U.S. auditors urged the Air Force Wednesday to rerun its marathon, $35 billion competition for refueling aircraft, upholding a protest by losing bidder Boeing.
The Government Accountability Office found the Air Force made "a number of significant errors that could have affected the outcome of what was a close competition between" Boeing and Northrop Grumman.
"We therefore sustained Boeing's protest," Michael Golden, head of the a GAO bid protest unit, said in a statement.
Northrop was teamed with EADS, parent of rival passenger-jet maker Airbus. EADS had no immediate comment.
Boeing shares briefly spiked up 2 percent on the news, but pared those gains to less than 1 percent on the New York Stock Exchange. Northrop shares were down 1.4 percent in mid-afternoon trade.
"The Air Force is aware of the Government Accountability Office's report and will review the findings and recommendations. We will release a statement this afternoon," said Air Force spokeswoman Maj. Dayan Araujo.
The Air Force "conducted misleading and unequal discussions with Boeing" by telling the company it had fully satisfied a key performance criteria, then later determining that Boeing had only partially met the objective, the GAO said.
The GAO's recommendation to the Air Force punctuated a fight over what is likely to be one of the richest contracts in Pentagon history.
Lawmakers from states where Boeing has manufacturing plants were delighted with the GAO ruling.
"I am not surprised that the GAO identified significant errors in the selection process. The Air Force bought a tanker that doesn't meet their needs and has been waging a PR campaign ever since," Sen. Patty Murray, Democrat of Washington, said in a statement. On Feb. 29, the Air Force picked the team of Northrop Grumman Corp and EADS to build 179 midair refuelers over the next 15 years to replace its aging KC-135 tankers.
Richard Aboulafia, an aerospace analyst at the Fairfax, Virginia-based Teal Group consultancy, said the GAO decision provided ammunition to Boeing's political backers, who are seeking to overturn the award.
Given a change in Air Force leadership earlier this month and the GAO findings, "Boeing has a respectable chance moving forward," Aboulafia said in an email. Boeing has proposed a tanker based on its 767 aircraft; Northrop offered a modified Airbus A330.
Douglas Harned, an analyst at Sanford C. Bernstein, was surprised by the GAO's ruling.
"It is a big positive for Boeing. It remains to be seen how the competition ultimately plays out," he said in a telephone interview.
Boeing hopes to stop EADS from establishing a U.S. production facility that would make Airbus in effect a second U.S.-based producer of large aircraft.
Los Angeles-based Northrop already has invited the media to a planned June 28 groundbreaking ceremony at a Mobile, Alabama, site where it would modify Airbus A330 jets into the KC-45 tanker, if its contract stands.
An earlier Air Force plan to lease and then buy 100 Boeing 767s as tankers collapsed four years ago after Sen. John McCain, now the presumptive Republican presidential nominee, tarred it as a taxpayer "ripoff."