Raytheon pushes to reverse Navy on Aegis, destroyer

WASHINGTON Tue Oct 21, 2008 7:44pm EDT

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WASHINGTON Oct 21 (Reuters) - Raytheon Co (RTN.N) is battling on multiple fronts for a share in billions of dollars of naval combat system work after a destroyer program was curtailed and the U.S. Navy pursued sole-source contracts with Lockheed Martin Corp (LMT.N) for upgrading its ship-based Aegis combat system.

Waltham, Massachusetts-based Raytheon last month filed an unusual formal protest against the U.S. Navy's decision on the Aegis upgrades.

"The decision to forego a competitive procurement directly prejudices Raytheon's direct economic interests," Raytheon said in a protest filed with the Government Accountability Office (GAO). A redacted copy was obtained by Reuters on Tuesday.

Raytheon accused the Navy of "hiding behind unsubstantiated claims of proprietary data" and said its refusal to hold a competition violated the most basic U.S. competition laws.

It chafed at the Navy's refusal to allow a competition and said it assumed every possible obstacle Raytheon might face.

"Were this... approach to competition using in horse racing, Seabiscuit never would have gotten out of the gate," it said in the protest, referring to the race horse that was hugely popular during the Great Depression.

The Navy last week filed a motion to dismiss the protest, according to two sources familiar with the case.

But Raytheon cannot protest the Navy's July decision to slash its DDG-1000 destroyer program, for which Raytheon was building the combat system, and switch back to the older DDG-51 destroyers, which are outfitted with the Lockheed system.

Instead, Raytheon has dispatched a swarm of senior executives to meet with congressional aides and defense analysts in a bid to counter the Navy's arguments for its decision on the destroyer.

Analysts say they understand Raytheon's concern, given the stakes involved -- billions of dollars of work on the new DDG-1000 destroyers, and billions more for upgrades to the combat systems on the older DDG-51 destroyers.

But they say the Navy also makes a compelling argument that opening the Aegis upgrade work to competition could lead to unnecessary delays and added costs.

CHALLENGING EVERY ARGUMENT

"Raytheon is challenging every argument that the Navy leadership is presenting for canceling its future destroyer," said analyst Loren Thompson of the Virginia-based Lexington Institute. "They're questioning the Navy's assessments of the threat, the cost and the capabilities of the new ship."

The Navy, citing changing military requirements, decided in July to halt its new DDG-1000 destroyer program at just two ships instead of the seven once planned.

It later bowed to pressure from lawmakers and agreed to add one more DDG-1000, and congressional aides said Raytheon clearly hoped it could persuade the Navy to add back even more.

Raytheon officials deny a link between its protest against the Aegis sole-source decision and the DDG-1000 cancellation, but congressional aides say Raytheon's goals are clear. "They are still trying to reverse that (DDG) decision," said one.

Congressional aides are not convinced Raytheon's lobbying drive will succeed, but Congress may examine the broader issue of Navy sole-source contracts in a hearing early next year.

HIGH HOPES FOR PROTEST

Raytheon still hopes it can prevail with its protest against the Navy's decision to give Lockheed three separate sole-source contracts for upgrades to its Aegis system. The GAO is due to rule on the protest by Dec. 31.

In its protest, Raytheon said the Navy's arguments about limits on use of Lockheed technical data by other competitors were "superficial and unpersuasive." It also said the Navy had not supported its claim about the urgency of the work.

Overall, Aegis upgrades could generate $13.6 billion in revenues, but defense consultant Jim McAleese said the work at issue in the three contracts being protested is worth far less.

He said it was the government's prerogative to set the requirements, strategy and schedule for its programs.

The Navy had a chance of winning the protest if it "stood up and clarified the uniqueness of the mission," which centers on the need to quickly add ballistic missile defense capability to its existing DDG-51 destroyers, McAleese said.

Thompson said the Navy was especially concerned about new, highly maneuverable Chinese missiles, which coupled with tracking sensors, could find and hit U.S. aircraft carriers.

The Navy said it would be inappropriate to comment on pending litigation until the GAO made its ruling.

Lockheed emphasized that the military services had the right to make sole source awards if they had good reasons.

Those could include the disruption, added costs and schedule delays that "would result if ongoing programs were continually recompeted and passed from contractor to contractor," said Lockheed spokesman Craig Quigley. (Reporting by Andrea Shalal-Esa; Editing by Tim Dobbyn)

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