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Northrop Grumman, together with partner European Aeronautic Defence and Space Co. [EADS], has agreed to challenge Boeing for the contract to replace 179 refueling tanker aircraft for the U.S. Air Force -- the first time the rivals will compete in the military market. The $40 billion contract is part one of a three-part deal estimated at $100 billion. Northrop, concerned its KC-30 -- which is based on the Airbus A330-200 -- would not be considered on the grounds that it is bigger and more expensive than the Boeing 767, declined to commit to the competition until language was added to the contract indicating the Air Force would consider aircraft with "significant" cargo space. Northrop is also hoping to win a $100 billion contract to upgrade the Air Force's fleet of B-2 bombers, a prospect it does not want to jeopardize by delaying the tanker program. Boeing might submit a tanker based on its 777 jumbo-jet instead of its 767, a matter it will address at a press briefing on Monday. Boeing lost the original tanker contract after it was revealed that former defense department official Darleen Druyan and former Boeing CFO Mike Sears had conspired to ensure Boeing would win the contract.

Sources: Forbes, MarketWatch, MSNBC
Commentary: Northrop Threats to Abandon Bidding Jeopardize Critical Air Force Program, Airbus Hopes To Land Big U.S. Tanker Contract, Lower Supply Costs, Northrop/EADS Win $560 Million German Defense Contract
Stocks/ETFs to watch: Northrop Grumman Corp. (NYSE:NOC). Competitors: Boeing Co. (NYSE:BA), General Dynamics Corp. (NYSE:GD), Lockheed Martin Corp. (NYSE:LMT). ETFs: iShares Dow Jones US Aerospace & Defense (NYSEARCA:ITA), PowerShares Aerospace & Defense (NYSEARCA:PPA)

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Source: Northrop to Bid on $40 Billion Air Force Contract