Boeing could win Pentagon's $35 billion tanker deal -- with no competition

The Air Force, still in need of airborne refueling craft, plans to buy 179 of these so-called tankers starting in fiscal 2011. The $35 billion contract for turning out about 15 planes a year may be awarded by June 2010, according to Bloomberg News.

The Air Force has tried many times to make this deal but hasn't had much luck in recent years. As I wrote in You Can't Order Change, Boeing (BA) almost won in 2002. But when it came to light that the company had offered jobs to a key Air Force procurement officer and her daughter in exchange for the award, the contract was canceled. Last year, the bidding process got caught up in electoral politics and was delayed.

Now it looks like Boeing might win the bid after all -- with no competition.

That's because the only other bidder -- a consortium of EADS, parent of Airbus, and Northrop Grumman (NOC) -- is threatening to withdraw from the process unless the Air Force changes the request for proposal (RFP) that details the criteria for selecting the winning bidder, according to Bloomberg. Northrop's CEO wants the Air Force to change the RFP so it won't have to bear "financial burdens."

The basic problem for Northrop appears to be that the Air Force now wants to buy a tanker that's smaller than the Airbus A330 that EADS/Northrop wants to sell. In order to meet that requirement, it seems EADS/Northrop would need to modify the A330 -- a costly process that it claims would wipe out its profits.

And of course, the latest wrinkle in the tanker process has caused the usual political noises. Rep. Norm Dicks (D-Wash.) -- where Boeing would build its tanker -- is hoping that the Air Force doesn't alter its RFP in response to pressure.

"A Sham"?

The Northrop congressional tag team begs to differ. How so? Sen. Richard Selby (R.-Ala.) -- where Northrop would build its tanker -- calls the current RFP "a sham," while his House colleague, Republican Bob Riley, blames President and Commander-in-Chief Obama for corrupting the process, according to Bloomberg.

But if the Pentagon spokesperson is to be believed, the RFP will remain the same. Bloomberg quoted Byran Whitman saying, "the Department cannot and will not change the warfighter requirements for the tanker to give advantage to either competitor."

And it looks like that bid could be awarded even if there is no competition. As Whitman said, "The Department wants competition but cannot compel the two airplane makers to compete." Simply put, Boeing could win this $35 billion contract with no competition.

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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