U.S. Air Force made late change to tanker criteria

WASHINGTON (Reuters) - Weeks before making a final decision, the U.S. Air Force changed criteria used to assess rival bids from Boeing Co (BA.N) and Northrop Grumman Corp (NOC.N) for new refueling tankers, resulting in a lower score for Northrop, people familiar with the changes said on Thursday.

Three sources, who asked not to be named, said it was unclear how the lower score affected the Air Force's overall assessment of the Northrop bid. It also was not immediately clear if Boeing's score changed as a result.

The losing side is widely expected to file a formal protest, and the recent change in evaluation criteria could well form the basis of a protest, defense analysts said.

Loren Thompson of the Lexington Institute said the "last minute" change in the evaluation criteria could be significant, since both proposals met nine key requirements for the new tanker, including air refueling capability, range, and ability to carry cargo and passengers.

"Whenever the outcome of a competition is close, the slightest doubts about the way in which the process was conducted can provide the basis for a successful protest by the loser," Thompson said.

Los Angeles-based Northrop and its European subcontractor, Airbus parent EADS (EAD.PA), are vying against Chicago-based Boeing to build 179 new refueling aircraft, a deal valued at $30 billion to $40 billion over the next 10 to 15 years.

Most analysts expect Boeing to win the contract, but Northrop insists it still has a fighting chance.

The Air Force picked a winner last week, but has not yet announced its decision. It is waiting for Pentagon acquisition chief John Young to sign off on the acquisition strategy for the tanker program. Officials now say an announcement is likely on Friday, although some caution it could slip to next week.

Northrop, EADS and Boeing all declined comment on the scoring issue, which the sources said involved a complicated model used by the Air Force to assess various factors including tanker fuel capacity and fuel consumption.

The Air Force also declined comment. "The KC-X contract is still going through the appropriate acquisition process. To protect the integrity of this process, we cannot comment," said spokeswoman Lt. Col. Jennifer Cassidy.

Northrop spokesman Randy Belote said his company was abiding by strict rules on the competition.

"The Air Force has directed Northrop Grumman not to divulge information related to the source selection process and we take that directive very seriously," he said.

Two sources briefed about the discussions told Reuters earlier this week that EADS had recently raised "substantial concerns" about changes in how the KC-30 offer was being evaluated, but they gave no further details.

The changes caught the bidders by surprise, given that they submitted thousands of pages of detailed answers to earlier Air Force questions over the past year, the sources said.

Initial proposals from the bidders averaged 15,000 pages, and final proposal updates averaged around 2,500 pages, according to an Air Force document obtained by Reuters. The service's detailed request for proposals was 1,095 pages long.

The Air Force used five evaluation factors to judge the proposals: mission capability, proposal risk, past performance, price and a complex analytical model with over 10,000 inputs called the Integrated Fleet Air Refueling Assessment (IFARA)

It has said the first three factors would be counted equally. Price and the refueling assessment would also be weighted equally, but with less importance than the first three.

The changes in question involved the refueling assessment, a computer model based on a war-time scenario that the Air Force has never before used in a high-stakes competition.

"Tanker features such as pavement loading, parking footprint, tanker fuel capacity, takeoff performance, and fuel consumption will be used against scenario constraints such as runway strength, ramp strength, ramp parking available, aerial refueling track location, takeoff conditions, and receiver mix," it said last year when asked to explain the model.

An earlier $23.5 billion Air Force plan to lease and buy Boeing tankers collapsed amid a procurement scandal that sent two former Boeing officials to prison on conflict-of-interest charges. This time the Air Force has sought to be as transparent as possible about this competition.

Officials have said a protest in this case could delay fielding of the new tankers by 18 to 24 months. Defense officials and industry sources nevertheless expect the losing side to protest the award, given its size and a spate of recent decisions faulting the Air Force on other contract awards.

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