Northrop draws a line in sand on tanker price


Northrop Grumman’s announcement backing out of the competition for the Air Force’s $35 billion refueling aircraft contract included a final parting shot at main rival Boeing.

At the end of its six-paragraph statement, Northrop President and CEO Wes Bush released the price that Northrop and its partner, EADS, had negotiated with the Pentagon during a previous competition to build the tanker.

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Northrop believes that price, $184 million, should effectively be the cost ceiling the Air Force pays for its new tanker. Bush said the Air Force should “expect the bill to be much less” for the Boeing tanker.

Randy Belote, Northrop’s vice president for strategic communications, on Wednesday reaffirmed his company’s belief that Boeing’s tankers should cost less because the 767 aircraft is smaller than the A330-200 Northrop and EADS offered.

Belote said he was reacting to criticism Northrop received for including the price in its exit announcement. Some analysts said the $184 million price was irrelevant because it relates to a different tanker contract that Boeing successfully challenged.

Northrop-EADS initially won a competition against Boeing to build the tankers in 2008, but Boeing protested that award with the Government Accountability Office (GAO). Pentagon officials then reopened the competition.

In an e-mail Wednesday, Belote again noted that the Pentagon agreed to a $184 million per-aircraft price for the first 68 A330-based tanker aircraft, including the non-recurring development costs.

“With the department’s decision to procure a much smaller, less capable design, the taxpayer should certainly expect the bill to be much less than the $184 million per tanker that the Air Force would have paid Northrop Grumman for the more modern, more capable KC-45 refueling tanker,” Belote said.

Lawmakers from Alabama, where Northrop planned to build the tanker, had expressed concern that tanker costs could increase if Northrop followed through on threats to pull out of what it said was an unfair competition that favored Boeing’s bid.

Pentagon officials now face the challenge of negotiating a fixed-price contract within budget after aiming to drive down costs through competition. The Pentagon so far has not announced any changes to the bidding process to accommodate a sole bidder.

A defense analyst said Northrop may have helped the Pentagon in its negotiations with Boeing in releasing the $184 million price.

“There might be factions in the Pentagon that wanted them to bid to keep Boeing’s bid competitive, and this might be a minimum way of showing support for the Pentagon by helping to keep Boeing’s bid competitive,” said Richard Aboulafia, vice president of analysis at the Teal Group.

“We are 100 percent focused on submitting a fully responsive, transparent and competitive tanker proposal to the Air Force. “Boeing recognizes it must earn the tanker contract by providing the Air Force with a modern and capable tanker that meets or exceeds all warfighter requirements and is cost-effective to buy, own and operate,” said Boeing spokesman Bill Barksdale.

Pentagon acquisition chief Ashton Carter said the first two lots of the new 179-tanker fleet will be purchased at a firm fixed price, while the remaining lots will use a “not to exceed” structure and economic price adjustment provisions to protect “both taxpayers and industry.”

Boeing has defended the Pentagon’s bidding process for the tanker program, saying it did not favor the Chicago-based company. Boeing officials are already working to dispel any perceptions that the company would take advantage of the situation.

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“We remain in a competitive situation,” Tim Keating, Boeing’s senior vice president for government operations, said at a meeting with reporters March 10.  “There is a contract we have to win. We have not won it yet.”

Northrop Grumman blamed the Pentagon bidding process for its decision to pull out. It said the process favored the smaller refueling aircraft offered by Boeing, and that the Northrop-EADS team had little chance to win the contract even if it spent millions on the competition.

Northrop’s decision to pull out has created tension between the European Union and the United States. European officials have accused the United States of protectionism, arguing the Pentagon changed specifications for the new tanker to favor Boeing.
French President Nicolas Sarkozy is expected to share his gripes with President Barack Obama when he visits the White House later this month.