March 9, 2010
Cost Control Becomes New Focus As Northrop Drops Refueling Tanker Bid
By John M. Donnelly, CQ Staff
Lawmakers who have promoted competition for defense work as the best way to protect taxpayers must now decide whether to allow a huge Air Force tanker contract to go to a sole bidder.
Northrop Grumman Corp.’s announcement Monday that it is dropping out of the long-running competition to build the next generation of refueling planes presents Congress and the Pentagon with the challenge of controlling costs when only one company is offering to build planes that could eventually cost more than $100 billion.
Northrop Grumman’s withdrawal appears to concede to Boeing Co. the first of three contracts for KC-X tankers, a job worth about $35 billion. The two later contracts will be offered for competitive bidding, but Boeing would likely have a huge advantage if the Air Force is satisfied with its performance on the first contract.
Congressional appropriators will have to provide money for the tankers, and Rep. Norm Dicks, the new chairman of the Defense Appropriations Subcommittee, said Monday that the government will still have sufficient leverage in contract negotiations. “I think they’ll get a good deal,” he said.
Boeing would build the planes largely in Washington, Dicks’ home state.
Northrop said it decided not to bid on the tanker contract because the government wrote its solicitation in a way that favors Boeing. Wes Bush, the chief executive officer and president, said the company will not protest the bidding process, as Boeing did successfully when the contract was initially awarded to Northrop.
The Pentagon said it was “disappointed” by Northrop’s decision. “We strongly believe that the current competition is structured fairly and that both companies could compete effectively,” Deputy Defense Secretary William J. Lynn said in a statement.
Earlier, Defense Department leaders, anticipating Northrop’s decision, said they planned to move forward with the contract award even if there was only one bidder. Air Force Secretary Michael B. Donley told reporters last week that the government has enough knowledge of Boeing’s tanker prices to be able to demand a fair deal.
Dicks said Congress will support a contract award to Boeing because lawmakers will be glad to get the program moving after about a decade of delay marked by scandal and recrimination.
And Dicks said he hopes to increase the rate at which the Pentagon plans to buy the tankers above the planned 15 per year.
“The new chairman of the Defense Subcommittee is happy,” he concluded.
Not everyone was pleased, least of all the Alabama congressional delegation. Northrop would have built its tankers in that state, in concert with the North American arm of the European Aeronautic Defence and Space Co., which owns the airplane manufacturer Airbus.
“The Air Force had a chance to deliver the most capable tanker possible to our warfighters and blew it,” said Sen. Richard C. Shelby, R-Ala.
“This so-called competition was not structured to produce the best outcome for our men and women in uniform; it was structured to produce the best outcome for Boeing,” Shelby said. “The Air Force’s refusal to make substantive changes to level the playing field shows that once again politics trumps the needs of our military.”
Once Northrop said it was seriously considering withdrawing from the competition, some lawmakers and a newly formed lobbying group proposed splitting the contract between the competitors. The previous chairman of the House Defense Appropriations Subcommittee, the late John P. Murtha, D-Pa. (1973-2010), had supported that option despite Pentagon opposition.
On Monday, the manager of the group calling itself “Build Them Both,” Carrie Giddins, urged President Obama to “step in and — with the stroke of a pen — hire each company to build the tanker. This will put 100,000 Americans to work, provide the Air Force more tankers more quickly and offer massive taxpayer savings over building only one.”
The Pentagon awarded its first KC-X tanker installment to the Northrop team in February 2008, but the Government Accountability Office ruled four months later that the competition was unfair to Boeing. The Pentagon agreed to rebid the contract, but the George W. Bush administration decided to defer the matter to the incoming administration.
The Defense Department released its draft request for proposals in September 2009.
The program has already been delayed significantly, largely because of a procurement scandal several years ago involving Air Force officials and Boeing executiv
Wall Street Journal
March 9, 2010
Northrop Quits Tanker Bid
After Long Battle, Field Clear for Boeing in Landmark $40 Billion Air Force Deal
By Peter Sanders
Northrop Grumman Corp. said Monday it would drop out of a protracted quest to win a $40 billion contract to build the Air Force's next generation of aerial-refueling planes, leaving Boeing Co. as the only competitor left standing.
The move forces Congress and the Pentagon to decide whether to award a massive military contract without a real competition.
