ANALYSIS-Price least important tanker criteria-US Air Force

WASHINGTON, Oct 3 (Reuters) - The U.S. Air Force views price as the least important of five criteria being used to evaluate bids in a $40 billion aerial tanker competition -- and that could be bad news for Northrop Grumman Corp NOC.N.

An Air Force chart shared with Northrop and its competitor Boeing Co BA.N said mission capability, proposal risk, past performance and an integrated fleet assessment "when combined, are significantly more important than Factor 4" -- the price.

That statement “makes it pretty clear that this about the plane and not about the price tag,” said Richard Aboulafia, a defense analyst with the Virginia-based Teal Group.

“That could be bad news because that was easily their

(Northrop’s) strongest selling point,” he added.

Northrop and Boeing have not released details about their pricing. But analysts expect Northrop and its partner, Europe's EADS EAD.PA, to discount the price of the larger Airbus A330-based tanker they are offering against Boeing's smaller 767 variant, as Airbus has done in the airliner market.

The Air Force chart, given to the bidders in July but recently obtained by Reuters, outlines the evaluation criteria for selecting the winning tanker.

Mission capability, proposal risk and past performance would be counted equally in the assessment, the chart said.

Price would be weighted equally with an integrated fleet air refueling assessment (IFARA) that compares the ability to meet peak demand across a range of tanker missions. But those last two factors would get less weight than the first three.

All other things being equal, price could still play a key role, Aboulafia said, but Boeing still appeared to have the upper hand in the contest, given its strong backing in the Congress and the Air Force’s apparent lack of interest in a multi-mission tanker that can also carry cargo and passengers.


Asked to explain the integrated fleet air refueling assessment, the Air Force said a variety of factors would be evaluated in a complex model.

“Tanker features such as pavement loading, parking footprint, tanker fuel capacity, takeoff performance, and fuel consumption will be used against scenario constraints such as runway strength, ramp strength, ramp parking available, aerial refueling track location, takeoff conditions, and receiver mix,” the service said in a statement.

Loren Thompson, analyst with the Lexington Institute, said the two obvious advantages of the Northrop offer -- a lower price and the ability to carry more fuel and cargo -- were underweighted in the Air Force process.

“It’s clear from looking at the way the Air Force plans to evaluate the two planes that Boeing has an edge,” he said, noting that the smaller Boeing plane burned less fuel per flight hour and took up less space on the ground.

Thompson said the Northrop tanker was newer and could carry more fuel or cargo, but added, “The way the Air Force is evaluating the two aircraft, that is unlikely to be decisive.”

But defense consultant Jim McAleese said picking the bigger tanker could allow the Air Force to buy less tankers in the long run, freeing up funds for fighters and other priorities, and that could be attractive given budget constraints.

He said Congress was also paying very close attention, and could raise questions if the Air Force chose a higher-priced Boeing plane that offered less capability.

Northrop argues its KC-30 tanker is a better buy for the Air Force because it carries more fuel, cargo and passengers.

Northrop spokesman Randy Belote said the company viewed its proposal as “very, very competitive,” and said the evaluation factors would show that the plane was a better value.

“No one, other than the tanker contractors and the Air Force, knows what was included in the KC-X proposals, therefore handicapping a winner or loser, based upon a single evaluation factors chart, is pure speculation or spin,” he said.

Northrop has raised questions about delays in Boeing’s delivery of 767 tankers to Italy and Japan, and says it has already built the refueling tanker that would be modified for the U.S. Air Force, factors that could play a role when the Air Force evaluates each company’s past performance.

EADS says the Australian tanker program is on track for a first delivery in late 2009.

Boeing insists it has worked out its issues and will deliver the first Italian and Japanese tankers soon. It says it has learned important lessons for the Air Force programs.

Spokesman Bill Barksdale said Boeing continued to fine-tune its offer. “We’ve done everything we can to make it the best offer we can do.”

Air Force acquisition chief Sue Payton last week told Reuters she was still aiming for a contract award in December.

Air Force officials will meet again with the bidders this month, ahead of a deadline for final offers next month.

(Reporting by Andrea Shalal-Esa, editing by Tim Dobbyn)

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