Air Force prodded to probe subsidies in tanker contract

House defense authorizers are directing the Air Force to review whether illegal government subsidies played any role in a contentious refueling tanker contract.

The decision, included in legislation sponsored by the House Armed Services Committee chairman, could set up a clash with Senate counterparts who are trying to steer clear of the tanker dispute in their version of the 2009 defense authorization bill.

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However, Rep. Ike Skelton (D-Mo.) offered a caveat in his chairman’s mark: Any inquiry would be done after the World Trade Organization (WTO) delivered its rulings on trade disputes between the United States and the European Union over illegal subsidies to Airbus and tax breaks for Boeing . The two bitter rivals on the world’s commercial aircraft market are also at the center of the tanker controversy.

On Feb. 29, the Air Force picked the Airbus 330 as its new tanker, selecting the team of Northrop Grumman and EADS, the European conglomerate that owns Airbus, for the contract. Since then, Boeing has launched an intense lobbying and public relations campaign to overturn the contract.

Boeing, aided by congressional supporters, has argued that the Northrop-EADS team had an unfair advantage because Airbus received government launch money for the A330, thus reducing the price of its bid.

The U.S. defense giant also filed an official protest with the Government Accountability Office, Congress’s watchdog arm. The GAO is expected to rule on the protest by June 19.

Based on what the WTO finds in either case, the Air Force Secretary would have 90 days from the rulings to conduct a review, allowing time for public comment on the effect of illegal subsidies on the program, for consultation with federal government experts, and to speak with officials at both the Northrop Grumman-EADS team and Boeing.

If the Air Force determines the illegal subsidy had a “material impact” that calls into question the “fairness” of the contract award, the service leaders have the right to take “appropriate measures” to remove the impact of the illegal subsidy and make the process “fair to all,” according to the legislative language in the chairman’s mark.

But the provision leaves that to the discretion of the Secretary of the Air Force. It is unclear when the WTO would rule on either of the cases, but it could be several more months until that happens. The discussion could spill into the next presidency and a new Secretary of the Air Force with a different approach than the current secretary, Michael Wynne.

Skelton has urged lawmakers not to take any legislative action to undo the Air Force’s tanker contract and to let the GAO do its work.

Nonetheless, if the WTO rules against the European Union, the provision will likely open up the floodgates for criticism and renew lobbying from Boeing and its supporters.

Sen. John McCain (R-Ariz.), the ranking member of the Senate Armed Services panel, urged the Air Force last year not to let the WTO cases determine its decision for the tanker. McCain, the GOP presidential candidate, was instrumental almost five years ago in thwarting a corrupt leasing deal for new tankers between the Air Force and Boeing.

The revelation of the corrupt deal ultimately led to the competition for the new refueling tanker contract.

As part of the tanker competition, Air Force officials extracted a commitment from both bidders that they would not be affected by the WTO case, even if it resulted in hefty penalties against either the U.S. or EU.

EADS has repaid all reimbursable government loans related to the A330, including principal and interest. All reimbursable launch loans are carried on EADS’s balance sheet as liabilities and are listed in the company’s annual report.

Pricing on both the Airbus and Boeing planes is determined through a complicated process that includes several market-driven factors.

At press time, the panel had not yet voted on the final passage of the $601.4 billion 2009 defense authorization bill, but provisions in the chairman’s mark largely remain untouched during the bill consideration process.

However, the provision may face a hard time in conference negotiations with the Senate. The Senate Armed Services Committee did not include any provisions regarding the tanker controversy and senators on the committee have opted to wait for the results of the GAO review before deciding whether to weigh in on the tanker program, according to congressional sources.

Additionally, House Armed Services Committee members agreed to authorize $100 million within the Navy’s F-18 E/F Super Hornet program that would allow the plane’s builder, Boeing, to take steps to reduce the cost of the fighter jet either for a year-to-year buy of the plane, or for a new multiyear buy should the Navy decide to enter a third such contract with Boeing. Boeing has been pressing the defense committees to approve the money that would ultimately position the company to enter another multiyear contract with the Navy.

Another Boeing program, the Future Combat Systems, took a hit during Wednesday’s markup. The panel agreed to slash $200 million from the $3.6 billion Pentagon request. Several GOP members on the committee, including Todd Akin (Mo.) and Jim Saxton (N.J.), attempted to restore full funding for the Army’s largest modernization endeavor. Boeing and SAIC are the lead contractors for that program — headquartering their operations in St. Louis, Akin’s district.

Meanwhile, the committee approved on a bipartisan basis an additional $722 million to allow the Navy to start building two submarines a year in 2010, 2011 and 2012 — accelerating the Navy’s current schedule.

Additionally, the House Armed Services Committee is requesting that the Pentagon clearly delineate its request for the wars in Afghanistan and Iraq and separate the requests for the two wars. The provision in Skelton’s mark expresses concern that the Pentagon’s requests for Afghanistan have not been transparent because they have been lumped in with those for Iraq.