Pentagon examining Boeing-Air Force C-17 ties

WASHINGTON (Reuters) - The Pentagon's internal watchdog is examining if the Air Force and Boeing Co BA.N had inappropriate contacts about a multi-billion dollar push to buy more C-17 transport planes, a source familiar with the matter told Reuters on Thursday.

The review follows a request by Arizona Sen. John McCain, a Republican presidential contender and the man whose dogged investigation helped kill in 2004 a $23.5 billion Boeing-Air Force deal for 100 Boeing 767 aerial refueling tankers.

That tanker investigation revealed unusually close ties between the Air Force and Boeing, and ultimately led to prison terms for a former top Air Force weapons buyer and Boeing’s chief financial officer for conflict of interest violations.

The Department of Defense Inspector General’s office decided to examine the C-17 issue after an initial probe, said the source, who asked not to be identified.

The IG’s office did not immediately return calls seeking comment. Boeing says there has been no inappropriate contact between it and the Air Force.

“We’re confident that when the IG looks into this they’ll reach the same conclusion,” said Boeing spokesman Dan Beck.

The inspector general’s review comes after the Government Accountability Office twice this year upheld protests about a $15 billion deal with Boeing for combat search and rescue helicopters, compelling the Air Force to reopen that competition. The contract award is expected this spring.

The Air Force launched a new tanker competition after the procurement scandal, and expects to award a contract to either Boeing or its rival Northrop Grumman Corp NOC.N in the first quarter.

McCain wrote to Defense Secretary Robert Gates about the C-17 issue in July, followed in September by a request for a formal investigation, after getting what he called a “notably unhelpful response” from Air Force Secretary Michael Wynne.

At issue is whether the Air Force wrongfully induced or encouraged Boeing to spend its own money to maintain suppliers for C-17 production, even though there are no military requirements on record for extra planes. In fact, the military has already set aside $500 million for the closing of the C-17 production line, now scheduled for 2009.

“I am troubled by the Air Force’s apparent disregard for proper acquisition policy, practice and procedure, and seeming eagerness to further contractors’ interests,” McCain wrote in his September request, a copy of which was obtained by Reuters.

Five senior Air Force officials briefed Congress this summer about a plan to buy 30 more C-17s and cancel upgrades for 30 C-5 transport planes about the time that House and Senate negotiators were meeting on the fiscal 2008 budget.

The C-17 purchases were not included in the 2008 Pentagon budget request, but Boeing spent hundreds of millions of dollars to keep suppliers working in the hope that Congress would add money for more C-17s, just as it added 10 C-17s in fiscal 2007.

In fact, House and Senate conference negotiators recently completed work on a bill that adds eight C-17s to the fiscal 2008 budget. McCain and several other senators refused to sign the conference report, but it passed without their support.

McCain said he was particularly concerned about an Air Force briefing slide that specifically mentioned Boeing’s drive to sell more C-17s. The slide called for the Air Force to give some “firm indication” to Congress by June 1 that it favored multiyear procurement of C-17s.

He said he was also troubled by a statement by Ken Miller, special assistant to Wynne, that Boeing had asked the Air Force to work the C-17 procurement into its program objective memorandum (POM) for fiscal year 2008 or 2009.

Those documents, McCain said, were meant to be internal service estimates of their forces and weapons systems within fiscal constraints set by the defense secretary. As key planning documents, they were not supposed to “be influenced by, or otherwise reflect discussions with, industry.”

Wynne told Reuters last week the U.S. military would need more C-17 transport planes in coming years because some Lockheed Martin Corp LMT.N C-5s were too old to be upgraded.

Pentagon arms chief John Young is currently reviewing a Lockheed program to upgrade engines on all 108 aging C-5 cargo airplanes after the cost soared to $17.5 billion from an initial estimate of $11.1 billion. That increase triggered a congressionally mandated review under the Nunn-McCurdy law.

Given the C-5’s advanced age, Air Force officials say it makes more sense to retire the oldest and most worn out of these planes and use the upgrade funds to buy more C-17s.

The Air Force already has 170 C-17 transport planes, 20 more are on order, and Congress is likely to add 10 more in fiscal year 2008. But the total number could swell to around 250, given problems with the C-5 upgrades, analysts say.

Boeing shares have fallen about 18 percent from their all-time high of $107.80 on July 25, dragged down by concern over delays in the manufacture of its new 787 airliner. In late Thursday afternoon trading they were up 2 percent for the day to $88.66.

Reporting by Andrea Shalal-Esa; Editing by Tim Dobbyn