Boeing said discouraged by tanker chances

WASHINGTON (Reuters) - Boeing Co executives, who discussed revised guidelines for a $35 billion refueling aircraft competition with U.S. defense officials on Tuesday, remain discouraged about Boeing's prospects for the work, said a defense analyst and another source briefed on the talks.

"Boeing fears that the Bush administration has made up its mind on what tanker it wants and so all of these meetings will have no real bearing on the outcome of the competition," said Loren Thompson with the Virginia-based Lexington Institute, who has close ties to the defense industry.

Northrop Grumman Corp, by contrast, described its discussions with U.S. Air Force and Defense Department officials as "an open and frank dialogue," and said it looked forward to submitting a revised proposal within the Pentagon's timetable.

Boeing's backers in Congress say the revised terms of the competition, issued by the Pentagon last week, favor Northrop and its European subcontractor EADS, which won the initial competition in February.

There are even reports that Boeing is considering not bidding in the competition, although several industry sources, defense officials and analysts say they doubt the company will withdraw after investing so heavily in its tanker program.

The Pentagon released a new draft request for proposals (RFP) to address what government auditors described as significant errors in the handling of the original competition.

The changes include a decision to give the bidders credit for greater fuel delivery, which lawmakers say will give an edge to Northrop's larger tanker based on the Airbus A330.

But the Pentagon also agreed to measure government ownership costs over 40 years instead of 25, which analysts say should favor the smaller Boeing 767-based tanker.

The Pentagon is meeting with officials from both companies this week, and aims to release a final request for proposals "sometime in mid-August," said spokeswoman Cheryl Irwin. The Pentagon hopes to award a contract award by year's end.

Boeing said it hoped to continue the discussions.

"We hope that it was just the beginning of a continuing dialogue as we move toward a final RFP that prescribes the right aircraft and gives appropriate weight to all of the capabilities that will be required for the evolving mission over the next several decades," said Boeing spokesman Dan Beck.

Northrop is seeking some "word and sentence" changes to the draft RFP, but basically accepts the Pentagon's revisions, vice president Paul Meyer told Reuters in an interview. He said Northrop wanted to ensure the documents were clear enough to avert another round of protests when a new award was made.

Northrop acknowledges that a larger aircraft will burn more fuel, a factor that could be reflected in the 40-year assessment of life cycle costs. But Meyer said ownership costs would be offset by the benefit of a younger A330 fleet worldwide, with commercial users bearing part of the cost of any modernization and upgrades needed later on.

Boeing's Beck confirmed a published report that Boeing was negotiating with the Italian government about any penalties resulting from delays in its delivery of the first of four refueling tankers to Italy, but gave no details.

Beck said the penalty could involve cash and extra services, and some resolution was expected by next year.

He said Boeing did pay a fine of well under $5 million to Japan last year for a one-year delay in its tanker delivery.

Boeing was downgraded in the U.S. tanker competition for its past performance on the Japanese and Italian tanker programs, analysts say.

The revised competition continues to view mission capability, proposal risk and past performance as the three most important evaluation factors, according to Pentagon documents shared with lawmakers.

Those factors are followed by consideration of the government's ownership costs, scores achieved in a complex model that compares the ability to meet peak demand across a range of tanker missions, and finally, the actual development and acquisition costs of the program.

A Pentagon chart explains that the first five factors, "when combined, are significantly more important than Factor 6," which examines the development and acquisition costs.

(Reporting by Andrea Shalal-Esa; Editing by Tim Dobbyn)