How Boeing Blew the Deal of the Decade

Home-field advantage couldn't save Boeing from an inferior bid for the Air Force's huge tanker program.

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For more than 50 years, Boeing has enjoyed a sweet setup with the U.S. Air Force: It has been the sole supplier of aerial refuelers critical to keeping short-legged fighter jets and support aircraft in the air on long missions.

By most accounts, Boeing has been in the pole position to win a $35 billion contract to upgrade the Air Force's entire fleet of tankers, a 179-airplane commitment that dwarfs any order a single airline could ever place for commercial jets. As the nation's second-biggest Pentagon contractor, with about $31 billion in defense-related revenues, Boeing has a vast network of backers in every corner of Washington, D.C.

Its tanker proposal entailed 767s that would have been built largely in the United States, compared with a competing proposal led by Northrop Grumman that would involve Airbus A330s built partly in Spain, England, and France. The Boeing planes would have fit smoothly into the Air Force system; the Airbus planes would require new infrastructure and strategy. And while employment figures for defense contracts are notoriously inflated, the Boeing plan would almost certainly have provided more U.S. jobs.

So how did Northrop, in conjunction with European giant EADS, surprise virtually everybody in the defense industry and snag the huge contract from Boeing?

On the merits, apparently. Details of the competing proposals are just beginning to emerge, and a forthcoming spate of congressional hearings is sure to elicit more info—plus plenty of overwrought political rhetoric. But defense analyst Loren Thompson of the Lexington Institute has scrutinized data released by the Air Force and concluded that the Northrop proposal "was deemed much better in virtually all regards." The Air Force, he writes, considered the Northrop proposal to be cheaper and less risky, and to provide more overall capability. Poor performance on a few recent contracts also worked against Boeing; the Air Force judged the Northrop team more likely to deliver the planes on time and on budget.

It's quite likely that hubris was a factor, too. For its muscle, Boeing has made numerous missteps in recent years, such as hiring an Air Force official later convicted of illegal acts regarding Boeing contracts she oversaw while still in her government job. In 2004, the Pentagon scuttled a $24 billion deal to lease and buy up to 100 tankers from Boeing after Sen. John McCain and others complained that the cost was exorbitant.

On the latest tanker deal, Air Force officials complained that Boeing was evasive on cost data and other key metrics. "Northrop was viewed as a model contractor, highly responsive," says one insider familiar with the negotiations. "Boeing was quite difficult."

Then there's politics. Boeing's most powerful ally in Washington is Rep. Norm Dicks, one of the ranking appropriators in the House. But Northrop, with its own slick Washington operation, built a coalition of political heavyweights starting with Sens. Richard Shelby and Jeff Sessions of Alabama, where the tanker will be assembled from components shipped mainly from Europe. Other big backers include Sen. Robert Byrd of West Virginia, where the refueling device, known as a "boom," will be built, and Haley Barbour, former chairman of the Republican Party, who's now governor of Mississippi, where Northrop Grumman builds ships for the Navy.

Northrop claims, in fact, that the KC-45, as the new tanker will be called, will provide 25,000 U.S. jobs in 49 states, even if the aircraft originates in Europe. Boeing used to claim that its tanker plan would generate about 20,000 American jobs, but that estimate has since drifted upward to 44,000 jobs.

It's a safe bet that all of those figures are inflated, but no matter what the correct numbers, the stakes remain high. Boeing's stock had already been sliding in 2007, largely because of delays with its 787 commercial airliner. Since the Air Force setback, its shares have dipped an additional 5 percent or so. Boeing has asked the Air Force for a debriefing on why it didn't win, which is scheduled for March 12. The company can appeal, and members of Congress can hold up funding if they don't approve of the Air Force's decision. But if Northrop really did win on the merits, Boeing could be in for a sustained loss of altitude.

TAGS:
Air Force
employment
defense spending
Boeing
  • Rick Newman

    Rick Newman is the author of Rebounders: How Winners Pivot From Setback to Success and the co-author of two other books. Follow him on Twitter or e-mail him at rnewman@usnews.com.

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