Air Force admits error in tanker study: Boeing

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

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.

Reuters obtained a copy of the document on Thursday.

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, noting the life cycle costs of the two bids remained nearly the same, even after adjustment for the errors.

"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 "minuscule fraction of the errors in the cost/price evaluations confirmed in the agency report."

Given that Boeing's 767 was the lower-cost offering, the Air Force should have analyzed whether factors deemed advantageous in Northrop's bid were worth the additional costs, Boeing said. No such evaluation has been conducted, a spokesman 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.

"This was a very thorough best-value capabilities-based source selection. It involved thousands of pages of documentation, months of unprecedented interaction between the Air Force and the offerors and independent reviews," said Lt. Col. Karen Platt.

She said any single document viewed by itself without a broader context could be easily misinterpreted. "The Air Force stands by its process and its decision."

$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 the slightly lower operating costs of Boeing's 767, a Northrop spokesman said.

Neither Northrop nor Boeing disclosed what the cost 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.

"The ... decision rests on what can only be described as patently unreasonable and unsupported judgments that reflect disparate treatment of the offerors," it said on Thursday.

Rep. Norm Dicks, a Washington Democrat, said the Air Force also failed to consider the impact of rising fuel prices, a fact that could result in billions of dollars of extra payments given the larger size of the Northrop tanker.

"The bigger the plane, the more fuel it burns," Dicks told Reuters. "I'm going to do everything I can in my power to stop this from happening. It's a giant waste of money that's going to cost the taxpayers billions over the years."

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 its computations, which caused a slight adjustment in the life cycle costs of the two aircraft, Northrop 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 said that even if Boeing's price or risk had been lower, she would have picked the Northrop plane due to its superior aerial refueling and airlift capabilities, past performance, and refueling assessment across the fleet.

Northrop spokesman Randy Belote said his company's bid prevailed for many reasons, including lower development costs and risks, unit costs that were $10 million to $15 million lower per aircraft; and better combat performance.

"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. "The slight adjustment does not affect the outcome," he said.

Defense analyst Loren Thompson said it was reasonable for the Air Force to add cost to Boeing's proposal since it had never built the version of the 767 that it had proposed, but he questioned why it did not "find similar risk in the Northrop proposal, since they've never produced this plane in Alabama."

(Editing by Toni Reinhold, Phil Berlowitz, Gary Hill)