UPDATE 2-Northrop threatens to boycott US tanker contest

Tue Dec 1, 2009 4:34pm EST

Related Topics

* Says changes needed to terms of competition

* Northrop concerned current terms favor smaller aircraft

* Also cites contractual and financial burdens (Adds reaction from EADS, lawmaker, byline)

By Andrea Shalal-Esa

WASHINGTON, Dec 1 (Reuters) - Northrop Grumman Corp (NOC.N) told the Pentagon's chief weapons buyer on Tuesday that it would not compete against Boeing Co (BA.N) to build new aerial refueling planes unless the Defense Department significantly changed the terms of the competition.

Northrop President Wes Bush told Ashton Carter, defense undersecretary for acquisition, technology and logistics, in letter dated Dec. 1 that the company would not submit a bid in the competition as currently structured.

Bush said Northrop remained concerned that the current terms of the competition showed a preference for an aircraft smaller than the A330-based tanker it had offered previously with Europe's EADS EAD.PA.

"The department's responses to date to our submitted questions suggest that the department is not planning to substantially address our concerns in the final release of the RFP (request for proposals)," Bush said.

"As a result, I must regrettably inform you that, absent a responsive set of changes in the final RFP, Northrop Grumman has determined that it cannot submit a bid to the department for the KC-X program," he said in the letter, which was released by the company.

Bush said Northrop weighed its decision carefully because it was convinced that the A330-based tanker would provide the best capability for the U.S. military and taxpayers.

"Furthermore, we are aware of how important it is to the credibility of the ultimate KC-X tanker award that it can be arrived at competitively," he said.

Copies of the letter were also sent to Air Force Secretary Michael Donley and Deputy Defense Secretary William Lynn.

Northrop said it remained concerned that the Pentagon's approach favored a smaller plane like the 767 offered by Boeing. As written, the terms also imposed a structure that "places contractual and financial burdens on the company that we simply cannot accept," Bush said.

Defense analyst Loren Thompson of the Virginia-based Lexington Institute said both tanker teams were concerned about the Pentagon's request for a fixed-price development contract that stretched over 18 years.

"To ask people to bid fixed prices on things that may not materialize until 18 years in the future is simply absurd," he said. He said Boeing officials saw Northrop's letter as "some sort of a maneuver," but they shared the concerns about the amount of risk the contractors were expected to carry.

Industry officials have also criticized the Pentagon's decision to set 373 mandatory requirements, 10 times those in the last competition, with no scale to rank the importance of items such as fuel offload versus a toilet's flow rate.

Bush said he hoped the Pentagon would modify the terms in a way that would allow Northrop to join the competition.

EADS spokesman Guy Hicks said his company fully supported Northrop's decision not to bid unless the terms were changed.

Senator Richard Shelby, a Republican who joined other Alabama lawmakers in criticizing the Pentagon's tanker competition rules last month, said as written, the competition amounted to a "sham" and a "sole-source contract to Boeing."

"If the Air Force wants a true competition -- one that aims to procure the best product for our warfighter -- it must fundamentally alter the current framework," Shelby said.

No immediate comment was available from the Pentagon.

Northrop threatened to drop out of the last competition as well, prompting key Republican lawmakers like Senator John McCain to weigh in on the company's behalf and ensure that there was competition for the new tankers.

But this time, Northrop might not have as much leverage, since its supporters were mostly Republicans, who no longer hold a majority in Congress, Thompson said. (Editing by Tim Dobbyn and Steve Orlofsky) ((andrea.shalal-esa@thomsonreuters.com; + 1 202 354 5807; Reuters Messaging: andrea.shalal-esa.reuters.com@reuters.net))

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