The tanker contract had come to represent an extreme example of how large weapons contracts can get bogged down in politicized protests which can drag on for years. Boeing first won the contract in 2002 and then lost it. Northrop and its partner, European Aeronautic Defence & Space Co.'s Airbus unit, secured it in 2008, setting off complaints the U.S. was enriching a foreign airplane builder. After Boeing successfully protested the selection process, the Pentagon was forced to start over again last year.
With only a few big weapons contracts up for bid, the competition among defense firms has become more cutthroat. Losing bidders now almost routinely file formal appeals with government auditors when big-dollar contracts don't go their way. In addition, members of Congress are more willing to wade into the process because so many jobs and funds for their districts are at stake.
The years of delay had required the Air Force to keep their Eisenhower-era fleet of tankers in service long after they had been slated for retirement.
In a statement, Northrop Chief Executive Wes Bush said the company wouldn't protest the contract and, in effect, handed the victory to Boeing. Mr. Bush said that while Northrop believes it had grounds to successfully protest the contract proposal, it would have caused another lengthy delay.
"America's service men and women have been forced to wait too long for new tankers….Taking actions that would further delay the introduction of this urgent capability would also not be acting responsibly," he said.
The tanker contract was initially awarded to Boeing in 2002. At that time, the plan was for the Air Force to lease the tankers from Boeing rather than buy a new fleet. But criticism of that arrangement came quickly, especially from Arizona Sen. John McCain, who argued it would be a better deal for the Air Force to buy the planes. The Congressional Budget Office also said the deal wasn't fiscally sound.
In late 2003, the contract was scuttled amid allegations of a major contracting scandal between Boeing's then chief financial officer and a senior Air Force weapons buyer who joined the company. Both the ex-Air Force official and Boeing executive went to jail over the issue of illegal job negotiations.
In 2006, the Air Force restarted the process and Boeing and Northrop and its European partner EADS submitted bids. In February 2008, the Pentagon awarded the contract to the Northrop team, which proposed using the Airbus A330 jet, a larger entrant than Boeing's 767.
Boeing quickly lodged a protest with the Government Accountability Office concerning the Air Force's selection process. That protest was eventually successful and the GAO overturned the Northrop victory.
The Pentagon reinitiated the process last year. Northrop soon began hinting that it felt the latest contest favored Boeing. That thinking led to Monday's announcement to withdraw.
Some applauded Northrop's pledge not to protest the new competition as a gesture of fair play. "I want to hail Wes Bush and Northrop on their decision," said Rep. Norm Dicks, a Washington Democrat whose state includes many Boeing facilities.
The Pentagon had already been girding for the possibility that it might be left with only one bidder. Earlier this month, Air Force Secretary Michael Donley said that the Pentagon is prepared for a sole-source contract that could still be fair. Mr. Donley said there were ample mechanisms in place to ensure that taxpayers get a fair deal.
Boeing spokesman William Barksdale said the firm "intends to submit a fully responsive, transparent and competitive proposal that meets the terms the Air Force has announced."
"We are disappointed by Northrop's decision not to submit a bid for the...program," Deputy Defense Secretary William Lynn said. "We strongly believe that the current competition is structured fairly and that both companies could compete effectively."
The decision also dismayed many lawmakers from regions that stood to benefit from a Northrop win. "I am deeply disappointed that Northrop Grumman was unable to submit a bid for the KC-X tanker program. Frankly, I am outraged at the Defense Department's bungling of this contract for what is now the third time," Rep. Jo Bonner (R., Ala.) said in a statement. Northrop had planned to build an assembly plant in Alabama.
Republican Alabama Sen. Richard Shelby, a critic of the latest tanker process, blasted the Air Force. "This so-called competition was not structured to produce the best outcome for our men and women in uniform; it was structured to produce the best outcome for Boeing."
When the Air Force set out the terms for the new tanker contract last year, both Northrop and EADS believed that it favored Boeing. Northrop and EADS warned that it might not participate if the terms weren't altered.
It remains to be seen whether any lawmakers will try to force the process to be opened up once again. In recent years, Boeing, Lockheed Martin Corp. and United Technologies Corp. have all successfully protested contracts. In 2007, the GAO overturned a $15 billion contract awarded to Boeing to build a fleet of Air Force helicopters.