Jan 31 2007

Tanker contract bidding opens

Mobile Press Register

The U.S. Air Force on Tuesday opened bidding on one of the largest military contracts in American history, releasing a densely worded, 1,000-page request for proposals that broadly defined its needs for a new fleet of aerial refueling tankers and held Mobile's chances at building the planes buried in its fine print.

Air Force officials said they had incorporated changes into the RFP that were designed to promote competition for the tanker contract. Whether those changes were enough to draw a bid from Northrop Grumman Corp. was unclear late Tuesday.

Los Angeles-based Northrop would build its KC-30 tankers in Mobile if selected by the Air Force, but the company has threatened to drop out of the contest because of bidding rules that it claimed unfairly favored rival Boeing Co.

The RFP "has laid the groundwork for a fair and open competition," said Sue Payton, the assistant secretary of the Air Force for acquisition. "We want a horse race."

Defense experts said it appeared the Air Force had taken steps to address Northrop's concerns, despite recent statements by the service that it would keep the RFP essentially unchanged from an earlier draft.

The Air Force "is openly acknowledging its support of a real competitive process -- and that requires more than one bidder," said Frank Cevasco, a former Pentagon acquisitions executive who runs a defense consulting business in Washington, D.C. "I hope (the Air Force) really did tweak the RFP in a way that will motivate Northrop to participate and produce a real competition."

The Air Force wants the new planes to replace its aging fleet of about 530 KC-135 tankers, which were built by Boeing and average 45 years in service. The Air Force has said the tanker is its top acquisition priority, and the service is under pressure from Congress to elicit at least two bids for the contract's first phase.

The initial order, to be awarded late this year, will replace 179 tankers -- or about a third of the KC-135 fleet -- at a cost of $30-40 billion over the next 15 years. Payton said the Air Force would not split the initial order and was committed to selecting a single aircraft.

"It will be a winner-take-all competition," she said.

Once the initial order is completed, the Air Force will review the program before proceeding with planned second and third phases, ultimately replacing all of its KC-135s and its fleet of about 60 KC-10 tankers. The massive KC-10 refuelers, which can carry about twice the fuel of a KC-135, entered service in the early 1980s.

Northrop and Boeing issued statements Tuesday saying they needed time to digest the RFP. Privately, Northrop officials told the Press-Register in interviews Monday and Tuesday that they faced an agonizing decision on whether to go forward.

The company and its chief subcontractor, EADS North America Inc., have invested more than $25 million in developing their bid, and project at least another $25 million to see it the rest of the way through, officials with both companies said.

Northrop chief executive Ron Sugar and Ralph Crosby, his counterpart at EADS North America, will collaborate on the final decision, according to the companies.

Their conclusion is expected to hinge on whether technical specifications in the RFP favor a low-cost replacement for the KC-135 -- a durable, efficient flying gas station -- or a bigger, more advanced aircraft that can carry large numbers of troops and equipment in addition to fuel.

"This is a tanker first," said Maj. Gen. Thomas Kane, responsible for structuring the Air Force's fleet of tankers and cargo planes. But he added that the service does value the additional features. "We've worked very hard ... to take into account the airlift capabilities of the airplane."

Northrop's KC-30 would be a significant upgrade in size and flexibility to the KC-135, and would offer greater range and payload than Boeing's KC-767. But the added features come with a price.

The KC-30 is based on the Airbus A330 jet, which sells on the commercial market for around $160 million, compared with $120 million for a commercial 767, according to industry estimates.

But value -- not price -- will be the determining factor, Payton said, adding that the Air Force will evaluate past performance and potential risks associated with each manufacturer.

"This is not a cost-only competition," Payton said. "If you're going to get best value, you have to promote competition. You don't go off and manipulate competition. You don't try to falsely create competition."

Chicago-based Boeing also faces an expensive choice. Based on guidelines in the RFP, the company must decide whether to submit its KC-767 in the competition or a tanker based on its newer, larger 777 commercial jet.

"We plan to examine the RFP closely and will be prepared to offer our most capable tanker to the Air Force," said spokesman Bill Barksdale.

Northrop said in a statement it would defer comment until it could "determine the alignment of the KC-30's capabilities to the requirements as specified in the final RFP."

The companies have 60 days to respond to the RFP.

Northrop's chief complaint has been that the Air Force's criteria for evaluating the planes was inadequate and biased against its KC-30. The company claimed that it wouldn't get full credit for its capabilities under the scoring system proposed by the Air Force in its draft RFP, released last fall.

Payton said the Air Force had addressed those concerns in the final RFP.

"You will see some updates that I think merit further review by everyone who's interested," she said. "We've done everything we can to level the playing field."

The Air Force briefed key Congressional legislators on the tanker program Monday, offering assurances that it had established a fair set of ground rules.

"I'm hopeful they'll do what they said they'd do, which is bring about real competition," said Sen. Richard Shelby, R-Tuscaloosa. "But talk is cheap. We need to look at the (RFP's) details to see if they've done that or if it's just tailored to Boeing."

The project has big stakes in Mobile. Northrop and EADS have said they would assemble and modify their tankers in a pair of new plants at the Brookley Field Industrial Complex, creating 1,000 direct jobs. Another 3,000 jobs could come from parts suppliers and other spin-off businesses.

"It's a huge project for our city, not only for the number of jobs but for the international recognition it brings with it," said Mayor Sam Jones, who will travel to Washington Thursday to meet with lawmakers about the competition.

Jones and other state economic development officials have spent much of the past two years pursuing the project. A $120 million package of tax breaks and other incentives remains available to the companies on the condition that they bring the work to Mobile.

"It's good to hear that some changes have been made, but I think there's a fair amount of skepticism at this point," said Mobile County Commissioner Stephen Nodine. "The Air Force has been saying all along they want competition, but they need to put that where in counts" in the RFP.

An analyst with close ties to the Air Force said that, even with the changes, Northrop remained a long shot and was likely to bow out of the contest.

"The selection criteria remain heavily weighted against an aircraft that can carry large amounts of cargo and passengers," said Loren Thompson, a defense analyst for the Lexington Institute in Arlington, Va. "The Air Force just doesn't want to pay for a bigger plane."

U.S. Rep. Jo Bonner, R-Mobile, expressed hope that both Boeing and Northrop "will find themselves in a position to sharpen their pencils and move forward with highly competitive proposals to build the new Air Force tanker."

Shares of Boeing (NYSE: BA) rose 50 cents Tuesday to close at $86. Shares of Northrop Grumman (NYSE: NOC) rose 23 cents to close at $70.96.