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$35 Billion USAF Tanker Contract Back Up for Grabs

U.S. Defense Secretary Robert Gates on Wednesday reopened a bitter $35 billion aerial tanker contest after the selection process that picked Northrop Grumman and EADS over Boeing was found to be flawed.

Boeing

The contest will now be overseen by John Young, the Pentagon's chief weapons buyer, not the Air Force, and Gates hoped a decision could be reached by December since the current process had already "gone on far too long."

"The GAO sustained eight of the slightly more than 100 issues protested with this contract. We will address all of these in the new solicitation, and we will request revised proposals from industry," Gates told reporters.

The Air Force contract award in February for 179 new aerial refueling tankers prompted an immediate protest by Boeing and vows of congressional intervention by its backers in Congress.

Last month, the Government Accountability Office said it found "significant errors" in the Air Force selection process, and urged the service to redo the competition.

The Air Force had been given until mid-August to announce its plans, but Gates rushed forward with a decision to reopen the competition—given the advanced age of the current KC-135 tanker fleet—which is used to refuel warplanes in mid-air.

Boeing had been expected to win in February with its tanker based on the 767 airliner but the Air Force opted for the larger Northrop entry based on the A330 airliner that is built by EADS's Airbus unit, the European archrival to Boeing.

Young said he hoped to issue a new draft request for proposals in late July or early August that would address the issues raised by the GAO and give bidders time to submit fresh bids, possibly with even lower cost estimates.

He said the goal was to award a new contract by December, but he would not allow a hurried reexamination of the contract.

"We will not expedite steps in the process. We have to do this methodically, fairly and without bias in any way," he said.

Young is a strong proponent of building prototypes before picking winners in defense acquisitions, but in this case, he said the Pentagon would still pick a single winning bidder.

Having both companies build tankers for the U.S. military would result in higher development, testing, training and maintenance costs, Young said, noting that competition between the two teams had already helped drive down prices.

"We do not have the resources" to develop and maintain two separate tanker fleets," Young, the undersecretary of defense for acquisition, told reporters.

Young said federal procurement law barred any evaluation of the rival bids' potential impact on preserving the U.S. defense-industrial base, an issue of concern to Boeing backers.

Nor were there plans to consider a U.S.-European aircraft subsidy dispute now before the World Trade Organization.

In addition to putting Young in charge, the Pentagon will also appoint a new source selection advisory committee to do the detailed analysis of the competing bids.

Defense analyst Loren Thompson of the Lexington Institute said continuing congressional concerns, a possible World Trade Organization ruling in July on the Boeing-Airbus subsidy dispute, and the sheer complexity of the tanker competition made it unlikely a decision could be reached by December.

Jim McAleese, a Virginia-based defense consultant, praised Young's willingness to assume responsibility for the controversial program, and predicted he would do everything in his power to finish work on it before the end of the year.

Young acknowledged that he had backed the Air Force's handling of the tanker competition before the GAO decision was released, but said his office's independent review had begun only in December, shortly before the contract award. Another independent review would be done this time around, he said.

George Behan, spokesman for Washington Democratic Rep. Norm Dicks, a strong Boeing supporter, said lawmakers still had many questions about how the process would unfold. "The question is, are they willing to concede that we may get to a different outcome and then accept that outcome," he said.

Sen. Maria Cantwell, another Washington state Democrat, told Reuters: "What we want to make sure is that the rebid is not just a redo with a rubber stamp 'approved' on it. We want to make sure that ... we don't have another misstep."

The 15-year contract is the first of three acquisition phases. The Air Force has said replacing its KC-135 tankers, built by Boeing but now averaging over 47 years of age, as its number-one purchase priority.

The GAO, a nonpartisan congressional watchdog, said in upholding Boeing's protest last month that the company would have had a "substantial chance" of being selected if not for flaws in the evaluation process.

Amid a broadly lower stock market Boeing shares were up 0.2 percent to $66.05 in afternoon trading, while Northrop shares were off 0.8 percent at $65.65.

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