In major upset, Boeing wins lucrative Air Force tanker contract

In a major upset, the Pentagon awarded Boeing a contract that will eventually be worth roughly $35 billion to begin replacing the Air Force's aging fleet of airborne refueling tankers, a lucrative deal that caps years of controversy and is certain to fuel a renewed lobbying battle on Capitol Hill.

If the contract is approved by Congress, Boeing will be well positioned to sell the Air Force hundreds of additional tankers for up to $100 billion more. The Air Force's planned purchase of an entirely new fleet of tankers-its existing planes date back to the Eisenhower administration-represents one of the richest deals in Pentagon history. The contract is an especially coveted prize because defense spending is scheduled to begin falling in coming years, likely making the tanker one of the Pentagon's last big-ticket buys.

The decision to award the initial purchase to Boeing surprised both lawmakers and industry observers, who had expected the deal to go to the European defense conglomerate EADS North America. Instead, Boeing emerges as the big winner, while EADS executives face the tough choice of deciding whether to contest the contract on Capitol Hill. As the subsidiary of a foreign-owned company, EADS might have a hard time persuading lawmakers to overturn Boeing's award or to split the purchase between the two companies.

"Boeing was a clear winner," Deputy Secretary of Defense William Lynn said Thursday evening.

He acknowledged that EADS had the right to appeal the ruling, but said he felt confident that the department's decision would withstand any challenge. Lynn said the evaluation of the two bids was thorough enough that it "will not yield grounds for protest."

Pentagon officials said the award would give Boeing $3.5 billion to provide an initial set of 17 next-generation tankers. The planes should be delivered by 2017, the officials said.

In a statement, EADS executives said they were reviewing the Air Force decision and had not yet decided whether to mount an appeal.

"This is certainly a disappointing turn of events, and we look forward to discussing with the Air Force how it arrived at this conclusion," EADS North America Chairman Ralph D. Crosby said in a statement. "With a program of such complexity, our review of today's decision will take some time."

The stakes had been high for both companies, each of which has spent years contesting the contract. Both promised to create thousands of high-paying new jobs if it won the deal, with Boeing laying out plans to hire thousands of workers in California, Kansas, and Washington state, while EADS said it would build an entirely new factory in Alabama to manufacture the tankers.

Lawmakers from the states which stand to gain jobs because of the Boeing win were quick to praise the Pentagon decision. Democratic Sen. Patty Murray of Washington said the decision was the "right one for our military, our taxpayers and our nation's aerospace workers."

"Even when competing against an illegally subsidized foreign competitor, Boeing's skilled workforce proved that they have the know-how and the product that can best serve our military," she said.

Republican Sen. Pat Roberts of Kansas said the Boeing contract would bring thousands of new jobs to the Wichita area, and estimated that it would have an economic impact of $388 million on his state alone.

"I am proud of our workers at Boeing Wichita who can out-compete anyone and look forward to seeing that first tanker finished and out of the hanger," he said.

Industry observers have long been divided about which plane was better for the Air Force. The EADS model was capable of carrying significantly more fuel, but Boeing's plane appeared to be cheaper to fly and easier to maintain, criteria which might have taken on added weight because of how often the planes are likely to be used in support of operations above Afghanistan, Iraq, and other nations.

The fight over the plane has been one of Washington's longest-running-and most contentious-lobbying wars. Boeing employs an army of lobbyists and retains strong support on Capitol Hill along lawmakers from both parties. It has long argued EADS enjoys an unfair advantage because it receives large subsidies from European governments and that it would be unwise to leave a key military contract in foreign hands. EADS countered that it can make a superior plane and would bring needed jobs to economically depressed areas of Alabama that are still recovering from Hurricane Katrina.

The Air Force has been trying to award the contract since 2001, but an almost surreal mix of outright criminality, corruption and sheer government incompetence derailed the two prior attempts to finalize a deal to replace its aging fleet of tankers, which are used to refuel jets, bombers, and other planes in mid-flight.

Boeing won the first round, in 2004, with an ambitious proposal to lease the tankers to the government rather than selling them outright. The deal attracted the attention of Arizona Republican Sen. John McCain, whose investigations led to an ethics scandal that ultimately resulted in prison terms for Boeing's then-chief financial officer Michael Sears, and the Air Force's No. 2 acquisitions official, Darleen Druyun, who admitted to trying to steer the award to the company in exchange for high-paying jobs at Boeing for herself, her daughter and her son-in-law. Boeing's then-chief executive officer, Phil Condit, was forced out in the wake of the scandal, and the company paid out $615 million in fines.

The contract was opened up again for bids in 2007. The following year, it was awarded to a joint bid from EADS and Northrop Grumman. Boeing formally appealed the decision, and it was overturned after the Government Accountability Office identified severe deficiencies in the criteria the Air Force used in selecting the Northrop/EADS bid. In the wake of the scathing GAO ruling, Defense Secretary Robert Gates fired several high-ranking Air Force officials.

Northrop dropped out in 2010, but Gates and the Air Force extended the bid deadline so EADS would have time to develop a solo bid. Boeing had built the entire current tanker fleet decades ago, but EADS quickly emerged as the front-runner.

Air Force officials said on Thursday that replacing the tankers is a critical national security imperative, and they expressed hope that the decision to award the contract to Boeing would be quickly ratified by Congress, allowing work to finally begin on building a new fleet of planes.

But that might be wishful thinking. EADS may well decide to appeal the decision, given the vast sums of money at stake, and could draw on support from Gulf Coast lawmakers from Alabama and its neighboring states.

Paradoxically, an EADS appeal could benefit from the Air Force's own actions. Late last year, the Pentagon inadvertently sent each company confidential information about the competing bid. Air Force officials have argued that the gaffe caused no real damage, but EADS and its congressional allies are sure to cite the mistake in any appeal.

McCain, in a statement after the announcement, was more circumspect.

"I am pleased that the Air Force has made a decision to award a contract for a replacement aerial refueling tanker," he said. "I look forward to the Air Force demonstrating over the next few weeks how today's decision was made fairly, openly, and transparently. Only such a process will ensure that we obtain the most capable aerial refueling tanker at the most reasonable cost."