Northrop Grumman drops out of Air Force tanker competition

WASHINGTON - Northrop Grumman Corp. announced Monday that it won't compete against Boeing Co. for a $35 billion contract to build refueling tankers for the Air Force because Northrop doesn't think it can win.

The decision puts the Pentagon on a path to doing something President Barack Obama said shouldn't happen any more: paying large amounts of money to a major defense contractor without undergoing any competition.

The decision also will probably knock out a major international competitor from gaining a foothold in the U.S. market. EADS, the European Aeronautic Defence and Space Co., had partnered with Northrop Grumman to vie for the tanker but was not expected to be able to compete against Boeing on its own.

Northrop Chief Executive Officer and President Wes Bush said in a statement that the Pentagon's guidelines for the program "clearly favors Boeing's smaller refueling tanker" but that the company would not file a formal protest.

"We have a fiduciary responsibility to our shareholders to prudently invest our corporate resources, as do our more than 200 tanker team suppliers across the United States," Bush said. "Investing further resources to submit a bid would not be acting responsibly."

In a press release, EADS North America released a statement by Ralph D. Crosby, Jr., Chairman of the Board.

"Five years ago EADS partnered with Northrop Grumman, as prime, to pursue the U.S. Air Force KC-135 modernization program. Two years ago our team was selected and awarded the contract. Today Northrop Grumman has decided not to submit a bid to the Department of Defense for the KC-X program. . . . This decision does not diminish our commitment to the U.S., or to its service men and women. The enduring strength of our commitment is reflected in the success of the Army's Light Utility Helicopter -- of which we are prime contractor and that just celebrated its 100th on-schedule delivery. And it also can be seen in the many EADS systems and capabilities that operate with the U.S. Army, Navy, Air Force and Coast Guard."

The political fallout was swift. Alabama Gov. Bob Riley, where Northrop would have assembled the planes and created thousands of new jobs, called the program a "charade" and said the Pentagon made it "impossible" for Northrop to compete.

"It's disgraceful," Riley said.

Sen. Jeff Sessions, R-Ala., called the development "tragic" and a "dark day for the American warfighter." Added fellow Alabama Republican Sen. Richard Shelby, "The Air Force's refusal to make substantive changes to level the playing field shows that once again politics trumps the needs of our military."

The Defense Department itself has also weighed in.

"We are disappointed by Northrop's decision not to submit a bid for the U.S. Air Force tanker replacement program. In the last tanker replacement (KC-X) competition, Northrop Grumman competed well on both price and non-price factors. We strongly believe that the current competition is structured fairly and that both companies could compete effectively. Based on the inputs we received from both offerors to the Department's draft Request for Proposal (RFP), we made changes to reduce the out-year risk to the potential manufacturers of KC-X. However, we did not change the war-fighters' requirements to accommodate either offeror. The Department strongly supports trans-Atlantic defense industrial ties and believes they benefit the American war-fighter and taxpayer," said Defense Deputy Secretary William Lynn in a press release.

A year ago, Obama said these kinds of no-bid contracts aren't a good deal for the taxpayer and vowed to change the way government agencies do business. With the support of Sen. John McCain, R-Ariz., his campaign rival in 2008, Obama ordered his senior advisers to come up with ways to encourage competition.

"The days of giving defense contractors a blank check are over," Obama declared.

On Monday, McCain spokeswoman Brooke Buchanan said that the senator regrets Northrop's decision and would continue to call for an "open and fair process to ensure the best deal for the American taxpayer."

Industry insiders say that the decision by Northrop wasn't surprising.

"When all was said and done, Northrop saw a lot of risk and not a lot of profit," whereas EADS was focused primarily on gaining entry into the U.S. market, said Loren Thompson, head of the Lexington Institute. "At the end of the day, the interest of the two teams diverged."

Boeing's supporters shrugged off concerns that Northrop's decision would mean higher program costs because Boeing would still have to meet requirements laid out by the Pentagon. Ultimately, they said it was good news that some of the work wouldn't go overseas to EADS.

"This will be an American company with American workers," said Democratic Rep. Norm Dicks of Washington state, where Boeing plans to build its tankers.

Boeing announced last week that it would offer a military version of its 767 passenger jet for a fleet of 179 new planes. The contract is expected to be the first of several to replace many Air Force planes that date back to the 1950s. Boeing said it will submit its formal bid by May 10.

A final contract is to be awarded in September.