Boeing says Air Force tanker award flawed

By Bill Rigby

NEW YORK (Reuters) - Boeing Co (BA.N) formally protested the U.S. Air Force's rejection of its proposal for a $35 billion aerial tanker program, saying its bid was evaluated unfairly and the competition was seriously flawed.

The U.S. defense contractor, which lost to rival Northrop Grumman Corp (NOC.N) and Europe's EADS (EAD.PA), filed its protest with the U.S. Government Accountability Office (GAO) on Tuesday, in hopes of canceling the decision.

"This competition was seriously flawed and resulted in the selection of the wrong airplane for the warfighter," said Mark McGraw, manager of Boeing's tanker programs.

The company charges the Air Force changed its requirements and the way it evaluated the competing bids, after it sent out requests to bid on the contract, in a way that favored the larger Northrop/EADS aircraft.

Boeing was never even told of certain changes in requirements, McGraw said on a conference call. He added that the Air Force never indicated that Boeing's 767 airframe, which is smaller than the Airbus A330 airframe proposed by Northrop, was unsuitable for the competition.

"It is clear that the original mission for these tankers -- that is, a medium-sized tanker where cargo and passenger transport was a secondary consideration -- became lost in the process, and the Air Force ended up with an oversized tanker," said McGraw.

Despite those misunderstandings, Boeing said it scored identical marks to Northrop on the five main criteria of the competition, contradicting Air Force officials who have said that the Northrop bid was superior on all but one of the criteria.

Losing the work build 179 tankers, worth $35 billion over 15 years, was a blow to Boeing, which built the current U.S. fleet of KC-135 tankers, now almost 50 years old on average.

LONG SHOT

Challenges by losing bidders on Pentagon contracts have become the norm in the past few years, as big defense jobs become fewer and further between, but industry analysts doubt that Boeing's attempt will yield results.

"It's a long shot," said Paul Nisbet at aerospace specialists JSA Research. "They (Boeing) more or less have to prove Department of Defense procedures were not followed or U.S. law was broken somewhere. These are not easy things to prove."

Full details of the Air Force's reasons behind its February 29 decision to pick Northrop/EADS have not been made public.

The Pentagon's top arms buyer, John Young, told reporters on Tuesday there were "substantial capability and cost differences" between the Boeing and Northrop/EADS proposals.

"There's no question the Air Force can provide an abundance of facts and analysis for the decision they made," Young said after testifying to a House Armed Services subcommittee.

Oppenheimer & Co analyst Myles Walton said the protest should come as no surprise given the significance of the program to Boeing's long-term defense franchise.

But "given the initial judgment by the Air Force combined with the Northrop team's better score on four out of five criteria, we anticipate Boeing's protest will be denied," Walton said in a research note.

The GAO, Congress's public funding watchdog, has 100 days to decide whether to deny or sustain Boeing's protest.

PROTESTS SOMETIMES SUCCEED

Boeing has been on the losing end of some recent successful defense contract protests.

Last year the GAO upheld a protest filed by Lockheed Martin Corp (LMT.N) and Sikorsky Aircraft, a unit of United Technologies Corp (UTX.N), against the award of a $15 billion combat helicopter contract to Boeing the year before.

And last month, the U.S. Air Force agreed to a GAO recommendation that it reevaluate the cost and risk of a $1.2 billion airplane maintenance contract awarded to Boeing.

"The probability of a favorable outcome for the protester has risen ten percentage points in the past four years," said Oppenheimer's Walton. "However, in absolute terms, positive outcomes for the filer are still below 30 percent."

Boeing had a previous deal to lease tankers to the U.S. Air Force that was scrapped in 2004 after a procurement scandal, but was still hot favorite to win against Northrop/EADS' proposal, which was viewed as politically risky.

Since the surprise award, Boeing's supporters in Congress have raised questions about the wisdom of using Airbus planes as a basis for the tanker, citing national security concerns and fears of losing aerospace jobs to Europe.

Republican Rep. Todd Tiahrt of Kansas, where Boeing has a major plant, said on Tuesday he is drafting a bill to revamp Air Force procurement policy and block funding for the Northrop/EADS contract.

But at a House Appropriations subcommittee hearing on Tuesday, Air Force Secretary Michael Wynne defended the award and denied charges the service steered Boeing away from offering a larger plane in the contest.

"These are competent suppliers. They can read a proposal," Wynne told the hearing.

(Additional reporting by David Morgan, John Crawley and Kevin Drawbaugh in Washington; Editing by Tim Dobbyn)