Air Force concedes errors in tanker estimates: Boeing

WASHINGTON Thu Jun 12, 2008 1:51pm EDT

WASHINGTON (Reuters) - The U.S. Air Force has conceded that Boeing Co's proposed KC-767 aerial refueling tanker would cost less over time than the winning plane offered by Northrop Grumman Corp and its European subcontractor EADS, Boeing told auditors reviewing its protest against the Air Force decision.

News of Air Force errors in calculating the life cycle costs of the competing bids, which were also confirmed by Northrop, comes as the Government Accountability Office (GAO) prepares to rule by June 19 on the Boeing protest.

In a 191-page document dated April 25 that was filed with the GAO, Boeing said mistakes in calculating the life cycle costs of the airplanes raised questions about the thoroughness and credibility of the Air Force's overall evaluation.

A copy of the redacted version of the document was obtained by Reuters on Thursday.

"With respect to the cost/price evaluation, as an initial matter, the Air Force now concedes that Boeing's most probable life cycle cost is lower than NG/EADS," Boeing wrote.

"This renders even more troubling the (Source Selection Authority's) initial public assertions that NG/EADS 'offered great advantage to the government in cost/price'," it wrote.

Boeing also said that the Air Force's acknowledgment addressed only a "miniscule fraction of the errors in the cost/price evaluations confirmed in the agency report."

But Northrop downplayed the impact of the Air Force error, saying life cycle costs were just one part of the Air Force evaluation. The final decision was based on the capabilities of its KC-30 tanker, not cost alone, Northrop officials said.

The Air Force declined comment. A spokeswoman said federal law barred the release of any proprietary information contained in the bids, such as design concepts, cost or pricing data.

$34 MILLION DIFFERENCE

Air Force documents initially put Northrop's life cycle cost at $108.01 billion versus $108.44 billion for the Boeing plane, a difference of $34 million or 3/100 of a percent.

In that calculation, Northrop's lower development and acquisition costs were balanced out by slightly lower operating costs of Boeing's 767, a Northrop spokesman said.

Neither Northrop nor Boeing disclosed what the costs would be for each bid, once adjusted for the calculation errors.

Boeing has argued in its protest and in a high-profile advertising blitz that the Air Force misled Boeing on the terms of the competition and skewed the results to favor Northrop.

Northrop, which was the underdog in the competition, is fighting to keep the contract valued at $35 billion.

During the protest review, the Air Force discovered five errors in the life cycle computation, which caused a slight adjustment in the operating costs of the two aircraft, Northrop said. But the initial results were "a dead heat" and remained essentially the same, even after the adjustments, it said.

Last week, the Pentagon's chief weapons buyer, John Young, said he hoped the contract would not be delayed by any "small" judgment calls by the Air Force.

In documents justifying her decision, Air Force acquisition chief Sue Payton wrote the award was based on the greater capability offered by the Northrop tanker. Even if Boeing's price or risk had been lower, Payton said she "still would have decided to award to Northrop Grumman given their higher mission capability (especially the superior aerial refueling and airlift capabilities), past performance, and (Integrated Fleet Aerial Refueling Assessment) evaluation."

Northrop spokesman Randy Belote said his company's bid was deemed advantageous for many reasons, including lower system design and development cost and risk; unit costs that were $10 million to $15 million lower per aircraft; and better combat performance in detailed simulations.

"Despite any minor inaccuracies in the process, the tanker providing the most capability at the best overall value is still the Northrop Grumman KC-45," Belote said.

"For all intents and purposes, the (life cycle) of both aircraft remain the same. The slight adjustment does not affect the outcome," he said.

(Editing by Toni Reinhold)