Boeing's dilemma: If company loses tanker appeal, should it throw in the towel?

Boeing Chief Executive Jim McNerney faces a tough dilemma if a federal review due next week doesn't back Boeing's claim that it should have won the massive Pentagon contract for new refueling tanker aircraft.

Should he back away from a confrontation with the U.S. Air Force or elevate it into a nasty political fight?

McNerney recently told Lehman Brothers analyst Joe Campbell that it will be his "most important decision this year."

He will have to make his choice even though, under the contract challenge's rules, he's in the dark about some details.

By next Thursday, the Government Accountability Office (GAO) must say whether it finds fault with how the Air Force chose a larger A330 jet built by Airbus over the smaller Everett-made 767.

The military unexpectedly awarded the contract, which is worth about $40 billion, to a joint venture between Airbus parent European Aeronautic Defence & Space (EADS) and Los Angeles-based Northrop Grumman.

If Boeing prevails in its first protest of a U.S. government contract in 30 years, the Air Force could redo the contest.

If not, McNerney must decide whether to push Boeing's expensive and aggressive lobbying campaign further into the political realm during a presidential-election season — or whether to reluctantly accept the result and call off the political-attack dogs.

The stakes for Boeing go beyond the lucrative defense contract. A victorious Airbus would set up an assembly plant in Alabama to build not only the tankers but also A330 commercial wide-body jets.

Court of public opinion

For the past three months, Boeing has spent millions of dollars on full-page ads in newspapers and trade magazines arguing the 767 should have won (See sidebar.).

In parallel, unions representing Boeing workers and the company's supporters in Congress — including this state's delegation — have loudly accused the Air Force of selling out national security and jobs in favor of a bid they say is bolstered by illegal European government subsidies.

Meanwhile, Boeing's lawyers have requested internal Air Force memos and e-mails and used them to file seven supplementary amendments supporting the company's claim that the contest was skewed to favor Northrop/EADS.

But only a small group of lawyers inside Boeing is allowed to see all that material. A GAO order protecting both companies' proprietary data means that not even McNerney or his defense chief, Jim Albaugh, may see the amended protest documents, except in a heavily redacted form.

"The companies and the Air Force have basically turned over their cases to the lawyers," said Loren Thompson, a well-connected defense analyst with the Lexington Institute.

Only a strong GAO ruling for Boeing gets McNerney off the hook. One with something for both sides, finding some errors in the procurement process but not enough to demand a redo, would still force McNerney to fight if he wants anything.

"We're preparing for lots of different scenarios," said Boeing spokesman Bill Barksdale.

No hints of the GAO's view have leaked out so far.

"If you believe Boeing's contention that this was a very close and flawed outcome, then even minor findings of error could be decisive," analyst Thompson said.

Mission requirements

But assessing the planes depends crucially on assumptions about how they will be deployed. Will they fly more missions or fewer? Longer-range missions or closer to the combat zone?

"I can give you a series of assumptions that leads you inexorably to the conclusion that [Boeing's] smaller plane is more efficient," Thompson said. "By simply tweaking those assumptions, I can lead you to very different conclusions."

That leaves considerable doubt as to how the GAO can sort out the mess.

"If 200 Air Force personnel can't do such a comparison reliably, how can a handful of GAO reviewers?" Thompson asked.

Complicating the situation, the review has to ignore the elephant in the room — the political dimension of the tanker controversy.

"The GAO investigation has a very narrow scope," Sen. Patty Murray, D-Wash., said in a speech in the Senate last week. "It can't consider the real-world concerns of Congress and the American people."

Those concerns are jobs in this state and elsewhere, as well as discomfort about the choice of a European airplane over an American one for a U.S. military contract.

Boeing says 44,000 jobs are at stake across the country, including those at suppliers and on the 767 line. Northrop/EADS counters that its bid will support 48,000 jobs in the U.S. Both tallies are debatable.

The argument that U.S. jobs should factor into the contract decision goes against Boeing's long-standing support of free trade and globalization. It's also contrary to the views of Boeing's major defense rivals — and not only Northrop.

Lockheed Martin CEO Robert Stevens, who heads the nation's largest defense contractor, told a conference in Brussels, Belgium, in early June the Northrop/EADS win "is the most recent example of the growing willingness of the United States to look to global sources of supply for vital equipment."

Of course, Stevens hopes to sell large numbers of his company's F-35 Joint Strike Fighters in Europe.

Political strategy

Politicians have a more local perspective. Murray's speech to the Senate strongly implied that even if the GAO rules against Boeing, the company's allies in Congress will continue the fight — perhaps by blocking funding of the tanker program.

In that case, with the unions supporting Boeing and influential with Democrats, the controversy could become a presidential-election issue.

Republican contender Sen. John McCain killed the original 2001 tanker deal, won by Boeing, calling its lease arrangement too expensive. He then intervened to make sure Northrop and EADS were not excluded from the new contest, which they won.

McCain is already being attacked on this in political ads.

And Republican legislators from the South who have endorsed plans for the Airbus assembly plant in their region will work to support the A330.

Will McNerney enter that political minefield if the ruling is against Boeing?

Defense analyst Thompson believes the prospect of an Airbus factory in Alabama will loom large for McNerney.

"Boeing is unlikely to give up, because in the process of conceding they would open the door for a major Airbus presence in their home market," Thompson said.

Yet Lehman Brothers analyst Campbell said his conversation with McNerney at the annual investor conference in Seattle last month gave him the impression that "if the GAO rules definitively against Boeing, McNerney is not likely to proceed with the campaign to overturn the Air Force decision."

Even Murray recognizes it will be tough to push Boeing's case further if the GAO rules decisively for Northrop/EADS.

"The GAO, if it was decided one way overwhelmingly, could have a very big impact on the political decisions that are made here," Murray said in an interview.

Right now, said Thompson, "Everyone is waiting for the GAO. ... No one has a clue."

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

The information in this article, originally published June 12, 2008, was corrected June 22, 2008. The initial Air Force refueling tanker contract is worth approximately $40 billion to the winner. A previous version of this story incorrectly stated the value of the Air Force refueling tanker contract as $108 billion. The Air Force estimates it will spend $108 billion to buy and operate those planes for 25 years, including maintenance and fuel costs. In addition, later contracts to replace the rest of the tanker fleet will bump up the Air Force's total procurement cost from $40 billion to about $100 billion.