September 24, 2009 / 2:09 PM / 9 years ago

CORRECTED: Pentagon says new tanker rules "crystal clear"

Corrects to “should” in first paragraph from “would”, to read... dispute should have been accounted for

By Jim Wolf and Andrea Shalal-Esa

WASHINGTON (Reuters) - The Pentagon unveiled on Thursday what it called “crystal clear” rules in a $35-billion contest to build new refueling aircraft after two botched attempts, although some lawmakers said a transatlantic trade dispute should have been accounted for.

Boeing Co, the second largest U.S. defense contractor, is vying for the contract against a team made up of Northrop Grumman and Europe’s EADS, parent of Airbus.

The contract would be for an initial 179 tanker aircraft, the first of three acquisition stages valued at $100 billion.

The Pentagon said it would release the new rules to companies on Friday and give them 60 days to comment. It hopes to award a contract for the new planes in the middle of next year, with the first planes to be delivered in 2015.

This is the Pentagon’s third attempt in eight years to start replacing its aging fleet of KC-135 tankers, which are more than 50 years old on average now.

A year ago, it canceled an earlier deal awarded to Northrop and EADS after government auditors upheld a protest by Boeing, saying the Air Force mishandled the bids.

Deputy Defense Secretary William Lynn told lawmakers the Pentagon had learned important lessons after government auditors concluded the last process was “too subjective.”

“This time we will be crystal clear about what we want and what the bidders need to do to win,” Lynn said, according to a briefing document obtained by Reuters.

“We have crafted this approach to favor no one except the warfighter and taxpayer,” he said, saying the competition would focus on price, long-term ownership costs and aircraft performance. “We’ve steered ‘straight down the middle.’”

The new requirements drew praise from some key lawmakers, although others said it was too soon for a detailed assessment.

Senator John McCain said the rules appeared viable but added, “the devil is in the details.” McCain led the opposition to an earlier $23.5 billion sole-source tanker deal with Boeing that collapsed amid an ethics scandal in 2004.

WTO DISPUTE

Boeing supporters generally welcomed the Pentagon’s new approach, but several criticized the Pentagon’s decision to exempt a Boeing-Airbus fight at the World Trade Organization over alleged illegal aircraft subsidies.

Lynn told Reuters the dispute should not factor into the bidding because appeals in the case might not be settled for years. He said the draft rules included a provision that would ban either company from passing on the cost of any WTO fines.

Lynn, Pentagon acquisition chief Ashton Carter and Air Force Secretary Michael Donley told lawmakers on Thursday that they were determined to ensure the competition was fair.

The fight pits Boeing’s political backers from Washington state and Kansas, where the company would do much of its tanker work, against lawmakers and others from Alabama, where the Northrop-EADS team would do final assembly of its planes.

House Armed Services Committee Chairman Ike Skelton welcomed the new rules, as did Rep. Norm Dicks of Washington state. But Dicks and other Boeing backers criticized the decision to exempt the trade issue from the bidding criteria.

Rep. Todd Tiahrt of Kansas said this week that he could pursue legislation to add the trade issue.

PENTAGON URGED TO SPEED PURCHASES

John Murtha, powerful chairman of the defense subcommittee of the House Appropriations Committee, called for the Pentagon to buy 36 airplanes per year, instead of the 15 planned under the new rules, saying it would save billions in maintenance and repair costs and get new tankers into the fleet sooner.

He still believed that it would be easier to build tankers with two suppliers, but was no longer insisting that the Pentagon buy planes from both bidders, said his spokesman.

The new rules call for fixed-price bids from the companies and require them to meet just 373 mandatory requirements, instead of the more than 800 requirements included last time.

Companies could enhance their proposals by meeting 93 additional non-mandatory requirements, and their score in that category could decide the competition, if the evaluated bids were within one percent of each on price.

The rules also include a complex model for judging the performance of the aircraft under various wartime scenarios, and give greater weight to fuel burn and military construction costs in evaluating the longer-term cost of ownership.

The first U.S. attempt to award a tanker contract collapsed in 2004 amid a conflict-of-interest scandal that sent a former top Air Force weapons buyer and Boeing’s former chief financial officer to prison.

Boeing shares were down 1.2 percent in afternoon trading to $51.77, while Northrop shares were off 0.9 percent to $51.11.

(Additional reporting by Adam Entous)

Reporting by Jim Wolf and Andrea Shalal-Esa; Editing by Lisa Von Ahn, Dave Zimmerman, Tim Dobbyn

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