UPDATE 2-US court lifts ban on Boeing work on KC-135 tankers

* Air Force analysis was not "arbitrary and capricious"

* Appeals court overturns lower court ruling (Adds Boeing comments, byline)

By Andrea Shalal-Esa

WASHINGTON, Nov 17 (Reuters) - A U.S. appeals court on Tuesday lifted a lower court's injunction against a $1.2 billion Air Force maintenance contract with Boeing Co (BA.N) that was protested by Alabama Aircraft Industries AAII.PK.

The U.S. Court of Appeals for the Federal Circuit overturned a federal claims court ruling in favor of Alabama Aircraft after rejecting the main basis for that decision.

It said the Air Force's price analysis underlying the award was not "arbitrary and capricious," as the lower court had ruled, and was not within the lower court's scope of review.

As a result, it said, the Air Force could now proceed with its contract with Boeing for maintenance and support of its aging fleet of KC-135 refueling tankers.

Boeing welcomed the decision and said it looked forward to beginning maintenance work on KC-135 aircraft under the contract it first won in September 2007.

"The appeals court ruling affirms that the Air Force correctly chose Boeing for this vital sustainment work to keep the KC-135 fleet flying and battle-ready for our nation's warfighters," said Boeing spokesman Forrest Gossett.

The KC-135 tankers, which are more than 50 years old on average, provide fuel in mid-flight for fighter jets and other military aircraft. The Air Force recently launched its third attempt in eight years to begin replacing the planes, but the existing aircraft will still need to continue flying for many years.

In its decision, the appeals court agreed with the trial court when it rejected Alabama Aviation's claims against Boeing for organizational conflicts of interest and the Air Force's evaluation of Boeing's past performance.

As a result of the decision, the appeals court said Alabama Aircraft, which was previously known as Pemco Aviation Group Inc, should not be reimbursed for its costs in preparing its original bid for the deal.

Alabama Aircraft twice protested the Air Force award with the Government Accountability Office, and then took the issue to federal claims court, where it prevailed in October 2008.

The Air Force and Boeing then appealed the federal claims court decision to the federal appeals court.

Boeing and Alabama Aircraft worked together as a team on the previous maintenance contract, which the Air Force has extended several times while the legal protests of the Boeing contract were being sorted out. (Editing by Tim Dobbyn and Steve Orlofsky)