House panel eyes subsidy review on tanker deal

WASHINGTON (Reuters) - The House of Representatives Armed Services Committee conditionally called for a review Thursday of any illegal subsidies' role in a $35 billion refueling-aircraft contest lost by Boeing Co.

The House panel mandated an Air Force review of the tanker's selection process if the World Trade Organization finds fault in a subsidy dispute pitting Boeing against Airbus, its rival in the commercial aircraft market.

On February 29, the Air Force picked a team of Northrop Grumman Corp and Airbus parent EADS, rather than Chicago-based Boeing, to start building a new fleet of 179 tanker aircraft based on Airbus's A330 aircraft.

Boeing has formally challenged the award with the Government Accountability Office, an arm of Congress that reviews federal contract protests. GAO is due to make its recommendations by June 19.

If the World Trade Organization, for its part, rules an illegal subsidy was given to "any large commercial aircraft manufacturer," the House Armed Services' bill would require the Air Force weigh the potential impact of that subsidy on the tanker program's outcome.

"If the Air Force determines that the subsidy did impact the competition, then it must find a way to remove the impact from the competition to ensure the fairness of the process," a committee aide said, citing a draft press release. The panel was due to publish a summary of the bill later in the day.

The tanker-related provision was authored by the committee's chairman, Democrat Ike Skelton of Missouri. It was adopted without debate shortly after midnight as part of the panel's version of a $601.4 billion fiscal 2009 defense authorization bill. The bill was approved 61 to 0.

The Senate Armed Services Committee, for its part, steered clear of the tanker issue in its version of the bill, pending the GAO's ruling on Boeing's protest.

The two bills still must be debated by the full House and Senate, then reconciled before any legislation may be signed into law by the president.

TIMETABLE

It was not immediately clear when WTO would rule in the trade subsidy matter brought by the United States for Boeing and the European Union, for Airbus. The timetable has slipped because of the complexity of the matter.

Some Boeing backers have charged that EADS received government subsidies for its tanker-related work, unfairly lowering the price of the Northrop Grumman-EADS aircraft.

Northrop has said EADS received no such subsidies, "only loans, and those loans were repaid in full, with interest, last year."

The Air Force decided early on that the subsidies dispute could not be adjudicated within the tanker program and therefore considered it irrelevant.

Sen. John McCain, the all-but-certain Republican nominee for president, urged the Air Force last year to disregard the subsidy issue for the tanker award. McCain, of Arizona, led an effort nearly five years ago that derailed an abortive $23.5 billion Air Force plan to lease then buy 100 modified Boeing 767s as tankers.

That plan collapsed after the Air Force's former No. 2 arms buyer, Darleen Druyun, was sentenced to nine months in prison on conflict of interest charges. She admitted negotiating a job with Boeing while representing the Air Force in dealings with the company over the abortive 767 tanker.

European officials have said Airbus receives just a fraction of the research funding that Boeing, the Pentagon's No. 2 supplier by sales, gets from the Defense Department.

The EU is challenging several subsidies given to Boeing by individual states, including Washington and Kansas, where the Boeing tanker would have been assembled for the Air Force.

The committee aide who described the tanker-related provision said the legislation left it up to the Air Force to determine if any illegal subsidy had a material impact and if so, what should be done to make the process fair to all.

This did not mean the Air Force would be required to re-run the competition, said the aide, who asked not to be identified by name before the committee put out a statement.

(Reporting by Jim Wolf; Editing by Braden Reddall and Louise Heavens)