UPDATE 2-GAO denies Northrop/Air Force motions on tanker protest

(Adds details from Boeing filing)

WASHINGTON, April 2 (Reuters) - The U.S. Government Accountability Office on Wednesday denied dismissal motions filed by Northrop Grumman Corp NOC.N and the Air Force, after Boeing Co BA.N submitted additional materials in its protest against a $35 billion Northrop aircraft contract.

Northrop announced the GAO decision and said it came after Boeing “streamlined its original protest and eliminated many of the elements that were central to the Air Force and Northrop Grumman motions.”

But Boeing rejected that statement as “spin,” and said it had added material to its initial protest filing, not eliminated any protest grounds.

“It’s powerful stuff that adds even more to what we feel is a very strong, compelling case that the KC-X process was flawed,” said Boeing spokesman Bill Barksdale.

Kenneth Miller, a special assistant to Air Force Secretary Michael Wynne, confirmed the GAO action. Miller said the Air Force would support the GAO as it continued its review of the Boeing protest.

The GAO is expected to rule on the case by June 19.

“This means we’re going to go through the entire process,” Miller told Reuters, adding that the Air Force had filed its motion to try to narrow the scope of the Boeing protest.

Northrop and its European subcontractor EADS EAD.PA, the parent of Boeing's archrival Airbus, won the deal on Feb. 29. That prompted immediate criticism from Boeing backers in Congress who say the deal will transfer valuable jobs to EADS.

Chicago-based Boeing first protested the contract award on March 11. It has filed three supplemental protest motions since then, including a response to the Northrop and Air Force motions that was filed this week.

In their motions to dismiss, which were filed last week, both Northrop and the Air Force had urged GAO to dismiss parts of Boeing’s protest because they should have been raised before the company submitted its final bid in the fierce competition to build 179 aerial refueling aircraft.

The Air Force said GAO’s action had helped it “better understand the protest issues.”

“The Air Force is satisfied with this result and will submit a fully responsive report on or before April 16, 2008,” spokeswoman Lt. Col. Jennifer Cassidy said in a statement.

Boeing said it was encouraged by the GAO decision. “This decision is consistent with our view that full consideration of all appeal grounds is warranted. We view today’s decision by the GAO as a significant development in our appeal of the tanker decision,” Barksdale said in a statement.

Northrop, which is based in Los Angeles, said it remained convinced that “the Air Force process that led to Northrop Grumman’s selection was fair, open and transparent.”

The GAO declined to comment, citing the ongoing litigation.

In its response to the Northrop and Air Force motions, a copy of which was obtained by Reuters, Boeing continued to argue that the Air Force evaluated the competing bids in a way that favored the larger Northrop-Airbus aircraft.

Boeing also said the Air Force itself acknowledged that its language on aerial refueling was ambiguous, providing grounds for the GAO to sustain Boeing’s protest.

It insisted that it was not challenging the very terms of the competition, as the Air Force had argued, but was questioning how the bids were evaluated by the Air Force.

For instance, it argued that the Air Force added various cost factors to Boeing’s proposals, but did not add cost to Northrop’s proposal for inadequate defensive equipment.

However, Air Force documents viewed by Reuters show that the service did indeed add over $2 billion to the overall life cycle cost estimate for the Northrop bid to address the “survivability” issue.

Boeing also said arguing that it should have addressed various issues before final bids were submitted “would have the potential to disrupt unnecessarily every major procurement,” particularly those in which the Air Force provided interim briefings. (Editing by Phil Berlowitz, Gary Hill)