Boeing is rethinking its decision to back out of a deal with L-3 Communications and Alenia North America to build C-27Js for the U.S. Air Force and Army.

Last week, Boeing Integrated Defense Systems President Jim Albaugh is said to have decided to pull out of the partnership to build the Joint Cargo Aircraft (JCA) over disagreements concerning Boeing's work share. Boeing was in talks to establish a new production facility for the aircraft in Jacksonville, Fla.

After Albaugh decided to back out of JCA, Boeing CEO Jim McNerney stepped in and reopened the matter, an industry source says.

This source suggests the relationship between Boeing and Alenia North America, as well as prime contractor L-3 Communications, was souring and they were not making headway on work share after a year of discussions. "Boeing is not used to being a follower" on contracts, the source says.

This week, however, it appears Boeing is publicly acknowledging the question is open. Chris Chadwick, president of Boeing Precision Engagement and Mobility Systems, which falls under Albaugh's purview, says "we are trying to close the business case" on the deal.

It appears to be a moot point, however, as Ben Stone, an Alenia official, says the company has "terminated" negotiations with Boeing. "We have stopped all negotiations in an effort to find work for Boeing," he says. "I am perplexed ... as to why Boeing would make that statement."

Weighing risk

At issue is the risk associated with Boeing funding the Jacksonville facility and how many of the aircraft the team would guarantee to roll off that production line. While the market appears robust for the C-27J, the Pentagon has only contracted for 78 of the aircraft. With a 2010 deadline for establishing the Jacksonville manufacturing plant looming, the team was mired in a disagreement over how many aircraft would be built in the U.S.

The confusion over the JCA points to the continuing disagreements within Boeing's defense sector over the company's role in the program, and indeed its future business strategy, since the loss of the KC-45A refueling tanker program to a Northrop Grumman-EADS team.

Work on JCA was part of a bracketing strategy by Boeing to encroach on Lockheed Martin's C-130J market by offering a smaller tactical airlifter -- the C-27J -- as well as a larger system, the C-17, to the Pentagon.

If Boeing drops out of the program, other U.S. contractors including Northrop Grumman -- emboldened by its KC-45 tanker win -- are considering an attempt to step in.