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Summit News

Boeing warns on "best value" tanker

WASHINGTON (Reuters) - Boeing Co BA.N said it would bid again under any rules to sell the U.S. Air Force refueling aircraft, but criticized a proposed approach to the multibillion-dollar competition backed by rival Northrop Grumman Corp NOC.N as courting problems.

James Albaugh, president and CEO of Boeing Integrated Defense Systems, discusses weapons systems developments, the controversial US Air Force tanker deal and military procurement reform during the Reuters Aerospace and Defense Summit, in Washington, December 17, 2008. REUTERS/Mike Theiler

The Air Force could “take a very pragmatic view,” set few requirements and pick the lowest-cost solution to meet those needs, said Jim Albaugh, chief executive of Boeing’s Integrated Defense Systems unit, speaking at the Reuters Aerospace and Defense Summit in Washington on Wednesday.

“The other approach is giving them the best-value tanker that they can get,” Albaugh said, adding this probably meant setting more requirements, then balancing more trade-offs in a complex selection process.

“But I think that is more susceptible to protest,” he said, referring to a formal challenge of the type that Boeing used, leading the Bush administration to order a new contest. The decision was then punted to President-elect Barack Obama.

Northrop Grumman Chief Executive Ron Sugar, at the Reuters summit on Monday, urged a “best-value competition ... as opposed to just simply a low-ball bid.” He said Northrop planned to bid and expected to win again.

Northrop, partnered with Europe's EADS EAD.PA, was picked by the Air Force in February over Boeing for a potential $35 billion deal to start building a fleet of 179 tankers.

The deal was canceled after a congressional umpire upheld a Boeing protest that it had been unfairly treated.

The Government Accountability Office, a nonpartisan arm of Congress, faulted the Air Force for miscalculating the full cost of operating the two rivals’ jets.

If not for the errors, GAO said, “we believe that Boeing would have had a substantial chance of being selected” to start replacing the existing KC-135 tankers, which are nearly 50 years old, on average.

Albaugh told Reuters: “If the focus is going to be on most probable life-cycle costs or acquisition costs or some combination of the two, you know we can respond to that.”

“We will play by any set of rules that they put in place,” he added.

The Pentagon’s chief arms buyer, John Young, told reporters last month that he and newly reappointed Defense Secretary Robert Gates would advise President-elect Barack Obama’s team to accept the best-priced offer after the bidders had shown an ability to meet a stripped-down set of requirements.

The complexity of evaluating some 800 requirements had been a “mine field” in the last attempt to award a contract, Young said on November 20.

In the last face-off, Young said Northrop beat Boeing’s price for development and production of the first 68 aircraft by nearly $3 billion.

James McAleese, a defense industry consultant, said Boeing apparently was planning to low-ball its next bid to head off Europe’s EADS’s drive to penetrate the lucrative Pentagon market in a big way.

"I don't think they will be caught sleeping a second time," he told the Reuters summit, referring to Boeing, the Pentagon's No. 2 contractor by sales after Lockheed Martin Corp LMT.N.

“EADS was giving the air frames away to build a strategic footprint in the United States,” he said, referring to planned facilities in Alabama for final assembly and a way of turning foreign exchange fluctuations to the company’s advantage.

Randy Belote, a Northrop Grumman spokesman, said “basing an acquisition decision for a major weapon system on low-cost doesn’t necessarily provide for the best capability and can actually cost much more over a 40-year program life.”

Albaugh, in his remarks to Reuters, said Boeing officials had joined an investigation led by Japan about an emergency landing of a Boeing 767 refueling tanker last week after it was unable to retract its refueling boom during a test flight.

A small fire occurred around the boom, which hit the surface of the runway after the plane stopped, and all crew members were evacuated safely, according to Japanese news reports.

Boeing delivered the first two of four tankers ordered by Japan in February and March, years later than initially planned, a fact that lowered its past-performance score during the U.S. tanker competition.

(For summit blog: summitnotebook.reuters.com/)

Additional reporting by Andrea Shalal-Esa; Editing by Tim Dobbyn

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