Northrop Grumman’s proposal for a tanker aircraft KC-30 during the refuelling of a US B2 bomber in the air. (Handout/EPA)

By Julie Johnsson | Northrop Grumman Corp. is withdrawing from a contest to provide the U.S. Air Force with a new fleet of tankers, leaving Boeing Co. primed to land the initial  35-billion contract that military officials hope to award by this fall.

With Monday’s announcement, Northrop made good on previous threats that it would drop out unless the Pentagon revised elaborate rules that appeared to favor the smaller Boeing 67-based tanker over the larger Airbus A330 that Northrop planned to bid with the corporate parent of Airbus SAS.

The tanker saga, which has played out for nearly a decade, is one of the longest and strangest contests overseen by the Pentagon and involves one of the largest jackpots in military history.

Boeing is now positioned to replace all 415 Eisenhower-era jets that serve as aerial gas stations for the Air Force through a series of contracts expected to total more than $100 billion, analysts said.

Airbus, meanwhile, won’t move forward with plans to build a large factory in Mobile, Ala., where it had planned to assemble tankers and A330 freighters, said Guy Hicks, vice president for communications with EADS North America.

“We continue to believe that Northrop Grumman’s tanker represents the best value for the military and taxpayer – a belief supported by the selection of the A330 tanker design over the Boeing design in the last five consecutive tanker competitions around the globe,” added Wes Bush, Northrop’s CEO and president, in a statement. “Regrettably, this means that the U.S. Air Force will be operating a less capable tanker than many of our Allies in this vital mission area.”

Being the sole bidder presents Boeing with risks as it adapts a commercial jetliner for military use, analysts said. The Air Force plans to award the contract on a fixed-price basis, leaving Boeing on the hook for any major cost over-runs.

Boeing struggled to meet deadlines and performance specifications for the first 767-based tankers that it developed for Japan and Italy. Between 2007 and 2009, Boeing recorded $315 million in charges related to the international tankers, according to Securities and Exchange Commission filings.

 ”Although this looks like good news for Boeing, there are real dangers here,” said Loren Thompson, defense analyst with the Lexington Institute. “First, there’s lots of risk associated with the fixed-price features of the contract. Secondly, if they try to reduce the risk by bidding high, that could get Congress involved in the process all over again.”

Boeing pledged to provide Pentagon planners with a competitive and transparent bid. “As we have in each of the previous rounds of competition Boeing will offer the most capable tanker and the tanker best suited to begin modernizing the aging KC-135 fleet –at lower total life cycle cost than any competitor,” said Boeing spokesman William Barksdale.

Boeing won the first round of the contest only to be stripped of its victory amid an ethics scandal, a result of Congressional inquiries led by Sen. John McCain in 2003 that resulted in jail terms for two Boeing executives and prompted Boeing CEO Phil Condit to resign.

Northrop scored an upset victory in 2008, but those results were annulled after Boeing mounted an unprecedented challenge and the Government Accountability Office later determined the Air Force’s evaluation of the bids had been marred by “significant errors.”

The latest rules, unveiled by the Obama administration in September and finalized in February, graded the proposals based on price as well as 372 mandatory requirements. The final scores would also take into account the life-time expenses of operating the aircraft, as well as the cost to retrofit Air Force runways and hangars to accommodate the new tankers. Thompson said these provisions penalized Northrop since the larger A330 would burn more fuel and require larger storage facilities.

But the Air Force’s new methodology did not give Northrop’s jet credit for being able to haul more fuel and cargo than the Boeing tanker, Bush said, “precluding us from any competitive opportunity.”

Air Force Secretary Michael Donley had downplayed suggestions that the latest contest favored Boeing, telling reporters at a Feb. 24 news conference: “We believe that both offerors are in a position to win this competition.”

While EADS voiced support for Northrop’s decision not to go forward with a bid, the European aerospace giant didn’t rule out pursuing the contract on its own. “Northrop Grumman has decided not to compete and that significantly limits the options,” said Hicks.

But it’s unlikely that EADS could find a new partner to replace Northrop and finalize a proposal by the mid-May deadline set by the Pentagon, Thompson said. “The last proposal has Northrop doing final assembly. They’ll have to revisit that,” he added.