Northrop Grumman's decision not to bid for the U.S. Air Force's KC-X aerial refueling tanker contract is being met with a private sigh of relief from Pentagon officials.

Another round of contentious competition has been averted. But the officials' sigh is likely being followed by an uneasy gasp at the tough challenge of negotiating a sole-source deal with Boeing that could endure to 2027.

The Pentagon's request for proposals (RFP) for the contract to build 179 tankers calls for bids to be submitted by May 10. Bryan Whitman, a Pentagon official, says, "We have an open competition underway and no decisions have been made to truncate the process."

"I would be surprised if the Air Force did not stick to the schedule and ask Boeing to submit a full proposal as the starting point for discussions" about pricing, says David Berteau, a senior advisor at the Center for Strategic and International Studies. With only one bid, the Pentagon will forgo the 120 days originally set aside to review the proposals.

The next hurdle for the Air Force will be securing a fair price for Boeing 767-based tankers. The competition was designed to drive down the cost and lock it in with a fixed-price incentive-fee development contract and fixed-price production lots. Now the onus is on the Air Force to validate Boeing's pricing and ensure good value. A congressional staffer notes that additional auditing and program management staff will be needed to validate pricing.

But resistance to a sole-source contract is not widespread in Congress. Lawmakers from Alabama, where Northrop Grumman and EADS were planning to modify and perform final assembly of their aircraft, were angry about the decision. Without Northrop Grumman willing to fight to compete, though, they have little grounds to pursue any action on the company's behalf.

The decision was also met with cries of protectionism from some camps in Europe. French President Nicolas Sarkozy plans to address the matter with President Barack Obama during a visit next month.

Boeing officials say they were surprised at Northrop Grumman's decision to pull out, and are proceeding as though competition remains. "There is a contract we have to win," says Tim Keating, Boeing's senior vice president of government operations. Boeing officials are still not providing many specifics on their proposed design, which will include the 787 digital cockpit and a new centerline boom. These are both new additions since the last 767-based bid.

Boeing plans to produce the tankers on the 767 line in Everett, Wash., applying lean techniques to nose-to-tail manufacturing in a "small area in the factory," says Boeing spokesman Dan Beck. They would receive military modifications in Wichita, Kan. The company officials have not articulated how items protected by International Traffic and Arms Regulations will be introduced into production.

Thirty 767-300ER passenger models are on order for commercial customers and another 27 freighters have been booked; last year Boeing produced 13 767s. Based on this rate, the production line has about four years' worth of work. Air Force production is expected to begin with Lot 1 of 7 aircraft in Fiscal 2013 and another 14 in Fiscal 2014, and it will likely be at a full rate of up to 15 aircraft by the time commercial 767 orders taper off.

Northrop Grumman/EADS was poised to propose an Airbus A330-200 for the $35-billion contract, but Northrop Grumman CEO Wes Bush announced his company would not bid because the Pentagon's revised source-selection methodology for this KC-X -- the last award was terminated after a Boeing protest turned up procurement missteps -- "clearly favors the smaller tanker," which is Boeing's 767-based proposal. "Investing further resources to submit a bid would not be acting responsibly," Bush says. He submitted formal notification to Pentagon acquisition chief Ashton Carter Mar. 8.

Wall Street largely applauded the decision as a smart risk-aversion strategy.

EADS CEO Louis Gallois says the company will not submit a bid on its own and ruled out the option of teaming with a new prime partner. However, company officials make clear that they were eager to bid with Northrop Grumman by their side. "Our partners at Northrop Grumman were very concerned with the fixed-price contract," says EADS North America CEO Sean O'Keefe. "We were not as concerned."

The partnership was forged more than five years ago with Northrop Grumman to leverage that company's "near-peerless" reputation in systems integration, program management and government compliance processes. "We're developing all of those capabilities, too," O'Keefe says, noting that in the intervening time his company won its first prime Pentagon contract, to build UH-72 helicopters.

"We could not bring that to the equation alone," O'Keefe says. But the partnership was a marriage of convenience: Northrop Grumman hoped for profit in a tanker business that was never core to its planning and EADS hoped for a win to justify building a U.S. commercial airliner final assembly plant. The no-bid decision is a bitter end barely two years after the team won the first KC-X competition.

"I don't think we feel burned by anybody. It is more of a case of disappointment," O'Keefe says. "Folks feel like they invested a lot of energy . . . and it is kind of hard to give it up."

Termination talks continue with the Pentagon over the defunct February 2008 win of a $1.5-billion contract to build the KC-45A.

EADS officials are now assessing how to amend their U.S. growth goals, as the tanker was to account for a major organic spike in company growth. O'Keefe notes that 250 more UH-72s must still be delivered, and the company will compete for the Army's Armed Aerial Scout competition. But the biggest opportunity for immediate growth will be through acquisitions. "We are looking at midcap companies and service industry kinds of opportunities that will help us really strengthen our hand in the aftermarket," O'Keefe says. Gallois's focus on maintaining the company's access to cash will limit near-term options.

The Pentagon has averted a potentially thorny competition and protest process, but the Air Force has lost an opportunity to prove it has the prowess to navigate a truly complex competition. Its acquisition corps has been under pressure since the KC-X mistakes and similar problems in an earlier competition to select a Combat Search and Rescue-X helicopter. The service's work on the tanker deal has not fully recovered since the procurement scandal involving leasing of Boeing 767 tankers after the 9/11 terrorist attacks when commercial customers dropped their orders.

"We are disappointed by Northrop's decision not to submit a bid for the U.S. Air Force tanker replacement program," Deputy Defense Secretary William Lynn said after Northrop Grumman's announcement. "We strongly believe that the current competition is structured fairly and that  both companies could compete effectively."