UPDATE 2-Alabama Aircraft wins suit on tanker maintenance

(Adds Air Force reaction, analyst comment)

By Andrea Shalal-Esa

WASHINGTON, Oct 1 (Reuters) - In another major setback to U.S. Air Force procurement, a federal court has ordered the service to redo a $1.1 billion competition for maintenance of its aging KC-135 mid-air refueling aircraft that had been awarded to Boeing (BA.N) in September 2007.

In a letter to the companies, Judge John Buckley of the U.S. Court of Federal Claims upheld a lawsuit filed by Alabama Aircraft Industries Inc AAII.O in June, and scrapped the Air Force's contract with Boeing.

"The Air Force must resolicit the procurement and take the necessary steps in a new solicitation to address explicitly the role of an ever-aging KC-135 fleet on the PDM (programmed depot maintenance) to be performed," he wrote in a letter dated Sept. 30, a copy of which was obtained by Reuters on Wednesday.

The overall ruling remains under protective order until lawyers for both companies redact any proprietary data.

Alabama Aircraft, formerly known as Pemco Aviation, had filed its lawsuit after losing a second protest filed with the nonpartisan Government Accountability Office.

The company remains a subcontractor to Boeing for current work on maintaining the KC-135 aircraft. But Boeing had canceled plans to bid together for the new work after the Air Force said it would do 50 percent of the work on its own.

Alabama Aircraft Chief Executive Ron Aramini welcomed the decision and said he looked forward to participating in a new competition to maintain the Air Force's KC-135 refueling tankers, work that has taken on new importance given new delays in the Air Force's effort to replace the old tankers.

"The deficiencies in the award obviously have been recognized and finally addressed, with the potential to restore integrity to the procurement process for the KC-135 PDM," Aramini said in a statement.

The Air Force said it had stopped work on the Boeing contract, while it reviewed the court ruling. A spokeswoman said the agency would "take appropriate action consistent with the court's decision."

'FLAWED' PROCESS

Aramini told Reuters in a telephone interview that the court ruling validated his company's view that it had been put in an unfair position in the original competition. "We think that this process was flawed. We think Boeing used our data from when we were partners to further their cause," he said.

The GAO, the audit arm of Congress, had upheld part of Alabama Aircraft's initial protest in December, but ruled against a second challenge filed by the company after the Air Force decided to stick with Boeing for the contract.

The KC-135 contract went to Boeing at a time when the Air Force envisioned a smaller number of existing tankers requiring maintenance because of plans for a new tanker fleet.

But the Pentagon now says it will put more money into maintaining the existing KC-135s given that a new contract for replacement aircraft could be year to four years away.