The KC-X new aerial tanker program Request for Proposals (RFP) attracted a third bid this time around. U.S. Aerospace submitted one based on the Ukrainian made Antonov transport. The question that immediately comes to mind is can this team win, or will it be Boeing (BA) or EADS (EADS:P)?

Realistically the chances of this bid being selected are low. The companies had asked for a sixty day extension to work on their proposal. The Air Force already slipping the contract deadline one month to accommodate EADS refused the further two month slip. This would have pushed award into 2011 with the current planned date of mid-November this year already late enough. The U.S. has been trying to get a replacement tanker for the aging KC-135 since 2001.

U.S. Aerospace and its partner obviously felt their proposal could be improved with the extra two months but did go ahead an turn one in that they feel meets all of the Air Force requirements. At the same time in a recent filing with the Securities and Exchange Commission (SEC) U.S. Aerospace makes clear that the Air Force could easily reject them.

The company writes “For any or all of these reasons, the Air Force may not select our bid, may disqualify our bid, or may refuse to consider it on the merits, or at all,” based on myriad factors. These include not meeting requirements, not having qualified sub-contractors, not having necessary facilities or capabilities and even missing the deadline. They didn’t do that turning one in on time.

Of course all of this could be standard “Forward Looking Statements” meant to make clear to anyone investing in their stock that they are being conservative in their estimates. The stock was trading at 18 cents at the close on Friday.

Certainly they have offered a cost effective approach. The Air Force must consider if it meets their requirements and they have the ability to produce the systems to the necessary schedule. Certainly stranger things have happened in defense contracting.

Boeing (BA) submitted their proposal for the KC-X aerial tanker program a day after rival EADS (EADS:P) did. Today was the day it was formally due, EADS coming in a little early. The Boeing proposal stresses their cost and size benefits over competing EADS with their larger A330 based aircraft. Boeing is basing their bid on a modified 767 airliner with advanced avionics from the yet to enter service 787.

Also U.S. Aerospace and Antonov submitted their competing proposal after losing a bid to delay things sixty days. There total cost is under thirty billion for a contract the Air Force has estimated at $37.5 billion based on an aircraft cost of only $150 million each.

The Air Force plan is to award the contract in four months. The three bids may make the competition’s source selection last longer and may also raise the chance of a protest.

If the U.S. Aerospace / Antonov team wins it might get very interesting.

EADS (EADS:P) had decided to go it alone with their own bid for the KC-X aerial tanker after former partner Northrop Grumman (NOC) decided the requirements favored Boeing (BA) too much. All that meant is that EADS would prime the contract but would probably find other companies, including U.S. ones, to sub for them. It is now being said by EADS that they have found at least one U.S. defense contractor to do “sensitive equipment”. The company is unidentified at this point.

This only makes sense as it allows Airbus to deliver a A330 aircraft or tanker to a U.S. facility to do the integration of the military equipment such as radios and defensive equipment. EADS is planning to do this with Lockheed Martin (LMT) on the Army’s new attempt at buying an Armed Reconnaissance Helicopter (ARH) and should do this for KC-X. Lockheed planned the same thing with Augusta Westland on the failed VH-71 program. By using an American company to do this sort of work it helps with security and technology transfer issues. It is also the reason that EADS North America exists.

Following reports last week that Boeing (BA) was considering not submitting a bid for the KC-X contract the company reiterated its interest today. The previous reports said that Boeing was concerned with the fixed price aspects of the contract but now the story is that the company believes EADS (EADS:P) due to its subsidies could assume more risk in their proposal.

It would be almost impossible now for the company not to bid due to all of the support it has gotten for getting the contract.

Last week reports started to come out that Boeing (BA) may not bid on the KC-X new aerial tanker program. This was due to concerns that the Air Force’s plans for a fixed price development and first production contract may not allow the company to make a profit.

Boeing has denied these reports and it would certainly seem strange for them not to after all of the arguing and noise about giving the contract to them for American jobs. There is though real concern that the contract may limit the ability of the winner to make money on it. In the past fixed price contracts for development often have not worked costing the contractor millions that it can only hope to make up on production.

It would be somewhat ironic that the Pentagon’s desire to limit their cost and exposure would cause even more delays to this critical program. One that is so critical that a sixty day delay in the RFP process has been attacked by legislators, media, retired military and unions.

In this report the Governor of Washington, Ms. Gregoire, and Senator Patty Murray make clear that awarding the KC-X contract to Boeing (BA) will protect jobs in that state. The two Democrats rightly point out that several thousand jobs at Boeing support the 767 program as well as supply parts and components to the company.

In another not surprise the two showed up at a rally with union members and local officials.

Once again the U.S. finds itself in this situation due to the severe reduction in the defense industrial base twenty years ago that leaves only Boeing and its competitor European company EADS (EADS:P). For there to be any chance at competition with a goal of saving money for the Pentagon the two have to bid against each other – jobs or not.

Boeing (BA) announced yesterday that they are forming a new division within the company called “Airlift and Tankers” (A&T). This group will have responsibly for the C-17 production and the hopefully capture of the KC-X and production of the KC-767 tanker.

Jean Chamberlin will be assigned as vice president and general manger of A&T.

The group will face serious challenges in the future if the KC-X is not won as C-17 production is winding down for the Air Force and the number of overseas sales is not large. There continues to be support in Congress to keep the C-17 going and if the KC-X contract does go to another source that pressure will only increase.

Good Luck to Ms. Chamberlin in her new job.

Winning the KC-X contract will certainly help Boeing (BA) out a lot.  Read my analysis from BNET: Government on the recent reported earnings of Boeing and Lockheed Martin (LMT).

Boeing (BA) issued a press release last night in response to EADS’ (EADS:P) decision to bid on the contract. In part it reads:

“We are confident in the superior value and capabilities of our NewGen Tanker and intend to present a compelling case for it in our proposal. While we are disappointed in the bid submission delay, we hope for a fair and transparent competition free of any additional changes intended to accommodate a non-U.S. prime contractor.

We also remain deeply concerned about the ability of a heavily subsidized Airbus/EADS to accept levels of financial risk that a commercial company such as Boeing cannot. We regret that these concerns will not be addressed in the bid evaluation, even when the U.S. government has proven in a world court that those subsidies are illegal and directly distort competition between Airbus and Boeing.”

It will be an interesting competition.

The World Trade Organization (WTO) which is expected to announce formally its ruling against EADS (EADS:P) for receiving illegal subsidies to support Airbus airliners and is also considering a complaint against the U.S. and Boeing (BA) announced that it does not intervene in military contracts and cannot be involved in the KC-X dispute between the U.S. and Europe.

The chance of France or the E.U. filing a complaint over the terms of the proposal which are seen as limiting EADS chances to bid seems remote. Certainly President Sarkozy of France has raised the issue with President Obama. The Air Force has extended the deadline for proposal submission sixty days to allow EADS to submit a proposal if they want.