Air Force awards $35B tanker contract to Boeing

WASHINGTON -- Capping a decade of delays and embarrassing missteps, the Air Force on Thursday awarded one of the biggest defense contracts ever -- a $35 billion deal to build nearly 200 giant airborne refueling tankers -- to Chicago-based Boeing Co. over European Aeronautic Defence and Space Co.

The contract will mean tens of thousands of jobs for a recession-weary nation, with Washington state and Kansas getting the bulk of the work building a replacement for the Eisenhower-era tanker fleet. The decision was a blow to the Gulf Coast and Alabama, which had been counting on EADS to assemble the aircraft at a long-shuttered military base in Mobile.

Air Force Secretary Michael Donley said the contract "represents a long overdue start to a much-needed program" as somewhat relieved Pentagon officials announced the decision, a clear surprise since defense analysts, lawmakers and even company executives had expected EADS to prevail.

"What we can tell you was that Boeing was a clear winner," deputy defense secretary William Lynn said.

Replacing the 1950s-era KC-135 planes -- the equivalent of a flying gas station -- is crucial for the military. Pilots who weren't even born when the last aircraft was delivered in 1965 are operating air tankers that the Pentagon is struggling to keep in flying shape.

The refueling tankers allow jet fighters, supply planes and other aircraft to cover long distances, critical today with fewer overseas bases and with operations underway far from the United States in places like Iraq and Afghanistan.

Pentagon leaders said both bidders met all 372 mandatory requirements for the contract. They said because the difference in price between the two bids was greater than 1 percent of the total, the cost essentially was the deciding factor, and other non-mandatory requirements were not used to make the decision.

The award gives Boeing the initial $3.5 billion for engineering, manufacturing and development of the first four aircraft. Under the contract, 18 tankers will be delivered to the Air Force by 2017.

Boeing will have to move fast to get the plane ready, at a time when its commercial aircraft division is still trying to deliver the new 787 and a new version of the 747.

"This will be a rapid-pace program, one that will be very focused on getting capability out to our warfighters as soon as possible," said Dennis Muilenburg, president and CEO of Boeing's defense business.

Both Boeing and EADS have said they were aggressive in their bids. Muilenburg declined to say how much Boeing cut into its anticipated profits with its final bid.

"Clearly we've been focused on affordability," he said. He said Boeing was able to make the plane more cheaply because it will be made on the same production line as the civilian version.

Although the plane is based on its passenger-carrying 767, and has some similarities to a tanker it is building for Italy and Japan, many pieces are different from the U.S. Air Force version. As a result, production and the plane's first flight are not expected until 2015, said Jean Chamberlin, vice president and general manager of the tanker program.

Lawmakers who have lobbied for Boeing to win the contract were gleeful over the news.

"I'm in the middle of a blizzard but it's all blue skies," said Sen. Pat Roberts, R-Kan.

Said Rep. Norm Dicks, D-Wash.: "This is the happiest day of my professional life." He called the win decisive.

Lawmakers from Alabama were bitter in defeat and suggested politics played a role.

"I'm disappointed but not surprised," Republican Sen. Richard Shelby said. "Only Chicago politics could tip the scales in favor of Boeing's inferior plane. EADS clearly offers the more capable aircraft."

Not only does President Barack Obama call Chicago home, but his new chief of staff, William M. Daley, resigned in January from the Boeing board of directors where he had served since 2006. The White House had said Daley would have no role in the Air Force decision.

Republican Rep. Jo Bonner vowed to get a full accounting of why the EADS bid was rejected.

"This competition has been challenged before and it's not unlikely it will be challenged again," he said. "It will ultimately be up to EADS to determine whether they will protest this decision and I will fully support whatever decision they make."

Lynn said that while the losing bidder has a right to appeal the decision, he believes the process was clear, transparent and fair enough that there will be no grounds for a protest.

The $35 billion contract calls for producing 179 new tankers. It could end up being a first installment on a $100 billion deal if the Air Force decides to purchase more aircraft.

Through the years, the Air Force's efforts to award the contract have been undone by Pentagon bungling and the criminal conviction of a top Defense Department official.

Initially, the Air Force planned to lease and buy Boeing planes to serve as tankers, but that fell through. The Air Force later awarded a contract to Northrop Grumman Corp. and EADS, but in 2008 the Government Accountability Office upheld Boeing's protest of the contract.

The GAO said it found "a number of significant errors" in the Air Force's decision, including its failure to fairly judge the relative merits of each proposal.

The Air Force reopened the bidding in 2010, only to be embarrassed again as it mistakenly gave Boeing and EADS sensitive information that contained each other's confidential bids.

Production will occur in Everett, Wash., Wichita, Kan., and dozens of other states. Boeing has said the contract will mean some 50,000 jobs.

Boeing workers leaving the Everett plant after a shift change Thursday afternoon greeted the news with blaring car horns.

"We are absolutely delighted, obviously," said Bill Dugovitch, spokesman for the Society of Professional Engineering Employees in Aerospace, the union representing Boeing's engineers and technical workers. "Our work force is ready to go to produce the world's best tankers."

Sen. Maria Cantwell, D-Wash., said many of those workers had been at Boeing their entire lives.

"It's part of the psyche of the Northwest. Building airplanes truly is what we do out here," said Cantwell, welcoming the prospect of at least 11,000 jobs to Puget Sound.

"This decision is a major victory for the American workers, the American aerospace industry and America's military," Sen. Patty Murray, D-Wash., said.

Boeing has highlighted its offering as an "American-made" tanker, in contrast to the European roots of its competitor. But both companies had planned to make their tanker in the United States.

EADS has 11 of its tankers in production and 28 more on order for countries including Australia and Britain. Boeing built a handful of its tankers based on its 767 passenger jet for Japan and Italy.

The two companies have tussled over whether they receive unfair subsidies from the governments in their home countries. Last month, the European Union said the World Trade Organization found U.S. aid to Boeing Co. violated international rules. The EU has claimed that Boeing received almost $24 billion in illegal subsidies, such as research grants and free use of technology from NASA, the Defense Department, and the states of Illinois, Kansas and Washington.

Last year the WTO ruled that trade rules were broken by Europe's "launch aid" to Airbus, including virtually risk-free loans as well as other support.

Jason Gursky, an analyst at Citi, said a potentially large benefit to Boeing is that the deal keeps EADS from gaining a foothold in the United States. The European company wants to set up manufacturing in the U.S. to profit from the dollar's weakness, compared with the Euro. Currently, EADS incurs all its costs in euros, which makes its planes more expensive when shipped to the United States.

In Mobile, backslapping and high fives quickly turned to tears and long faces as officials delivered word of the Air Force's decision.

"The news is bad," Alabama Development Office Director Seth Hammett said.

Mobile County Commission Chairman Merceria Ledgood said the Gulf Coast region "would live to fight another day." But despite efforts by state and local officials to put a positive spin on the news, most said they were extremely disappointed.

"There's no way to say we haven't had the breath knocked out of us," said Bill Sisson, executive director of the Mobile Airport Authority.

Boeing's share price jumped $2.44, or about 2.5 percent, to $73.20 on the news.

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Associated press writers George Tibbits in Seattle, Bob Johnson in Mobile, Ala., Josh Freed in Minneapolis, and Chris Rugaber and Ben Evans in Washington contributed to this report.