Airbus and Boeing will likely split the Pentagon's $35 billion tanker deal

The Pentagon recently announced its third attempt to find a supplier willing to accept $35 billion in exchange for 179 airborne refueling tankers. If BusinessWeek's reporting proves prescient, that $35 billion will be divided in some way between the two bidders -- Boeing (BA) and EADS' Airbus subsidiary in partnership with Northrop Grumman (NOC).

Before getting into why the contact will likely end up being split, it's worth focusing on the regional politics involved. The Boeing work for the tanker would be done in Washington, Connecticut and Illinois. By contrast, the Airbus/Northrop Grumman tankers would be built in Alabama and South Carolina -- not to mention Europe. In short, the Democratic party wants Boeing to win, and the Republican party favors Airbus/Northrop.

But what would be in the best interest of the Pentagon? A case could be made for divvying up the order based on the fit between different Pentagon requirements and the capabilities of the bidders' different aircraft. Specifically, the Airbus KC-30s would work best for the Pentagon's longer-range assignments across Asia, and the smaller Boeing KC-767s would cost less to operate on shorter refueling jobs.

The Air Force specifications for the tanker put Boeing at a disadvantage. That's because these specs put a heavier emphasis on the tanker's ability to fly long distances and carry more fuel -- thus ruling out Boeing KC-767.

But that's not all. The Air Force wants its tankers to be able to operate on long, 15,000 foot runways at its newer military bases as well as shorter 6,000-foot runways on bases in India and the Philippines. As BusinessWeek points out, this would again put Boeing at a disadvantage because its other possible tanker, a version of its 777 commercial jet, might not meet that spec.

Boeing is playing from behind on two other fronts as well. The Air Force wants early, so-called pre-production, versions of the tanker within 18 months of the July 2010 contract award at a "not-to-exceed" price per tanker. But since Boeing does not know when it will be able to build its KC-777 or how much it will cost, it may not want to comply with the deadline or the fixed-price requirement.

Nevertheless, the Pentagon could wind up back at square one if it awards the contract to one supplier because a single-source deal will almost certainly result in the loser filing a complaint. And that would only further delay the delivery of these badly needed tankers. So to make sure that the third try at awarding that $35 billion is the last, look for the Pentagon to split the bid.

Peter Cohan is amanagement consultant, Babson professor and author of eight books including, You Can't Order Change. Follow him on Twitter. He has no financial interest in the securities mentioned.

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