At a recent press availability the U.S. Air Force Chief of Staff, General Schwartz, said that he expects the final RFP for the KC-X contest to be released next month. He also stated that it will be little changed from the draft RFP. Both Northrop (NOC) and Boeing (BA) have been submitting questions and comments on the draft RFP and some of these will be addressed in the final one. The RFP will be released a few weeks after the 2011 Defense Budget goes to Congress which is planned for 2 February.

Schwarz did say that the final RFP may have changes based on recent comments by Northrop and its partner EADS (EADS:P) that they might not participate as they felt the RFP favored Boeing too much. Both groups had also commented on the use of a fixed price development contract and how it transferred too much risk to the contractor from the Government.

The KC-X Tanker RFP is expected to be released in the next few weeks. Previously Notthrop and its partner EADS had threatened not to participate as they felt the draft RFP was biased in favor of Boeing. Now they are saying they will wait and see what is in the RFP when it is put out. It is in the best interest of the Air Force and the U.S. Government to receive multiple bids on the project.

Without competition the chance of this third attempt proceeding will be difficult. Sole sourcing the contract to either Boeing or the Northrop team will cause an outcry in Congress no matter what as both companies have their supporters. Not putting out a competitive RFP will only lead to protests and further delays in what has become a critical program to replace the aging KC-135 aircraft.

We are all going to have to wait to see what the Air Force puts out and how Northrop, EADS and Boeing respond to it.

Supposedly in a meeting between DoD and Air Force officials with members of the Alabama Congressional delegation it came out that the U.S.A.F. will adjust the KC-X RFP to keep Northrop Grumman (NOC) and EADS (EADS.P) in the competition. This of course is a report by Senator Sessions (R-AL) from the meeting. There is no official response as to how the U.S. officials will react to Northrop’s threatened non-participation.

It is in the best interest of the U.S. Government to have two bidders for this program and this may be a necessary step to assure that.

Recently 125 members of Congress wrote a letter that was sent to President Obama and released publicly to try and get the U.S government to take punitive actions against EADS and Airbus for receiving illegal subsidies. The World Trade Organization (WTO) supposedly has ruled on that a few months ago. The case is still ongoing with counter charges and reviews. Many in Congress who support Boeing feel that this should be taken into a account when the KC-X bids are reviewed. Although Northrop Grumman and EADS have threatened not to participate.

Boeing releases a statement about the letter and their appreciation for the Congress Members actions:

“Boeing is encouraged to see such strong bipartisan congressional support for U.S. action to end the illegal subsidies that European governments have for decades provided to Airbus at the expense of American industry and its workers.

“Despite an imminent final WTO ruling on illegal subsidies, Airbus appears poised to extend and continue the practice of using illegal subsidies for its new aircraft, the A350. This new plane directly targets America’s aerospace industry and the tens of thousands of workers who design and build aircraft in the United States.

“As stated in the congressional letter to the president, our government policies should not reward foreign governments or companies that benefit from illegal subsidies. We look forward to working with Congress to ensure this matter of principle and of important policy is enforced.”

EADS and others have made claims that Boeing through its military contracts over the last sixty years has received the equivalent of these subsidies themselves. That case is still pending at the WTO.

Of course the Defense Department needs two bids to efficiently carry out the competition so all this back-and-forth may ultimately have no effect.

It has been reported that last week Boeing (BA), Northrop Grumman (NOC) and EADS (EADS.P) had a series of meetings with the Air Force to discuss the draft KC-X RFP and the final one. After these meetings EADS and Northrop made clear that their threat not to submit a bid without changes to the RFP language was not an idle negotiation ploy as some have said. The companies believe that the current RFP is biased towards the smaller, cheaper Boeing 767 rather then the larger Airbus 330.

The discussions also indicate that the final RFP will come out before the end of January. Without two bidders it will be hard for the Air Force to proceed so they need a proposal from Northrop and EADS. At the same time they must have an RFP that will hopefully be protest proof and get the needed capability quickly.

One of the solutions that has been mooted to solve the KC-X issue is to buy aircraft from both Boeing (BA) and EADS (EADS.P). This would certainly eliminate many of the issues around the source selection. The Defense Department and Air Force have not supported this idea in the past due to the logistical costs related to operating two dissimilar aircraft. Of course the problem the Air Force faces is that the KC-30 and KC-767 are too dissimilar.

