Subsidy rule added to tanker bid

Boeing got a sweet surprise Tuesday in the fine print of the Air Force announcement that formally resumed the Defense Department's quest for new refueling tankers.

As one of the conditions for bidding this year on the multibillion-dollar contract, the team competing with Boeing — Northrop Grumman and its partner European Aeronautic Defence & Space, or EADS — is required to disclose any government subsidies.

Subsidies and "launch aid" for commercial airplanes made by EADS, the parent company of Airbus, are the subject of a thorny dispute between the United States and Europe in the World Trade Organization (WTO).

The Air Force's Request For Information (RFI) asks firms that want to build refueling tankers to explain how "launch aid," loans on preferential terms and penalties by the WTO would affect them. The RFI's language ties the commercial-subsidy issue to the defense-procurement area.

Military-procurement analysts said such language in an RFI was probably unprecedented. EADS and Northrop officials had not expected it, according to sources at both companies.

But Rep. Norm Dicks was anticipating it. Dicks, D-Bremerton, has pressed everybody from the secretary of defense on down about whether the Air Force would address the subsidy issue, culminating in long discussions with defense staff over the Easter recess.

"They still were not certain what they would say in the RFI last week," Dicks said. "But it looks like they understood the problem," he added.

"They ask the question I have been asking: If Airbus is intending to compete for Pentagon business, how does the Defense Department account for the unfair subsidies the European governments have given the consortium?" Dicks said.

"This RFI should make everyone happy, because it sets up a very fair competition."

Northrop and EADS may not feel that way.

Northrop-EADS spokesman Wendell Bugg said it was too early to determine the impact of the subsidy-disclosure request. In a statement, Northrop said, "We are in the process of analyzing [the Air Force request] in depth and welcome the opportunity to provide a response."

Boeing lauded the Air Force request, noting, "Boeing will be ready to compete and strongly believes all competitors should play by the same set of rules."

The request does not guarantee that either Boeing or Northrop-EADS will walk away with billions in orders for new tankers. It also poses the possibility of putting new engines on the existing tanker fleet.

But a request for information "casts the widest net possible to get a full plate of ideas from industry," Dicks said.

The tanker program has been on hold for two years after a scandal surrounding the $23 billion leasing deal initially struck with Boeing.

Boeing and EADS are the only two makers of passenger aircraft large enough to be converted into tankers. EADS, based in Paris and Munich, owns 80 percent of Airbus. EADS' U.S. partner, Northrop, would complete conversion of the planes into tankers.

The United States has a complaint against Airbus with the WTO, alleging European governments have provided up to one-third of the cost of Airbus commercial projects, with the loans paid back with interest only if the aircraft is a commercial success.

The Air Force RFI asks potential bidders to disclose how they might be affected by "application of retaliatory duties that may be imposed pursuant to the aircraft litigation at the World Trade Organization."

The Air Force request in this competition "is designed to respond to U.S. politicians' concerns about the impact of subsidies and aid on this particular contract," said Richard Aboulafia, a military-aircraft analyst with the Teal Group, a Fairfax, Va., consulting company. "They are doing due diligence" in light of the ongoing WTO dispute, he said.

U.S. lawmakers, including Duncan Hunter of California, chairman of the House Armed Services Committee, have repeatedly said the subsidies would give EADS an unfair advantage in any tanker contest.

The Air Force requested companies interested in the tanker program disclose "business arrangements that involve a financial contribution from a government including a receipt of subsidies," grants and other financing received to launch new aircraft lines.

The request "is part encouragement, part warning, part recognition of the political environment," said Christopher Bolkcom, a military-aircraft analyst for the nonpartisan Congressional Research Service. "The Air Force appears to be keeping its options open," he said.

Material from Bloomberg News is included in this report.

Boeing reportedly

nearing deal

in criminal probes

NEW YORK — Boeing and federal prosecutors have reached a preliminary agreement to resolve a pair of high-profile criminal investigations, but the company is balking at calls by some Justice Department officials for roughly $750 million in fines and penalties as part of a comprehensive settlement, according to people familiar with the details.

Based on the talks so far, Boeing would avoid pleading guilty to any specific charges in both cases while admitting wrongdoing under what is known as a deferred-prosecution agreement, these people said. The company has signaled it may be willing to pay about $500 million to simultaneously settle related civil claims, they said. The government is seeking significantly more, but negotiations aimed at a compromise are heating up, they said.

A comprehensive settlement would resolve long-standing allegations that Boeing improperly acquired thousands of pages of Lockheed Martin's proprietary documents dealing with rocket programs and illegally recruited a senior U.S. Air Force acquisition official while she still had oversight of billions of dollars in other Boeing contracts.

Justice Department spokesmen declined comment.

The Wall Street Journal