UPDATE 3-US Air Force to review Boeing bid, comply with GAO

(Adds details on timing of response)

By Andrea Shalal-Esa

WASHINGTON Feb 4 (Reuters) - The U.S. Air Force said on Monday it would "fully comply" with the Government Accountability Office's recommendation that it reevaluate the cost and risk of a $1.2 billion airplane maintenance contract to Boeing Co (BA.N), after losing an appeal last week.

GAO, the congressional audit arm that weighs federal contract disputes, on Friday rejected a request to reconsider its Dec. 27 ruling that faulted the service's handling of the contract to maintain KC-135 refueling aircraft, and said its recommendations remained in effect.

"While disappointed in GAO's denial of the request for reconsideration, the Air Force intends to fully comply with the recommendations made by the GAO in its decision of December 27, 2007 to reevaluate the price realism and risk assessment of the offerer's proposals," said Air Force spokeswoman Lt. Col. Jennifer Cassidy.

The Air Force must report to the GAO if it has not implemented its recommendations within 60 days from the original decision -- by late February, according to the GAO.

Friday's decision was the latest in a series of protest defeats for the Air Force, which last year was forced to redo a $15 billion helicopter competition also initially won by Boeing.

It comes as the Air Force is preparing to make a contract award in another closely-watched competition, a fierce battle between Boeing and Northrop Grumman Corp (NOC.N) for a $40 billion contract to build 179 new aerial refueling tankers.

On Dec. 27, GAO upheld in part a protest by losing bidder Pemco Aviation Group Inc, which changed its name to Alabama Aircraft Industries Inc AAII.O on Jan. 1.

"The original decision and recommendations stand," GAO spokesman Michael Golden told Reuters on Friday.

In that ruling, GAO said the Air Force had not documented a required analysis about the realism and potential risks of Boeing's final proposal revisions, and urged the service to go back and do that work, and then make a new contract decision.

"If the agency determines a proposal other than Boeing's represents the best value to the government, the agency should terminate Boeing's contract and make an award to that other offerer," said the ruling.

Alabama Aviation welcomed the GAO ruling as a positive development in its bid to wrest the contract away from Boeing. The company's stock was up 5.4 percent to $4.22 in Monday afternoon trading on Nasdaq.

"The GAO's rejection of the request for reconsideration makes clear our position that there are significant problems with the award of the KC-135 contract to Boeing," Alabama Aircraft Chief Executive Ronald Aramini said in a statement.

"We feel very confident that a proper evaluation of cost and risk, if aligned with GAO recommendations, will show Pemco/AAII to be the low-cost, low-risk best value provider of this service," he said.

Boeing spokesman Brian Ames said the company remained confident that it would still be selected the winner at the end of the process.

Nick Schwellenbach with the nonprofit watchdog group Project on Government Oversight welcomed the GAO's stance.

"I'm glad the GAO stood up to the Air Force," he said. "I think it's a good thing that the Air Force is actually going to do a realistic assessment of the cost now. If the Boeing offer ultimately wins, at least the taxpayer will be assured that he's getting the best deal." (Reporting by Andrea Shalal-Esa; Editing by Tim Dobbyn/Andre Grenon)