Some in Congress and in the industry suggested the split buy last Summer and now it has been raised again. If Northrop Grumman (NOC) does refuse to submit a bid then the contest is on hold unless there is the will to do a sole source contract again. The split buy would solve that issue and keep Northrop playing.

We will have to see how this plays out.

Last week Northrop Grumman (NOC) and its partner EADS (EADS.P) wrote a letter to the Defense Department stating that they are not interested in bidding on the KC-X contract if the current RFP language stands. Their argument is that it is currently biased towards a smaller aircraft which means that it is set up to give Boeing the contract. In their eyes there is no reason to go through the motion of bidding just not to win.

This of course caused all sorts of critics to rise up and claim that Northrop was trying to force the Government to bias the RFP and contract towards Northrop. Basically this is an attempt to blackmail the Government. The problem the Air Force has faced is that they need to write a RFP that gets them the best value bid meeting all of its requirements and is done in such a way that no protest occurs. This is proving difficult to do. The two aircraft, KC-767 or A330, are dissimilar enough that the requirements have to be carefully chosen. At the same time there is a great deal of pressure in Congress to support American companies and products. This is the state that the U.S. has gotten itself into by allowing only one major source of aircraft of this size to remain — Boeing (BA).

Now Northrop’s supporters in Congress are striking back. In a recent editorial the Congressman for Mobile, AL where EADS will assemble the aircraft, Jo Bonner (R-AL), writes that it is unfair to tar Northrop. In his eyes the Government is going out of their way to award a sole source contract to Boeing. This violates the spirit if not the law on contracting. He writes “And the reason Northrop Grumman, and its partner EADS, was not playing a game of chicken is because the draft RFP, released by the Air Force in September, has been all but written to guarantee the pre-selection of the smaller, older and much less capable Boeing 767″.

That is the crux of the problem. The Government lost the last attempt to award the contract competitively. Their attempt to let a sole source lease to Boeing before that was overturned by Congress. This next round doesn’t look good either. There is a crying need for this capability and it lags because of politics, industrial policy and poor management.

Ashton Carter the Undersecretary of Defense for Acquisition, Technology and Logistics (USD (AT&L), who is the head “weapons buyer” at the Pentagon had a press availability recently. At this he stated he is committed to the current plan for the KC-X program with a final RFP coming out by the end of the year. The draft RFP in his eyes was less subjective then past ones and the questions from industry are being used to shape the final RFP. He is confident that the Air Force will get it right on their third try. It will have to be seen if this is true.

Several Representatives and Senators from states where Boeing (BA) would do much of the work if they won the KC-X tanker contract are pushing the Air Force to either exclude outright EADS (EADS.P) or place a cost factor on their bid. This is all due to the World Trade Organization (WTO) draft ruling that the company received illegal subsidies from several European governments. Supporters of the Northrop Grumman (NG) and EADS say that the ruling is draft and not finalized and should not apply in this competition.

If there was such a move by the Air Force it would significantly reduce the competition in the contract process. It would make the Air Force award the contract to Boeing as the other bid would not be competitive. Of course this is what the legislators want, but a sole source award to Boeing probably would not be palatable to others in Congress or the Department of Defense. There should be at least two bids for each contract and this one is limited to Boeing, EADS and possibly the Russian company Ilyushin. Chances are that a Russian aircraft would not be chosen no matter how cost effective it is. This leaves the U.S. in a very limited position with the KC-X.

This kind of fighting can be expected to go on for the next several months to after the contract award and resolution of any protest.

Boeing’s (BA) Wichita, KS plant has supported may of their military programs over the years. In their last bid for the KC-X proposal the 767 aircraft would have been modified to become the new tanker there. In October the company would no longer make that commitment to using the Wichita plant. The company had discussed using a lower cost plant to do the work with an eye to lowering their overall cost. This obviously was a blow to the employees and the political supporters of the work being done there.

Now Boeing announced yesterday that at least some of the military conversion of the aircraft will be carried out in Wichita. This will gain them even further support from some key Senators and Congressmen as well as there unions. In many ways the company had no real choice. The Wichita plant has long been established, can do the work and needs it. The announcement makes sense at this time.n