Boeing Wins Protest of Northrop Aerial-Tanker Award

June 18 (Bloomberg) -- Boeing Co. deserves another chance to bid on the $35 billion U.S. Air Force aerial-tanker contract won by rival Northrop Grumman Corp., a government agency said.

``Our review of the record led us to conclude that the Air Force had made a number of significant errors that could have affected the outcome of what was a close competition between Boeing and Northrop Grumman,'' the U.S. Government Accountability Office announced today in Washington. ``We therefore sustained Boeing's protest.''

Boeing appealed to the GAO after Northrop and partner European Aeronautic, Defence & Space Co. won the contract Feb. 29, snaring a program that had been Boeing's for more than half a century. Boeing claimed changes the Air Force made during the competition favored Northrop. The selection of Northrop was undermined June 12 when both companies confirmed the Air Force miscalculated operating costs of the competing aircraft.

``While the variance in costs is trivial, it points to a broader erosion in the government's rationale for picking the Northrop-EADS plane,'' Loren Thompson, an analyst at Lexington Institute, an Arlington, Virginia-based public policy research group, said in an e-mail before the announcement. ``The outcome of the competition was fairly close, as Boeing has argued in its filings, rather than a decisive win for the Northrop-EADS team as the Air Force asserts.''

Boeing shares have declined 11 percent since the decision, compared with a 12 percent drop in Northrop. Boeing rose $1.08 to $75.46 at 1:22 p.m. in New York Stock Exchange trading, while Northrop fell 33 cents to $70.76.

Air Force Response

Boeing beat the odds in winning support from the GAO, the investigative arm of Congress that sustains only one in four protests. Winning the protest also helps Boeing keep its main commercial-aircraft rival, EADS' unit Airbus SAS, from a getting a foothold in the U.S. defense industry. Airbus took the No. 1 commercial-plane position away from Boeing in 2003.

GAO rulings are advisory. While the Air Force isn't required to follow the agency's recommendation, the service has to explain to Congress if it chooses to ignore the advice.

The Air Force must now respond within 60 days with a course of action based on the GAO findings, adding to a four-year delay in the program that the service says is needed to replace a fleet of airborne tankers in use since 1956.

Replacing Fleet

Efforts to begin replacing the fleet of more than 500 tankers have been held up since 2004, when a plan to lease and buy 100 aircraft from Boeing collapsed amid ethical violations by an executive and an Air Force official that sent both to jail.

Alabama Governor Bob Riley was in an editorial board meeting at Bloomberg headquarters in New York when he learned of the news, which will create further delay in Northrop's plans to build the tankers in his state and create at least 1,500 jobs.

``Oh, God, that's not good,'' said Riley, a Republican serving his second term. Earlier, he said it would take ``an absolute nutcase'' to prefer the Boeing bid over Northrop's.

The GAO decision doesn't imply that Boeing now has an easy road to reversing the original award and capturing the work for itself, said Jim McAleese of McAleese & Associates, a government contracting and national-security law firm in McLean, Virginia.

``To be successful in any potential re-competition, Boeing must demonstrate that it is either technically superior at a reasonable cost/price-premium, or that it is significantly lowest-evaluated-cost,'' McAleese said in an e-mail before the announcement. He wasn't involved in the protest.