Northrop Threats to Abandon Bidding Jeopardize Critical Air Force Program

WSJ reports that Northrop Grumman Corp. is threatening to boycott bidding against Boeing Co. for aerial-refueling tankers contracts because of concerns over the bidding rules, a move that could complicate one of the U.S. Air Force's most sensitive weapons programs. People familiar with the matter say bidding guidelines favor Boeing's cheaper refueling plane, ignoring the extra capabilities that Northrop's proposal airplane offers, such as cargo and passenger capacity. Over the weekend, they say, the Air Force held steamy consultations with industry officials in an effort to keep competition going; a Northrop dropout would likely delay the program which is "critical to restoring the Air Force's credibility." In 2001 two Boeing execs went to jail after a tanker contract went to Boeing without competitive bids. Northrop executives have repeatedly stated they will not be a stalking horse to exact a better price out of Boeing. While the Air Force has said it will consider cargo capacity and other functions, Northrop says the rules don't describe exactly how extra capabilities will be evaluated relative to the plane's cost, causing one insider to comment: "If one plane is 30% more capable than the other at 10% greater cost, shouldn't that plane win?"

• Sources: Wall Street Journal
• Related commentary: Defense Sector Bests the S&P 500 for a Seventh Consecutive Year, Air Force Might Hire Private Sector Contractors for Next-Generation GPS Satellite System, Defense Stocks Should Continue to Outperform in 2007, Time To Get Defensive
• Potentially impacted stocks and ETFs: Northrop Grumman Corp. (NOC), Boeing Co. (BA). Competitors: Lockheed Martin Corp. (LMT), General Dynamics Corp. (GD), Raytheon Company (RTN). ETFs: iShares Dow Jones US Aerospace & Defense (ITA), PowerShares Aerospace & Defense (PPA)

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