Wants Fixed Pricing For All Early Orders; Decision Delayed

The US Air Force continues to take a hard line with competitors for its latest aircraft contract. The USAF's top acquisition officer told teams from Boeing and Northrop Grumman this week the armed service wants a fixed price for the initial batch of 80 aerial tankers.

Bloomberg News reports that's a shift from past practices -- in which the Air Force sought bids on only the first few production batches of each competitor, and delayed negotiations on later orders until a winner was selected.

In essence, the move forces Boeing and Northrop/EADS to put their best prices forward right from the start in the KC-X competition -- rather than tantalizing the Air Force with an attractive opening bid, and then raising prices later.

" That's when we found a lot of increased costs," Air Force Assistant Secretary for Acquisition Sue Payton said Tuesday. This time, "they'll be bidding knowing they have competition, so they have to be careful."

The decision to require a fixed price will push the final decision on KC-X until December, about two months later than originally planned. But the delay is worth it, Payton adds, to show the contest was fair.

"We are documenting every single question, every single answer," she said. "The selection-decision document has got to be written with enough detail" to show the losing party "exactly why they lost."

The fixed price stipulation would apply to nearly half of the 179-plane order over 15 years. Boeing has offered a tanker variant of its 767 commercial airliner in the competition; Northrop is fielding a variant of the Airbus A330-200.

Boeing's KC-767 is smaller, and offers less in the way of cargo capacity than the KC-30... but it is also cheaper than the EADS plane, and is also seen as having the advantage of being the lone all-American offering.

But don't be so quick to hand Boeing the win, according to two defense analysts -- who say the fixed price stipulation may work to EADS' favor.

"They are expected to offer a very low-priced aircraft because Airbus is eager to penetrate the North American market," Lexington Institute analyst Loren Thompson said of the EADS/Northrop team. "That will put great pressure on Boeing to meet the price even if it means lower profit margins."

Richard Aboulafia of the Teal Group agreed, saying the fixed price strategy is well-suited for the price breaks EADS is prepared to offer, in order to score the win over its American rival.

"Boeing is more focused on profitability," said Aboulafia, adding the KC-30 still offers higher long-term operating costs, which will be taken into consideration by the Air Force.

The eventual winner of the KC-X contract will replace the Air Force's current fleet of Boeing-built KC-135s, the average age of which is 44 years old.

FMI: www.af.mil, www.boeing.com/ids/globaltanker/index.html, www.northropgrumman.com/kc30/