Tanker Talk

Northrop Grumman's threat yesterday to abandon its bid for the KC-X airborne tanker competition "is merely a posturing move," according to a research note issued this week by Credit Suisse analysts Robert Spingarn and Julie Yates.

Northrop wants to opt out of the competition unless the Pentagon makes significant changes to the draft request for proposals, which, Spingarn and Yates write: "((A))ppears to favor the smaller tanker likely to be offered by BA ((Boeing)). We suspect partner EADS endorsed NOC’s ((Northrop's)) strategy. Frankly, we agree, as our recent visit to the annual USAF Airlift/Tanker Convention suggests that the recently adopted pass/fail nature of the evaluation process favors a smaller aircraft that meets minimum hurdles."

The Credit Suisse analysts further write:

Simply a Ploy: We see NOC’s letter as part of a negotiation process because NOC has concluded it would have to bid the current RFP at a massive loss in order to win, as the extra capabilities offered by its Airbus 330-based tanker will not receive credit unless bid prices are within 1 percent of one another. This “negotiation” needs to be wrapped up soon because the Secretary of Defense may see this as an issue that impacts his legacy.

NOC’s Objectives: (1) To alter the new pass/fail evaluation method in order to favor a premium technical solution/capability at a justifiable price premium (2) To re-introduce proposal risk to differentiate maturity of the two candidate aircraft, where BA’s “frankentanker” suffered last time (3) To re-introduce past performance which penalized BA in the prior contest.

Path Forward: (1) We think the final solution must allow Sec. Gates to deliver a new tanker at savings of at least several hundred million dollars to the taxpayer vs. the ‘08 contract (2) Given that USAF Air Mobility Command & OSD are now refusing to pay a premium price for additional technical capability (beyond KC-135 performance), NOC must explain why it’s a/c is a better solution (3) To achieve a more balanced RFP, we think NOC must be prepared to make concessions that have an equally favorable benefit for BA.

If NOC refuses to accept concessions, Secretary ((Robert)) Gates might go ahead with an uncontested award, but Congress remains an unpredictable factor.