approaching 50.

But the taxpayer will get a better bargain.

EADS estimated that the original 2001 tanker-lease deal awarded to Boeing, adjusted for inflation and for the larger number of tankers now ordered, was approximately $16 billion more expensive than the one now finalized.

Crosby said EADS has spent $45 million in the past year putting together its bid and lobbying to win the competition. Including the previous round, when it teamed with Northrop Grumman, he said EADS spent a total of $200 million to compete for the tankers.

That money has earned EADS a lot of goodwill in Alabama and surrounding Southern states, along with a newfound respect inside the Pentagon.

But giant defense contracts like the tanker don't come along often. EADS builds Army helicopters in the U.S., but for the foreseeable future it won't build any big airplanes here and remains shut out of the top rank of U.S. defense contractors.

For Boeing, hard work lies ahead. It will have to avoid setbacks, like those encountered in building 767 tankers for Japan and Italy, if it is to deliver the first 18 planes to the Air Force by 2017.

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

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