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.

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.

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