Sep 11 2008
Mobile Press Register
By GEORGE TALBOT
Defense Secretary Robert Gates on Wednesday canceled the U.S. Air Force jet tanker competition, abruptly ending a fierce political battle for the potential $40 billion contract with a decision that dealt a significant setback to Mobile's aerospace ambitions.
Gates said he called off the heated contest between Boeing Co. and Northrop Grumman Corp. after determining that he couldn't close the deal with the time he has left in office. Gates earlier this month said he hoped to award the 179-plane contract by year's end, ahead of the Jan. 20 deadline when a new administration will enter the White House. But the latest twist in this long-running saga for the Air Force could suspend the tanker contest another year or longer.
"Over the past seven years, the process has become enormously complex and emotional — in no small part because of mistakes and missteps along the way by the Department of Defense," Gates said. "It is my judgment that in the time remaining to us, we can no longer complete a competition that would be viewed as fair and objective in this highly charged environment."
The surprise decision had sweeping consequences for the companies, their shareholders, the military and Congress, but nowhere was the impact more direct than in Mobile. The city has huge stakes riding on the outcome. Los Angeles-based Northrop and its bidding partner, the European Aeronautic Defence and Space Co., planned to assemble KC-45 tankers and A330 commercial freighters in a pair of new plants at the Brookley Field Industrial Complex. The $600 million project would create 1,500 direct jobs and could generate thousands more within a new aerospace corridor stretching from Virginia to Texas.
An incentives package valued at $120 million helped lure the contractors. State and local officials said Wednesday that the package was on hold until they could discuss the project with Northrop.
Mobile came close Mobile came tantalizingly close to landing the deal in February, when the Air Force announced it had selected the Northrop plane over Boeing's KC-767. But that deal was scrapped in June when government auditors found mistakes in the way the Air Force conducted its bid process, and Gates in July ordered a second round of competition to be completed by January.
Chicago-based Boeing, which planned to assemble its tankers in Everett, Wash., and Wichita, Kan., had been pushing for more time to improve its bid, saying Gates' proposed timeline was unreasonable. In August, the company threatened to drop out of the competition if it wasn't given at least six months to revise its offer.
Boeing applauded the decision Wednesday, saying it "will assure delivery of the right tanker to the Air Force and serve the best interests of the American taxpayer." The company's supporters hailed it as a victory for American workers. Boeing's backers in Congress have criticized the Northrop plane, based on an Airbus A330 commercial jet, for its foreign pedigree.
"Some officials in the Pen tagon insisted on throwing this competition to a French-made tanker, and we said, 'Not on our watch,'" said U.S. Rep. Todd Tiahrt, R-Kan. "We demanded fairness for Boeing workers, and that's exactly what happened with today's decision."
Northrop said it was "deeply disappointed" by the news, and its supporters claimed the Pentagon caved to Boeing's political pressure.
"It is unacceptable that the Department of Defense would abdicate its responsibility to our men and women in uniform," said U.S. Sen. Richard Shelby, R-Tuscaloosa. "This misguided decision clearly places business interests above the interests of the warfighter. We are a nation at war, sending our pilots into battle on planes that are largely older than they are. This approach is irresponsible, shortsighted and harmful to both the warfighter and the nation."
Aging tanker fleet The Air Force has said that new tankers are its top priority. The service wants the planes to replace an aging fleet of KC-135 Stratotankers, which were built by Boeing in the 1950s. The initial contract for 179 planes was designed as the first of three orders to replace the full fleet of more than 500 planes, pushing the value of the deal above $100 billion over time.
Outrage was high in Mobile, where local officials condemned the decision.
"I am, frankly, embarrassed for the Department of Defense leadership," said U.S. Rep. Jo Bonner, R-Mobile. "They have an urgent military need yet are simply giving up efforts to address that need."
Defense analysts said the decision was a major victory for Boeing because it keeps the company's prospects alive. But Northrop would still be favored to win the contract because the Air Force has stated a clear preference for its KC-45, a newer, larger plane than the KC-767, according to Loren Thompson of the Arlington, Va.-based Lexington Institute.
"Gates did the only thing he could do under the circumstances," said Thompson. "The deal is so complex that there simply was not enough time to get it done."
The key for both compa nies, Thompson said, is whether the new administration chooses to start the competition over from scratch — a process that could take at least two years to complete — or picks up where the current competition left off.
In the race for the White House, Republican John McCain is viewed as favorable to Northrop's bid in part because of his history as a Boeing antagonist. McCain in 2003 helped kill a $23.5 billion Air Force deal to lease 100 tankers from Boeing, exposing a corruption scheme between the company and the Air Force's chief weapons buyer.
Democratic candidate Barack Obama, who shares the same Chicago hometown as Boeing, has criticized the Air Force for not choosing Boeing.
Boost for McCain? Aerospace analyst Michel Merluzeau said Gates' decision removes a potentially damaging political issue for McCain ahead of the Nov. 4 election. Democrats have characterized McCain's opposition to the Boeing lease deal as a sign that he opposes American jobs. An Obama administration "will clearly do all it can to favor the Boeing bid," said Merluzeau, founder of consulting firm G2 Solutions near Seattle.
The Air Force said Wednesday it supported Gates' decision to delay the contest, and Gates said he was assured the current fleet could keep flying in the interim. Boeing last year won a $1.1 billion contract to maintain the KC-135s over a rival bid from Alabama Aircraft Industries Inc. The Birmingham-based company, formerly known as Pemco, has filed a federal lawsuit claiming the Air Force unfairly favored Boeing for the deal.
EADS officials said they were disappointed by the decision but planned to keep fighting for the deal.
Gates' decision "represents a major failure of the defense acquisition system," said Ralph Crosby, chairman and chief executive of EADS North America. "If the special interests of one contractor have prevailed over the highest priority needs of the U.S. armed forces, it is a terrible precedent."
EADS, the parent company of Airbus, hoped to use the contract to establish a long-sought production foothold in the United States. The move would break a monopoly on large aircraft production currently held by Boeing and help EADS ease a financial crisis caused by the Euro's soaring value against the dollar.
The company has said any plans to move commercial production to Mobile are contingent on winning the tanker contract.
Northrop chief executive Ron Sugar said in a Wednesday e-mail to employees that the company "entered this competition in good faith and proposed the most modern, most capable tanker available, at the best value to the American taxpayer.
"The Air Force agreed when it selected our KC-45 tanker last February," it read. "We knew then that we had the best offering, and we will continue to pursue with determination and commitment the opportunity to ultimately provide a superior tanker product to our warfighters."