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Summit News

Air Force: No major tanker term changes

WASHINGTON (Reuters) - The Pentagon is unlikely to overhaul its latest list of requirements for a fleet of refueling aerial tankers, despite objections from one of the bidders, Air Force Secretary Michael Donley said on Monday.

U.S. Air Force Secretary Michael Donley answers questions during the Reuters Aerospace and Defense Summit in Washington, December 14, 2009. REUTERS/Stelios Varias

Northrop Grumman Corp NOC.N and its partner, European aerospace group EADS EAD.PA, this month said the Air Force's terms favored rival Boeing Co BA.N. Northrop said it would not compete in the projected $50 billion competition without significant changes in terms.

Replacing an existing fleet of KC-135 refueling tankers -- now 49 years old on average -- is a top priority for the Air Force, which wants a competitive process, Donley said.

He told the annual Reuters Aerospace and Defense Summit that the service was well aware of the troubled history after two failed attempts to award the tanker contract, and was “very leery” of making any changes that could be seen as benefiting one company’s bid over another.

“We’ve had two misfires on this. We need to get it right this time,” said Donley, who took over as the top civilian at the Air Force in October 2008, just after Defense Secretary Robert Gates canceled the previous contract.

The Northrop-EADS team won a contract to build 179 tankers for the Air Force in February 2008, but Gates scrapped the deal after U.S. auditors upheld a Boeing protest.

Donley stopped short of calling the tanker competition a headache, but said it was clearly one of the biggest challenges for the Air Force.

The Air Force was carefully reviewing over 300 changes suggested by the two teams, he said, but it felt confident the requirements piece would not be significantly revamped.

“The requirements part of the RFP (request for proposals) is very strong,” Donley said. “I wouldn’t anticipate major changes to the RFP in that area.”

FINAL TERMS NEXT MONTH

The Air Force had a final meeting with senior executives from both teams last week and was reviewing all comments and changes requested. The service still planned to issue a final request for proposals in mid-January, he said.

The contest for the lucrative Air Force contract has ignited passions among lawmakers from states such as Alabama and Washington where the rival companies have large presences.

U.S. Senator Richard Shelby, an Alabama Republican, on Monday criticized Senator Patty Murray’s comments in a radio interview boasting of the proficiency of Boeing production lines. Murray is a Democrat from Washington state.

“To publicly assert that Alabama is a risky choice to build the new Air Force tanker is unfounded,” Shelby said in a statement. “To declare that Alabama cannot build anything is simply ignorant.”

Northrop Chief Executive Ron Sugar last week told Reuters he had philosophical concerns about moves by the Pentagon to use fixed-price contracts to develop new weapons programs, which can encounter unanticipated engineering issues.

It is better to use fixed-price contracts to produce weapons once they have finished the development stage, Sugar said.

An inappropriate contract type could create a “lose-lose situation” for industry and the government, Sugar said, speaking generally about such contracts, noting that some past efforts had collapsed without a weapon ever being produced.

Donley said a fixed price contract was appropriate in this case because the two airplanes being offered were commercial planes that required minimal development work.

“The amount of development required is really minimal,” Donley told the summit. “We think a fixed price approach has validity in this environment.”

But he said there were provisions in the contract to make adjustments in future years.

“There are economic pricing adjustments that can be made in the out-years ... which we think should be able to mitigate some of the risk,” he said.

(For summit blog: blogs.reuters.com/summits/)

Reporting by Andrea Shalal-Esa, Tim Hepher; Editing by Andrew Hay

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