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Originally published March 8, 2010 at 10:52 AM | Page modified March 9, 2010 at 7:37 AM

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Boeing, now alone in tanker bidding, must figure the right price

Northrop's withdrawal leaves Boeing with a pricing dilemma as it prepares a final bid for the huge Air Force refueling-tanker contract.

Seattle Times aerospace reporter

The impact

Contract: 179 planes in first phase.

Boeing's entry: Based on 767; details undisclosed.

Employment: 2,000 direct jobs in Everett, 6,000 support jobs statewide.

Assembly: Contract would keep Everett's 767 line running until 2027 at least.

Source: Boeing

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Northrop Grumman walked away from the $40 billion Air Force refueling-tanker competition Monday, drawing a widely criticized and nearly decadelong procurement process close to an outright Boeing victory.

With the likely prospect of air tankers rolling out of Everett until around 2027 at least, the outcome could secure as many as 2,000 direct jobs in Everett and an additional 6,000 statewide at suppliers and others, according to previous Boeing estimates.

Yet Northrop's withdrawal leaves Boeing with a pricing dilemma as it prepares a final bid. The Pentagon, embarrassed by the lack of competition, now will be under extra scrutiny over what it pays for its tankers.

On one hand, because the contract is a fixed price — meaning the winner must swallow the loss if program costs escalate beyond the price it bids — Boeing typically would be expected to aim high, especially with no competition.

At the same time, Boeing will want to avoid the appearance that it is taking advantage of Northrop's withdrawal to jack up the price.

"This competition was supposed to be a model for future procurement," said Issaquah-based aviation analyst Scott Hamilton of Leeham.net. "It's clear the Department of Defense fell short again in running a procurement process that works."

The contract is to supply the Air Force with 179 tankers used to refuel fighter, transport and bomber aircraft en route to their targets.

Northrop had teamed with EADS, parent of European planemaker Airbus, to offer a tanker based on the Airbus A330.

In 2008, the Defense Department cited a rough contract value of $35 billion, or about $196 million per airplane, plus an extra $5 billion in operational support and other costs.

Certainly, the rivalry in the previous round of the tanker competition between the Boeing 767 and the A330 drastically reduced the cost to the taxpayer.

The Pentagon in 2003 struck down a sole-source lease deal for Boeing that would have cost the government $23.5 billion for 100 tanker aircraft, or $235 million per airplane.

As it withdrew Monday, Northrop said that in the 2008 award canceled after a Boeing protest, its winning bid would have cost "$184 million per airplane for the first 68 tankers, including the nonrecurring development costs." (Planes delivered much later would have cost more as prices escalated.)

In a parting shot, Northrop's statement suggested that with the Pentagon now set to choose "a much smaller, less capable design, the taxpayer should certainly expect the bill to be much less" than $184 million per plane.

But with the competition now reduced again to a sole source award to Boeing, lowball pricing is unlikely.

Boeing had no specific comment Monday on the Northrop withdrawal.

Defense-industry analyst Loren Thompson of the Lexington Institute said a key reason behind Northrop's decision was the risk attached to a fixed-price contract.

When the Pentagon last month issued requirements for the new contest that were widely seen as favoring the 767 over the larger A330, Northrop executives judged they would have to "set a very aggressive price" to win, Thompson said. But that would have risked "losing money, big money" some years down the road.

Boeing now has a corresponding dilemma.

"When you see a lot of risk, the logical thing to do is to bid higher," Thompson said. "But not if it is going to get Congress mad at you."

Rep. Norm Dicks, D-Bremerton, confirmed last week as the chairman of the powerful Defense Appropriations subcommittee, insisted that despite working only with Boeing, "the government can negotiate a good deal."

He noted the government can apply rules requiring greater transparency in a sole-source competition to avoid a single bidder gouging the taxpayer.

"Both (Defense Secretary) Bob Gates and (Air Force Secretary) Mike Donley have said if there is only one bidder, they are going to go ahead," Dicks said. "As chairman, I feel that we need these tankers, and I'm going to do everything I can once we get into production to accelerate the program."

Northrop said it will not file a protest over terms of the competition. On Tuesday, EADS CEO Louis Gallois said that EADS won't bid alone for the tanker.

Northrop said it decided to quit because the selection process detailed by the Pentagon "dramatically favors Boeing's smaller refueling tanker" and does not give credit for "the added capability of a larger tanker, precluding us from any competitive opportunity."

EADS North America Chairman Ralph Crosby reiterated that view and in a statement called the outcome "disappointing." Crosby said the decision "does not diminish our commitment to the U.S."

In contrast, Dicks, who has vigorously championed Boeing in this fight, was jubilant.

"I'm feeling very positive," he said. "This been a real battle, but it looks like we are finally there."

The capability provided by air-refueling tankers to project U.S. air power around the globe is "one of the things that makes us a superpower," he said.

"I think it's good that this thing [will] be built in the U.S. by a U.S. company we can count on," Dicks said.

"And we need the jobs," he added. "This is a very difficult economic time. It's important to protect those 767 jobs in Everett and keep the production line going."

The company has not disclosed which 767 model it intends to use for its new tanker proposal, which is due in two months, but the plane will have winglets and a 787-style state-of-the-art flight-deck display.

Politicians in Mobile, Ala., where the rival Airbus A330 tanker would have been assembled had Northrop won, reacted bitterly and blamed the outcome on political pressure — particularly from labor unions, including the International Association of Machinists.

"I am devastated by today's news," Mobile County Commissioner Stephen Nodine said in a statement. "The war fighter, the American taxpayers, and the workers of the Gulf Coast have been cast aside in favor of 'Political Protectionism.' ... I'm disgusted at the way our Southern workers have been treated as second-class citizens by organized labor, which fought so hard to protect its power structure at the cost of 48,000 jobs nationwide that the KC-45 program would have supported."

Boeing stock, which had fallen Monday morning, rallied briefly after the news broke, but dropped back and closed down a little more than 1 percent for the day at $67.24.

Dominic Gates: 206-464-2963 or dgates@seattletimes.com

Seattle Times Washington, D.C., correspondent Kyung Song contributed to this report.

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