Northrop to Drop Out of Long Running Tanker Battle

Monday, 08 Mar 2010 03:45 PM

Northrop Grumman has decided not to bid against Boeing in the U.S. Air Force's multibillion-dollar aerial tanker competition after concluding it would be too risky, according to sources closely following the issue.

Northrop spokesman Randy Belote declined comment, saying his company would announce a decision when it finished analyzing the Air Force's final request for proposals (RFP) for a competition that could be worth as much as $50 billion.

EADS, Northrop's partner in the competition, also declined comment. EADS, keen to gain a bigger foothold in the United States, had been backing a fresh bid by Northrop, a European source told Reuters last week.

Sources briefed on the decision said Northrop subsequently told EADS it would not bid, forcing the European defense giant to consider its options, including a possible solo bid.

A Northrop announcement was expected after the close of the U.S. stock market on Monday, said the sources, who were not authorized to speak on the record.

"If they don't see big money, they don't want to do anything," said one European defense source in describing Northrop's decision.

To win, Northrop would have to pare its profit to a low level, and then abide by a fixed-price contract for nearly two decades, with only a small adjustment allowed for inflation.

Northrop and EADS won the last competition in February 2008 with an Airbus A330-based tanker plane, but the deal, valued at around $35 billion, was later canceled after government auditors upheld a Boeing protest.

Northrop told the Pentagon in December it would not submit a bid in this follow-on competition unless there were significant changes to the Air Force's draft rules, which Northrop said clearly favored Boeing's smaller 767 airplane.

But one congressional aide who studied the revamped final rules carefully said the changes made by the Air Force were "largely technical."

Defense analyst Loren Thompson, chief operating officer of the Lexington Institute, said Northrop's decision followed an intensive review of the final rules, under pressure from its congressional backers and EADS to submit a bid.

"Northrop has tried for two weeks to figure out how they could bid on this program without taking excessive risks," Thompson said. "What they saw is that they were likely to lose, and if they won, the level of risk was so high that they might regret winning."

Congressional aides said EADS, whose North American unit is the prime contractor for a large U.S. Army helicopter program, could theoretically submit an independent bid for the refueling planes, but said it faced a big uphill battle politically.

"It's doable, but it definitely sharpens the U.S. vs. Europe perspective if Northrop isn't the prime contractor," said one aide, who was not authorized to speak on the record.

Representative Norm Dicks from Washington state, a big supporter of Boeing's 767-based bid, also just assumed control over the House defense appropriations subcommittee.

Thompson said any solo bid by EADS would be a "face-saving, but money-losing proposition," noting that the actual cost of submitting a bid was likely to be around $100 million and it was unclear if EADS would be considered a qualified bidder.

Richard Aboulafia, defense analyst with the Teal Group, said a solo EADS bid would provide "the momentary illusion of competition," but said the RFP and political forces still appeared to be skewed against a European bid.

EADS was also still grappling with major problems on its A400 military transport plane program, which could limit its flexibility in terms of offering the Air Force rock-bottom prices for the A330-based tanker, he said.

Even additional European funding for the A400M would not help, he said.

"Limiting your losses to several billions of euros is not the same as getting several billions."

Northrop shares were trading lower at around $64 on the New York Stock Exchange.

© 2015 Thomson/Reuters. All rights reserved.

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