February 29, 2008 / 12:36 AM / 12 years ago

Northrop-EADS beats Boeing to build U.S. tanker

WASHINGTON (Reuters) - The U.S. Air Force said on Friday it had picked a transatlantic team led by Northrop Grumman, instead of Boeing, to start building a new aerial refueling fleet in a surprise choice worth about $35 billion.

An Airbus A330 Multi-Role Tanker Transport plane is seen in a handout image. REUTERS/Airbus/Handout

Northrop Grumman Corp (NOC.N) and its European partner, Airbus parent EADS EAD.PA, “clearly provided the best value to the government,” Sue Payton, the Air Force’s chief weapons buyer, told reporters at a briefing.

The contract is to supply up to 179 tanker aircraft in a deal valued at about $35 billion over the next 15 years, the Air Force said in a statement. The aircraft will replace Eisenhower-era KC-135 tankers built by Boeing Co (BA.N).

Northrop shares rose as much as 6 percent in extended trading from their $78.61 close on the New York Stock Exchange, while Boeing slipped 3 percent to $80 per share.

The initial contract for the newly named KC-45 tanker is for four test aircraft for $1.5 billion.

The program marks the first stage of a multi-decade plan to replace more than 500 KC-135 tankers used to extend the range of fighter jets and other warplanes.

With follow-on orders and in-service maintenance, it could be the second costliest military purchase over decades, topped only by Lockheed Martin Corp’s (LMT.N) F-35 Joint Strike Fighter.

Future phases of the purchase could bring the cost of the entire fleet to more than $100 billion, although the winner of this competition is not assured of winning future ones, Air Force officials said.

Boeing’s KC-767 had been widely predicted to win the initial contract, partly because it had a greater amount of U.S. domestic production compared with the Northrop-EADS aircraft, based on the Airbus A330 airliner.

“I am extremely surprised,” said Loren Thompson of the Lexington Institute, a prominent defense analyst. “To get this outcome, Northrop Grumman had to convince the Air Force to consider the aerial refueling mission in a new way. Their analysis must have been compelling.”

The U.S. Air Force calls the new tanker fleet its top acquisition priority.

In 2004, the U.S. Congress killed an earlier $23.5 billion Air Force plan to lease and then buy 100 modified Boeing 767 tankers amid a Pentagon procurement scandal brought to light chiefly by Sen. John McCain of Arizona, the all-but certain Republican nominee for U.S. president.

Reporting by Jim Wolf, editing by Tim Dobbyn

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