Boeing tanker "back in the game" after GAO backs company's protest

Government auditors resoundingly backed Boeing's protest over the Air Force refueling-tanker contract Wednesday. Yet, after the celebrations by Boeing supporters and employees, there's a long way to go before the company could clinch the contract.

The ruling by the Government Accountability Office (GAO) "appears to promise a new 2009 season for the tanker soap opera," wrote Morgan Stanley analyst Heidi Wood in a note to investors.

The Air Force will have little option now but to rerun the competition for a tanker deal, worth about $40 billion. That means the Pentagon choice between an Everett-built Boeing 767 and an Airbus A330 will almost certainly extend into the next administration.

And with congressional supporters of Boeing galvanized, the process will become increasingly political.

Yet Jeff Bialos, a partner in Washington, D.C., law firm Sutherland, Asbill & Brennan who consults for defense companies, warned that it's too early for Boeing to claim victory.

"There are times when you win the protest and nevertheless lose the award," Bialos said. "This decision doesn't necessarily mean Boeing wins."

The surprisingly strong GAO decision was greeted with ebullience by Boeing's supporters in Congress, led by Sen. Patty Murray, D-Wash., and Rep. Norm Dicks, D-Bremerton.

During a phone interview with a Seattle reporter from a room just off the House floor, Dicks interrupted his comments to banter with Rep. Rick Larsen, D-Lake Stevens.

"Larsen, how sweet it is!" Dicks greeted his colleague.

Back on the phone, Dicks said Congress will keep watching the contract closely. "I'm not going to accept any decision now except a Boeing victory."

Murray, who kept the tanker issue alive since the February contract award with repeated speeches on the Senate floor, said she had talked by cellphone to some workers on the 767 production line in Everett.

"I could hear the excitement in their voices," Murray said. "We are vindicated and we're back in the game."

The GAO decision came as a huge blow to the joint venture formed by Northrop Grumman and Airbus parent company EADS (European Aeronautic Defence & Space).

From Boeing's perspective, the ruling could hardly have come out better.

In addition to telling the Air Force it should redo the bidding, the GAO recommended that "the Air Force reimburse Boeing the costs of filing and pursuing the protest, including reasonable attorneys' fees."

The full GAO ruling won't be released until both sides have had a chance to black out sensitive information. But a summary statement outlined seven major mistakes in the Air Force procurement process that detracted from "full and open competition and fairness."

The list of errors could be summed up as wrongly assessing both the capabilities and the costs of the two tankers.

Loren Thompson, a defense analyst with the Lexington Institute, said the outcome is "a vindication for Boeing's leadership."

"This is just about the most sweeping denunciation of a procurement that I have ever seen come out of the GAO. It raises many questions of fairness and professionalism," he said. "The whole thing is going to have to be done over."

Yet it's not finished yet, Thompson warned.

"Northrop could still come back and win this competition," he said. "The problem here was not with their plane — the GAO was explicit about that. The problem here was with the way the Air Force went about evaluating the two planes being offered."

Jim McAleese of McAleese & Associates, a government contracting and national security law firm in McLean, Va., said even if the A330 is judged more expensive in terms of total program costs over 25 years, the Air Force could still select the Airbus jet on the basis that it provides better value.

Bialos said the Air Force could "paper the record a little better" — adjusting the relative cost estimates of the two planes and fully briefing both parties as to where they stand so as to address its acknowledged errors — but without changing the final outcome.

Bialos, who is a former Deputy Undersecretary of Defense in the Clinton administration, said the contest will now become even more political.

Congress may use the opening provided by the GAO ruling to force discussion of political issues such as securing U.S. jobs and protecting national security.

The GAO "is not a forum that will send any cosmic message about the openness of U.S. defense markets or the implications for the U.S. industrial base," Bialos said. But now that the Air Force faces rebidding the contract, "Going forward it's different."

Norm Dicks certainly sees it that way.

"The GAO report is as strong as I've ever seen," he said. "But there are another 10 things I could write down not even in the report that make it even worse" for Northrop and EADS.

Aside from technical matters such as the A330's higher fuel costs and higher maintenance costs, Dicks has a list of political issues he now sees returning to the front burner: alleged illegal Airbus subsidies, preserving the U.S. industrial base, "protecting the crown jewels of technology," and securing American jobs.

"Most of the members [of Congress] were waiting for the GAO," Dicks said. "If we had to challenge this thing now in Congress, we're in a much stronger position."

"And we reserve that right," he added. "I think Boeing has won."

Boeing issued only a brief statement.

"We welcome and support today's ruling by the GAO fully sustaining the grounds of our protest," said Mark McGraw, Boeing vice president for tanker programs, in a statement. "We look forward to working with the Air Force on next steps in this critical procurement for our warfighters."

Northrop's official response was equally terse.

"We respect the GAO's work in analyzing the Air Force's tanker acquisition process. We continue to believe that Northrop Grumman offered the most modern and capable tanker for our men and women in uniform," Northrop said. "We will review the GAO findings before commenting further."

And EADS spokesman Guy Hicks said "it's important to recognize that the GAO announcement is an evaluation of the selection process, not the merits of the aircraft."

Analyst Thompson was scathing about the latest selection process, which followed an earlier scandal when the contract was awarded to Boeing in 2001.

That deal died after Air Force procurement officer Darleen Druyun was found to have granted Boeing favors before being hired by the company. Druyun and former Boeing Chief Financial Officer Mike Sears went to jail over their illegal collusion.

"After going through the worst procurement scandal in modern times, [the Air Force] has proceeded to make a series of erroneous awards," Thompson said.

"The situation has deteriorated to a point where we can't even count on the fairness or objectivity of the process."

The Air Force must formally respond to the GAO recommendations within 60 days.

If Northrop/EADS win the tanker job, they plan to assemble the planes in Mobile, Ala., raising the prospect that Boeing's arch-rival would be building commercial A330 jets in the U.S.

The joint venture had already sent out invitations to a groundbreaking ceremony in Mobile for two proposed tanker production plants at the end of this month.

That ceremony may now be put on hold.

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

The information in this article, originally published June 19, 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.