WASHINGTON Northrop Grumman and Airbus parent EADS won a $35 billion U.S. Air Force refueling plane deal on Friday in a surprise blow to Boeing, until now the Pentagon's sole supplier of aerial tankers.
Northrop Grumman Corp (NOC.N) and EADS EAD.PA, "clearly provided the best value to the government," Sue Payton, the Air Force's top acquisition official, told reporters at a briefing.
The Air Force plans to buy 179 tanker aircraft over the next 15 years to begin replacing its KC-135 tankers, on average 47 years old, that were built by Boeing Co (BA.N).
The decision, which could still be challenged by Boeing or its backers in Congress, caps for now a saga that included a canceled Boeing order and the Pentagon's biggest procurement scandal in decades -- with jail terms for an ex-Air Force weapons buyer and Boeing's former chief financial officer.
Shares of Northrop, the Pentagon's No. 3 supplier after Lockheed Martin Corp (LMT.N) and Boeing, rose as much as 6.5 percent in extended trading on Friday. Shares of Boeing, which was widely expected to win the job, fell as much as 5 percent before paring their losses to be down 3 percent.
"A major reversal of fortunes, and a truly surprising outcome," said Richard Aboulafia, of the TEAL Group aerospace consultancy, about Boeing's loss.
Boeing said it was disappointed with the outcome and would weigh its options after a detailed Air Force briefing on the reasons for the decision.
"We believe that we offered the Air Force the best value and lowest risk tanker for its mission," Boeing said.
The initial contract for the newly named KC-45 tanker, a modified Airbus A330 airliner, covers four test aircraft for $1.5 billion. With plans to buy 175 more planes, it would be worth $35 billion overall, the Air Force said in a statement.
Gen. Arthur J. Lichte, commander of the Air Force's Air Mobility Command, said the Northrop plane offered many advantages over Boeing's proposed 767-based tanker.
"More passengers, more cargo, more fuel to offload, more patients that we can carry, more availability, more flexibility and more dependability," he said, listing Northrop's edge.
The program marks the first stage of a multi-decade plan to replace more than 500 KC-135 tankers used to extend the range of fighter jets and other warplanes. The United States hopes to start operating the new tankers in 2013.
Including follow-on orders and in-service maintenance, it could be the second costliest military aircraft purchase in coming decades, topped only by Lockheed Martin's F-35 Joint Strike Fighter.
Future phases of the tanker renewal plan could bring the costs to more than $100 billion, although the winner of this competition is not assured of capturing the next contracts.
Parts for the Airbus A330 commercial airliner are built mainly in France, Germany, Britain and Spain, then transported to Toulouse in southwest France for assembly. But the new U.S. tanker will be assembled in Mobile, Alabama, and employ 25,000 workers at 230 U.S. companies, Northrop said in a statement.
Both tanker proposals had strong backers in Congress divided along the lines of where jobs would be created.
Key members of Alabama's delegation, for instance, wrote that any attempt by a contractor -- by implication, Boeing -- "to wrap itself in the American flag during a competition today is disingenuous and condescending."
Payton said the Air Force had made its decision without regard to the number of American jobs at stake.
In one poll of industry analysts, all 10 respondents had predicted a Boeing win.
"I am extremely surprised," said Loren Thompson of the Lexington Institute, a prominent defense analyst. "To get this outcome, Northrop Grumman had to convince the Air Force to consider the aerial refueling mission in a new way. Their analysis must have been compelling."
Northrop Grumman's win will be "very positive" for the company's growth plan, Chief Executive Ron Sugar told Reuters.
EADS Chief Executive Louis Gallois said the contract had been won without low-balling the price. "No we didn't smash the price," he told Reuters.
The U.S. Air Force calls the new tanker fleet its top acquisition priority.
In 2004, the U.S. Congress killed a $23.5 billion Air Force plan to lease and then buy 100 modified Boeing 767 tankers amid a Pentagon procurement scandal brought to light chiefly by Sen. John McCain of Arizona, the all-but certain Republican nominee for U.S. president.
The lease plan grew out of congressional concern for Boeing, the biggest U.S. exporter, after a slump in airliner sales sparked by the September 11, 2001 attacks.
Darleen Druyun, the Air Force's one-time No. 2 arms buyer, went to jail in 2005 for violating federal conflict of interest laws. She negotiated a job with Boeing while overseeing Air Force negotiations on the doomed lease deal.
The scandal also sent to jail Michael Sears, the Boeing chief financial officer who recruited Druyun.
(Additional reporting by David Morgan, Kevin Drawbaugh, Bill Rigby, Tim Hepher; Editing by Tim Dobbyn)