Tanker Dilemma: What Are Northrop Grumman’s Options?

After four years and $200 million in expenses, Northrop Grumman may have reached a dead end in its bid to build the Air Force’s future aerial-refueling tanker. That can’t come as a total surprise to newly-minted CEO Wes Bush, who doubted the wisdom of pursuing the tanker contract from day one. But now it falls to Bush to decide whether the company should withdraw from the next round of competition, or find some way of staying in the game. It appears that he has four basic options from which to choose.

1. Bite the bullet and bid. Northrop thinks that the Boeing team will have little trouble meeting all the mandatory performance requirements specified in the solicitation because standards were set low enough to accommodate either potential bidder. But if both planes meet all requirements and there is no extra credit for exceeding minimum thresholds, then the winner will be whoever’s plane is cheaper. Northrop always planned to offer an aggressive price by leveraging the close relationship of Airbus to European governments, but its modified A330 is so much bigger than Boeing’s 767 that achieving parity in pricing would be hard. To make matters worse, the solicitation burdens the Northrop entry with adjustments for higher fuel burn and construction costs over the life of the plane, so rather than being rewarded for offering a bigger, more capable plane, Northrop feels it is being penalized. The bottom line is that Boeing is likely to offer a more competitive price, which makes it hard for Bush to explain to his demanding board why the company should spend $100 million putting together another tanker proposal. Bush also has to be concerned about how seriously he would be taken in the future if the company decided to bid in circumstances where it repeatedly warned it would not.

2. Lodge a protest with GAO. Northrop Grumman could formally protest to the Government Accountability Office that the pending solicitation is so skewed in Boeing’s favor that it violates federal acquisition standards. There is a provision for such preemptive protests, but getting GAO to side with Northrop’s team would require it to step outside its usual role and question the government customer’s description of needs. GAO is usually not comfortable doing that, because it assumes cabinet agencies like the defense department have superior credentials for determining their operational requirements. It prefers to pass judgment on whether the terms of a solicitation have been correctly applied, rather than judging whether the terms themselves are acceptable. Obviously, Northrop would be in even worse shape if it lodged a formal protest, and then GAO did not agree with its complaint.

3. Challenge a sole-source award. If Northrop elects not to bid, then the government would presumably award the tanker contract to Boeing as long as it satisfied performance and pricing specifications. However, the absence of competition would raise several acquisition issues. For example, the federal acquisition regulation specifies only a handful of circumstances under which a sole-source contract can be awarded, and Northrop might contend that none of the required circumstances exist. If the government contends there is only one responsible source — an argument deemed acceptable by the regulation — Northrop could argue that it too is a responsible source but has been forced out of contention by a flawed solicitation. If the government argues compelling urgency, another acceptable reason for sole-sourcing, Northrop could argue that the record of the tanker program to date does not demonstrate a need for urgency. And so on. Conversion of solicitations from competitive to sole-source arrangements is a complicated process that requires congressional notification and may even require congressional approval under recently passed reform legislation. So it appears that simply by not bidding, Northrop could delay the tanker program and expose it to a renewed round of congressional scrutiny.

4. Petition Congress for redress. Some members of Congress will undoubtedly find it suspicious that Northrop Grumman won the first round of tanker competition handily, but in the second round faces such bleak prospects that it may not bid at all. The government has a simple answer: the first round of competition was not administered professionally, and the acquisition strategy has therefore been revamped. But that answer won’t mollify legislators whose home states stand to lose hundreds of jobs if Northrop is out of the running, so the company has already begun working legislative angles. However, it is operating at a disadvantage: Senator McCain has not visibly engaged in support of the Northrop team this time around, the Alabama delegation that strongly favors a Northrop victory is now in the minority, and Congressman Jack Murtha — the biggest backer of a split tanker buy in the lower chamber — has died. So Northrop has fewer cards to play on Capitol Hill today than in the past, and its prospects of success there are correspondingly limited.