Pentagon brass meet on tanker, no statement Tuesday

WASHINGTON (Reuters) - Top Pentagon and Air Force leaders met on Tuesday to finalize plans for a $35 billion aerial-refueling competition, and officials plan a statement later this week, according to sources told about the plans.

Pentagon spokesman Chris Isleib denied earlier reports that a statement would be issued on Tuesday.

Tuesday's meeting included Deputy Defense Secretary Gordon England, chief Pentagon arms buyer John Young and Acting Air Force Secretary Michael Donley, said one source, who asked not to be named. Defense Secretary Robert Gates was also briefed.

Boeing Co (BA.N), whose 27,000 machinists have been on strike since Saturday, is vying against a team made up of Northrop Grumman Co (NOC.N) and Airbus parent EADS (EAD.PA) to build an initial 179 refueling tankers for the U.S. Air Force.

Boeing Chief Executive Jim McNerney and Jim Albaugh, who heads Boeing's defense business, asked England at a Pentagon meeting on August 21 to give them six months to craft a competitive proposal in the revamped competition.

England then also met with Northrop Chief Executive Ron Sugar in the interest of fairness, said two sources, who asked not to be named. At the meeting, England emphasized the department's desire to resolve the competition as expeditiously as possible, one of the sources added.

The Pentagon had planned to issue the final request for proposals for the competition by mid-August, with the aim of awarding a contract around the end of December.

The department had already signaled that it would agree to give the companies 60 days -- not 45 -- to respond to the final bid specifications, according to sources close to the process.

It was not immediately clear whether the Pentagon officials had agreed to any further extension, a move that could make it difficult to award a contract before President Bush leaves office on January 20.

One source said Boeing is unlikely to get the full six months it seeks, but the companies could get four months -- two months longer than expected -- to work on new bids. That would make bids due in mid-January and a contract award unlikely before mid-March at the earliest.

Another option under consideration would be to cancel the Air Force's contract with Northrop -- which is subject to a stop-work order at the moment -- and defer any decisions to the next administration, said a second source, who asked not to be named.

In February, Northrop and EADS beat Boeing for the deal in a huge coup for EADS as it seeks to move into the lucrative U.S. military market, and a move that would pave the way for Airbus to begin producing commercial airliners in the United States.

The Defense Department decided to rerun the competition after the Government Accountability Office, ruling on a protest filed by Boeing, found the Air Force had made "significant errors" in evaluating rival bids.

The Air Force took 10 months to evaluate the initial bids, but the revamped competition involves changes in just eight areas faulted by the GAO, a less complex task.

Based on its analysis of draft revisions to the tender, Boeing has argued it needs six months to meet what it says is the Pentagon's request for a bigger plane than the 767-200ER model it initially proposed.

Northrop won the earlier contest with an Airbus A330 derivative that can carry more fuel than the 767.