The decision by Northrop Grumman/EADS North America not to submit a bid for the U.S. Air Force’s KC-135 replacement competition is largely seen as continued posturing by the team, rather than an end to its ambitions to win back the $35-billion deal to rebuild aerial refuelers.

Northrop Grumman officials have publicly criticized the Pentagon’s KC-X plans -- specifically the draft request for proposals (RFP) released last September -- but so far the Defense Dept. appears unmoved.

"We very much want a competition," Deputy Defense Secretary William Lynn said during the Credit Suisse/Aviation Week Aerospace and Defense Finance conference here last week. "But we are very cognizant that we have to do what we’ve done all the way along, which is play this down the middle. We can’t favor one side over the other. We can’t compel the contractors" to enter the competition.

His steadfastness is a stark contrast to the KC-X competition of two years ago under the oversight of his predecessors. At that time, Northrop Grumman threatened not to bid, complaining the Pentagon’s source selection process would favor a smaller aircraft than its Airbus A330 option. The Pentagon then added another factor to the evaluation criteria -- a factor many observers believe helped the company’s bid win.

Financial analysts are not taking seriously Northrop Grumman’s threat to walk away. Robert Spingarn of Credit Suisse says Northrop Grumman’s announcement is "merely a posturing move" and is "part of a negotiation process because [Northrop Grumman] has concluded it would have to bid the current RFP at a massive loss in order to win."

Another financial analyst suggests the timing for the no-bid threat was plotted to ensure the company’s options are kept open. If Northrop Grumman were to pull out after the final RFP is issued, it would have less leverage and room to maneuver to possibly re-enter the competition.

Lawmakers on Capitol Hill could get involved if the team sticks with its plans not to bid. They could again embrace an option to buy both tankers at once, splitting the work with the lion’s share annually going to the best-performing team.

Air Force Chief of Staff Gen. Norton Schwartz seemed chagrined during a luncheon speech at the conference here. "I do find it curious that some have indicated they understand our requirements better than we do," he said. Industry should be postured to "satisfy the needs of the customer long before satisfying the marketing imperatives of the producer," he noted.

By default, Northrop Grumman’s decision to walk away from the deal would mean the Pentagon could justify a sole-source deal to Boeing, but the Senate Armed Services Committee, and especially ranking member Sen. John McCain (R-Ariz.), have pushed for a competition. The Pentagon may be compelled to make some concessions if Congress rejects a sole-source contract.

The draft RFP emphasizes low cost, prompting the Northrop Grumman/EADS North America team to cry foul. Northrop Grumman President/Chief Operating Officer Wes Bush outlines two primary complaints in a Dec. 1 letter to Pentagon acquisition chief Ashton Carter: the perceived draft RFP’s preference for a smaller aircraft and the Pentagon’s plans for a fixed-price development contract, which would shift risk onto the contractor.

"For all of the reasons we have provided, Northrop Grumman cannot proceed to submit a bid to the department against the RFP as currently planned," Bush writes. "The department’s responses to date to our submitted questions suggest that the department is not planning to substantially address our concerns in the final release of the RFP," Bush states.

Jim Palmer, Northrop Grumman’s chief financial officer, declined during a presentation at the finance conference last week to say whether a concession on one of those points would be enough to entice the company to re-enter.

Boeing has been less overt about its concerns, but Dennis Muilenburg, CEO of Boeing Integrated Defense Systems, also sent the Pentagon a Dec. 1 letter of concern about the RFP. "We are not questioning the warfighter’s requirements," Muilenburg told Aviation Week at the conference. "This is not a negotiating process. This is a comment process."

Boeing objects to the use in the forthcoming competition of the Integrated Fleet Aerial Refueling Assessment (Ifara), a tool that measures performance of aircraft in various operational scenarios. Ifara was the factor added in the 2007-08 competition after Northrop Grumman threatened not to bid. The Pentagon’s annual escalation rate of 2.5% projected for fuel cost, is too low, Muilenburg says. And, he takes issue with the method used to just military construction costs.

Like Northrop Grumman, Muilenburg is worried about the risk associated with a fixed-price contract, which would call for requirements discipline from the Air Force.

The Defense Dept. plans to review these issues and Lynn says the final RFP will be out in January.

Photo: Northrop Grumman