Tanker ruling favors Boeing

Aerospace giant Northrop Grumman Corp. said Wednesday that it was suspending the hiring of thousands of engineers in Southern California after a ruling by a federal auditing agency left its $35-billion Air Force contract to build aerial refueling tankers in limbo.

The Government Accountability Office ruled that the contract awarded to Century City-based Northrop was flawed and recommended that the Pentagon hold another competition for what is expected to be the biggest military purchase for at least a decade.

The ruling was a major victory for rival Boeing Co., which had challenged the contract award, arguing that the Air Force had unfairly favored Northrop’s bid to build 179 tankers.

The decision is also expected to prolong the bitter rivalry between the nation’s second- and third-biggest defense contractors and embolden “Buy America” proponents who have criticized the contract because many of the parts for Northrop’s tanker would be made in Europe.

The ruling is the latest in a series of high-profile blows for the beleaguered Air Force, coming just weeks after the civilian and military heads of the service were forced to resign. The officials were pushed out by Defense Secretary Robert M. Gates after an investigation uncovered lax oversight of the Air Force’s nuclear arsenal.

The Air Force said Wednesday that it would “determine the best course of action” after it had reviewed the GAO’s decision.

“The Air Force will do everything we can to rapidly move forward so America receives this urgently needed capability,” Sue C. Payton, assistant secretary of the Air Force for acquisition, said in a statement.

Though the recommendations of the GAO, an auditing arm of Congress, are not binding, the findings “were so sweeping that it is nearly inevitable that the Air Force will have to start over in competing the tanker program,” said Loren Thompson, a defense policy analyst for the Lexington Institute.

“Protesting contract awards has become common, but it’s rare for the GAO to be so definitive in rejecting an award, particularly when the service was saying that it was transparent and fair,” he said.

The tanker contract will mean new jobs for Southern California no matter which group gets it. Northrop and Chicago-based Boeing are the largest private employers in Southern California, with a combined regional workforce of nearly 60,000.

With the latest decision, Northrop executives said the company would suspend hiring for the tanker program, which was slated to swell its workforce in Southern California by about 7,500 people. Boeing’s proposal would create about 4,000 jobs in the Southland, mostly with suppliers who would make parts for its plane.

The ruling may become the second major acquisition decision to be overturned by the GAO in a year. Last August, the auditor ordered the Air Force to redo a competition for a $16-billion search-and-rescue helicopter program.

At the Pentagon, the GAO’s decision was met with a sense of shock. Air Force officials immediately plunged into the 69-page document to try to make sense of what went wrong, a senior Defense Department official said. The complete document, which contains proprietary information, has not been publicly released.

During the competition, Air Force officials had 700 informal written exchanges, 60 telephone conference calls and 10 face-to-face exchanges with both teams to discuss the bidding process and had high confidence that the GAO was going to uphold the contract, said an official who requested anonymity.

The latest ruling also raises the prospect that the service won’t get the new tankers for several more years, placing increasing strain on a fleet whose average age is 47. Replacing the fleet, which enables warplanes to fly great distances without having to land for refueling, has been the service’s top priority.

But on Wednesday the GAO sided with Boeing, saying the “Air Force had made a number of significant errors that could have affected the outcome of what was a close competition between Boeing and Northrop Grumman.”

The GAO cited seven major reasons for upholding the protest. Among them was a finding that the bids included “misleading and unequal discussions with Boeing.” Boeing was told, for instance, that it had satisfied a key performance criterion when it had only partially met it. The report also found problems with the way the Air Force evaluated the cost of operations and maintenance involved in Boeing’s plan.

The GAO cautioned that the review did not evaluate the “merits” of each aircraft but examined how the Air Force evaluated the proposals, leaving open the possibility that Northrop’s bid could still prevail in another round of competition.

The process of awarding the contract has had a number of twists since it was proposed in 2001. The initial effort to lease new tankers from Boeing was terminated after a former Air Force procurement official was jailed for negotiating a $250,000-a-year job with the firm while she was reviewing multibillion-dollar bids, including Boeing’s tanker proposal.

The Air Force took a year to come up with the terms of the new tanker competition and spent another year evaluating the proposals.

In February, the Air Force selected Northrop, which submitted a proposal to modify the A330 passenger jet that is currently built in France by the Airbus subsidiary of European Aeronautic Defense & Space Co. Parts for Northrop’s plane would be made worldwide, with aircraft assembly in Mobile, Ala.

Boeing, which built the current fleet of KC-135 tankers, offered a modified, 767-passenger jet that it currently assembles in Everett, Wash. The proposal was widely considered the favorite, having won the initial bid that was later canceled.

But in an upset, the Air Force picked Northrop’s proposal. That immediately drew the ire of Congress members from Washington and Kansas, where Boeing maintains large-scale operations. In March, Boeing challenged the award, arguing that the way the Air Force evaluated the proposals was flawed.

The decision was a gamble for Boeing, which hadn’t protested an Air Force contract in more than a decade. Boeing’s chief executive, James McNerney, risked antagonizing the Pentagon with his spirited defense of Boeing’s case.

Boeing launched an aggressive public relations campaign -- publishing dozens of full-page advertisements in newspapers touting its plane and accusing Northrop of sending jobs overseas. Northrop responded by saying the accusations misrepresented its bid.

The publicity push even spilled over into YouTube.com, where a sarcastic video called “Merci McCain” thanked presumed Republican presidential nominee Sen. John McCain (R-Ariz.) for creating “tens of thousands of jobs for the French.”

McCain led the congressional inquiry that resulted in the cancellation of the original lease contract with Boeing.

After the GAO released its decision Wednesday, McCain said his concern remained that the Air Force buy the best tanker at the best price.

“As I have under similar circumstances, I now urge the Air Force to carefully consider the GAO’s decision and implement its recommendations as quickly as, and to the fullest extent, possible,” McCain said in a statement.

McCain’s presidential rival, Sen. Barack Obama (D-Ill.), also weighed in. He said in a statement that the competition “must be reopened to ensure a fair and transparent process that fully considers the needs of America’s military and our workforce.”

The decision was issued under a protective order. But the GAO has asked the parties involved to identify sensitive material so it can quickly release a public version of its decision.

“While I respect the process for appealing the Air Force’s decision, I am very disappointed to hear the tanker acquisition process may be further delayed,” Gen. Arthur J. Lichte, commander of the Air Mobility Command, said in a statement.

It’s important, he said, that we get “this critical asset in the hands of our war fighters. Without a new tanker, this capability -- and our nation’s ability to project power and humanitarian assistance in the future -- is in significant jeopardy.”

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peter.pae@latimes.com

amadhani@tribune.com

Pae reported from Southern California, and Chicago Tribune reporter Madhani from Washington. Times staff writer Peter Speigel and the Tribune’s Julie Johnsson contributed to this report.