Why Boeing shouldn't protest U.S. tanker deal

By Keith Epstein

updated 11:27 a.m. ET March 5, 2008

Boeing executives, bewildered at losing a multibillion-dollar contract for a fleet of refueling tanker aircraft, are girding for battle as they lay legal groundwork for kicking up a more official fuss—the filing of a formal protest of a U.S. Air Force decision to buy from Northrop Grumman and partner European Aeronautic Defence & Space.

But even with billions at stake, shares tumbling, and an anticipated dent in earnings, there are some good reasons why Boeing shouldn't complain — and just might not. Sources say these downsides, too, are being debated in the company's executive suite and that no decision on a protest will be made until after a Pentagon briefing on the matter. Explains one Boeing source: "We certainly wouldn't want to aggravate our customer" — the Air Force.

Even crafting a statement the company issued Mar. 4 proved painstakingly tedious, as insiders strived to strike a balance in tone. Executives wanted to convey their sense that the company was misled by the Air Force. If Boeing had known the Air Force was seeking a plane with more fuel-carrying capacity and cargo space, say company insiders and a congressional source, it would have based its proposal on the larger Boeing 777 instead of the 767. The statement by Mark McGraw, Boeing's vice-president for 767 tanker programs, sidestepped some of the details but got to the point: "There may well have been factors beyond those stated in the [Air Force request for proposal], or weighted differently than we understood they would be, used to make the decision."

Boeing also is complaining about having to wait until Mar. 12 for a formal briefing on why it was not selected — a briefing McGraw says he wants within days. "The questions we are asking, as well as others being raised about this decision, can best be answered with a timely debrief." But Congress is likely to get the answers first; two top Air Force acquisition officials, Sue Payton and Lt. Gen. John "Jack" Hudson, will defend the Northrop Grumman/EADS choice at a Mar. 5 hearing of the House Defense Appropriations subcommittee.

Patchwork Planes

Video   Boeing tanker flap March 5: Reporters from BusinessWeek and Defense Daily discuss the implications of Boeing protesting the loss of a $40 billion Air Force contract for midair refueling jets. CNBC

The realities are complex. A protest could add yet another yearlong delay to replacing the military's aged fleet of KC-135 Stratotankers. These Dr. Strangelove-era airborne gasoline stations first entered service in the 1950s and are routinely falling apart and patched up. Yet they remain critical to U.S. global warfighting because they enable U.S. fighter jets and bombers to continue missions rather than return to aircraft carriers or bases.

A protest also could prolong attention to a series of embarrassments and turbulence for Boeing in recent years, including a scandal involving an earlier replacement tanker bid. Boeing also had troubles delivering tankers to other countries. And development of its high-tech "virtual fence" along the U.S.-Mexican border has been plagued with so many problems that deployment is now stalled.

Boeing has had difficulties on the commercial airliner side as well. Delays in the 787 Dreamliner over the last six months have depressed the company's stock. The tanker deal, while potentially worth $100 billion over its life, amounts to a less impressive revenue source on an annual basis. But it represents one of the largest military aircraft contracts in modern times, and comes at a point when projected sales increases for Boeing's defense unit are modest—only about $1 billion above the current $32 billion a year.

Even before the Gulf War, the nation's fleet of Stratotankers was stretched thin and at risk of having trouble with failing parts and systems that would ground too many tankers at once. Some of the planes have plywood floors, cockpit windows that come loose, and cracks in the landing gear — among countless other costly maintenance headaches. Putty holding parts in place sometimes give the planes the appearance of having Band-Aids, which is essentially what they are. Before each Stratotanker takes off, a maintenance crew must check hundreds of items on a list the size of a phone book. The inspections require eight hours, compared with only two hours for the average modern jet. Sometimes, mechanics unable to find replacement parts have had to improvise their own. Once, in 2003, parts fell from a landing KC-135, prompting repairs to flaps on 14 planes.

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Strategic risks and soaring maintenance costs made the Air Force eager for a new fleet — years ago. But bureaucracy and scandal delayed acquisition, most recently in 2003 when the Air Force, after a congressional investigation spearheaded by Senator John McCain (R-Ariz.), halted an order to lease 100 tankers from Boeing.

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