Op-Ed: Tanker Wars: Why Northrop Grumman Thinks It Can't Win
(Source: Lexington Institute; issued November 2, 2009)
Last week, one of the two teams competing to provide the Air Force's future aerial-refueling tanker launched an unusual campaign to overturn the service's strategy for buying the plane. Northrop Grumman and its European partner Airbus signaled that they don't believe they have a plausible chance of winning under the proposed terms, and began building the foundation for a formal protest.

What's unusual about the move is that competitor Boeing hasn't been all that happy with the revised tanker solicitation either, but Northrop has elected to pursue an aggressive strategy that is sure to anger its Air Force customer. Here's why Northrop is willing to take that risk.

When the Air Force conducted an initial round of competition for the next-generation tanker two years ago, there were five basic selection criteria: mission capabilities, past performance, proposal risk, proposal cost and something called an "integrated fleet refueling assessment." Northrop Grumman managed to prevail on most criteria by convincing the Air Force to look at the refueling mission in a new way -- a way that rewarded Northrop for offering a bigger plane with greater range and carrying capacity. Boeing's rival 767 tanker was also bigger than the Eisenhower-era planes that the Air Force wanted to replace, but nowhere near as big as Northrop's modified Airbus A330.

Although both planes had been in commercial production for many years, Northrop persuaded the Air Force that the version of the 767 Boeing was offering entailed major development risks, whereas its own tanker would be a more straightforward modification. The Air Force chose the Northrop offering based on its greater carrying capacity, lower risk and competitive price.

Boeing's response was to launch its first protest of a Pentagon contract award in ten years, a protest that the Government Accountability Office upheld on multiple counts. In essence, GAO found that the Air Force had deviated from its stated selection criteria and thus treated Boeing unfairly.

The competition now unfolding attempts to correct previous problems by eliminating any subjectivity or uncertainty in the selection of a winning design.

However, the new acquisition strategy is so different from what came before that it effectively eliminates any competitive advantage in offering a bigger plane. In fact, it penalizes the bigger plane by counting higher operating and construction costs against it.

The new approach minimizes subjectivity or uncertainty in the selection process by establishing 373 "mandatory requirements" -- performance features and characteristics -- that plane must satisfy to be considered. This is a "yes-no" determination in which no credit is given for exceeding a requirement. The competition thus becomes a "price shootout" in which all non-cost factors are leveled and the company bidding the lowest price prevails.

From Northrop Grumman's perspective, this is the worst of both worlds. On the one hand, the superior performance features of its plane get little credit. On the other hand, it has to offer a competitive price on a plane that is intrinsically more expensive to build and operate than the smaller Boeing tanker, at least on a per-plane basis. To make matters worse, Boeing and its backers are invoking a recent World Trade Organization finding that Airbus commercial transports were illegally subsidized to cast doubt on whatever price Northrop actually does bid.

So unless the Boeing plane fails to meet some mandatory requirement, Northrop figures its rival is almost certain to win. And after what happened the last time around, Boeing isn't in a mood to make any concessions.

Given the high risks associated with an 18-year, fixed-price contract, Northrop Grumman may not bid at all unless there are changes to the process.


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