Boeing's Game: Bid or No Bid?

Its threat to pull out of the renewed Air Force tanker competition with Northrop/EADS could rile up Congress—possibly just what Boeing wants 

by Joseph Weber and Keith Epstein 
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The high-stakes poker game between Boeing and the Northrop Grumman/EADS alliance to build $35 billion worth of airborne refueling tankers is taking a new and—for Boeing—very risky turn. Boeing says it has "little option" but to pull out of the tanker competition if the Defense Dept. doesn't give it six months to submit proposals for the larger plane with greater fuel capacity sought by the Air Force. 

Company spokesman Daniel C. Beck tells BusinessWeek that "if Boeing is unable to secure sufficient time to prepare a competitive proposal, there is little option for Boeing other than to no-bid." Within Boeing, sources tell BusinessWeek, some managers are arguing for pulling out of the competition regardless of what the military does. 

Boeing on Aug. 21 leaked word to The Wall Street Journal that it may fold its cards. Jim Albaugh, head of Boeing's defense unit, warned that "there is a really high likelihood that we would no-bid the program" if the company doesn't get the time he says it needs to recast its plans to accommodate a bigger plane than Boeing has long planned on. 

The Defense Dept., in reopening the competition Aug. 6, gave both planemakers until Oct. 1 to submit new bids and to enter more discussions that would lead to "best and final" offers by the end of November or early December. It said it wants to have the competition wrapped up by New Year's Day, well in advance of a new Administration and Congress. Boeing (BA) supporters have said that timetable is far too short (BusinessWeek.com, 8/13/08) to shape a new proposal, even though Boeing has had since at least February to retool its bid. It was in February that the Air Force awarded the contract to the Northrop (NOC) alliance, triggering a protest by Boeing that led to a new competition. 
Boeing's Strategy

Although the threat of taking its chips off the table suggests that Boeing plans to simply quit, the move actually may improve the company's chances of winning the new battle. Such a delay could move the decision into the hands of a new White House and Congress that might be more inclined to favor Boeing. Boeing would be taking a gamble that Democrats would control Washington, since they generally are believed to tilt in favor of the heavily unionized company, and even more so because Northrop is allied with EADS, or European Aeronautic Defence & Space (EAD.PA), maker of Airbus planes. 

So far, Democratic politicians from Washington State, where Boeing does much of its manufacturing, have pushed hard for the home company. They have pressed for more time and sought to have the decision made by Congress, instead of the Pentagon or the Air Force. The Air Force made significant errors in awarding the contract at first to the Northrop partnership, the Government Accountability Office ruled in June after a Boeing protest. Among them, GAO said, was giving extra credit for a larger plane—based on the Airbus A330 model—after telling both companies initially that it wouldn't give such credit. Boeing based its design on its smaller 767 commercial jet. This was deemed unfair. 

If Boeing does actually pull out of the competition, analysts say, it would be betting that Congress won't tolerate a no-bid situation, preferring competition over what would amount to a single-supplier award. The company may figure that Congress would prefer to extend the deadline for just a few months to make sure the Pentagon has a reasonable choice. Indeed, Albaugh in his comments to The Wall Street Journal minimized the delay. "This is an airplane that's going to be in the inventory 40 years," he said.

"What we're asking for is an additional four months to have a meaningful competition." 

Says Boeing's Beck: "Keep in mind that in the first competition it was nine months" from first indications of the Air Force's requirements to submission by the aircraft manufacturers of their first proposals. It takes months, he says, to "thoroughly understand the requirements, conduct trade studies, finalize a configuration determine costs, and then align costs and schedule." 

Boeing has hinted at seeking more time for a while, and the Washington rumor mill has been abuzz about the companys next move for weeks. In a statement e-mailed to BusinessWeek last week after Boeing officials met at Ohio's Wright Patterson Air Force Base with Defense officials, company spokesman Beck made clear Boeing's preference for a recast request for proposal, or RFP. "We hope that it was just the beginning of a continuing dialogue as we move toward a final RFP that prescribes the right aircraft and gives appropriate weight to all of the capabilities that will be required for the evolving mission over the next several decades," Beck said. "Boeing remains committed to providing the Air Force with a next-generation tanker that meets real-world mission requirements and that is selected through a fair, open, and unbiased competition that follows a realistic timetable." 
The Air Force Already Blinked Once

By contrast, Northrop officials have welcomed the shorter timetable, and they say enough time has elapsed. Northrop Vice-President Paul Meyer called his company's session with Defense officials a "productive review." He said the Defense Dept. won't alter the specifications it laid down when Northrop Grumman won the first round. "It is also clear that the department recognizes the need to begin production of the next generation of aerial refueling tankers as quickly as possible," Meyer added in a prepared statement, noting that the current tanker fleet is nearly 50 years old. "We look forward to submitting our proposal within the timeline established by the Defense Dept." 

While Northrop favors speed—figuring that the Pentagon is tilting its way—it, too, has proven a shrewd poker player at times. Last year it threatened to pull out of the competition unless the military altered its initial bid request, and the Air Force obliged it. That time the Air Force blinked. This time, however, the Pentagon may be hard-pressed to blink again. 

Boeing began considering using its 767 as a new tanker as early as 1992; it might have used a larger plane in the recent tanker competition, but the company says it had no idea the Air Force would want a plane with more fuel and cargo capacity. 

"We still believe it was the right plane for that competition," says Beck. Boeing and military officials have no meetings scheduled between now and the anticipated release of a final request for proposals by the Air Force next week.