Atlantic crossing: Northrop's proposed partnership poses risks.

The Air Force desperately needs to replace its aging fleet of 600 air tankers. Northrop Grumman Corp. recently announced that it was considering joining with the European Aeronautic Defence & Space Co. to bid for the contract. Northrop's move surprised the defense and aerospace world because it would team the Los Angeles defense contractor with the parent of Airbus, a fierce rival of Boeing Co. and the only other company expected to bid for the contract. If Northrop agrees to the partnership, it could prove immensely profitable. But it also carries political risk in a world where Boeing and Airbus are fighting for aerospace supremacy.

Background

The Air Force's fleet of 600 fuel tanker aircraft was nearly all built during the Eisenhower administration and it's unclear how much longer the planes can fly.

Only EADS, the French-German owner of commercial aircraft builder Airbus, and Boeing are capable of bidding for the contract. That's because the tankers are based on the largest commercial aircraft, which only Airbus and Boeing manufacture. So far, Los Angeles-based Northrop has said it is only considering the transatlantic venture, but Chief Executive Ron Sugar has already met with EADS executives.

The proposal strikes some as intriguing, given the scandal involving Boeing's failed $23.5 billion deal to supply 100 tankers based on its 767 commercial aircraft. Congress killed the original deal after a former top Air Force procurement officer admitted to inflating the tanker contract price and steering contracts to Boeing while negotiating a lucrative job at the firm.

Pro

Northrop can get its share of billions of dollars in contract money as the Air Force replaces its aging tanker fleet. As the American partner, it would be lead contractor, even though Airbus would build the airframe, the basic structure of the aircraft.

Northrop officials believe that the tanker proposed by Airbus, a modified A330 two-engine commercial jet, will fit the Air Force's need better than its Boeing counterpart. The A330 is larger than the Boeing 767, which would give it some cost advantages over the smaller plane. It also has a greater range, it can stay in the air longer and it carries more fuel.

Sen. John McCain, R-Ariz., who led the Senate investigation into the tanker contract, blasted the Air Force last year for awarding the original contract to Boeing without bidding. The Air Force then agreed to competitive bidding.

One of Northrop's other strengths is assembling and integrating subsystems for aircrafts. It recently was the lead contractor for the E-8C Joint Surveillance Target Attack Radar System, a flying command and intelligence center built around a Boeing 707.

Con

Northrop clearly risks angering those who insist the U.S. military should "buy American."

The tanker competition is an outgrowth of the often cutthroat competition between Airbus and Boeing to provide the world's airlines with new commercial jets. Airlines, especially in Asia, are ordering dozens of new jets, and the competition is fierce. Each side claims the other gets unfair advantages due to government subsidies, and the dispute could end up before the World Trade Organization.

Members of Congress attached an amendment to the defense budget prohibiting the military from awarding contracts to foreign companies that receive government subsidies--a move directly targeted at EADS. Northrop reportedly wants an escape clause in any EADS partnership agreement. For Northrop, another risk is riding the wrong horse. While the company believes that the A330's larger size is an advantage, the smaller modified Boeing 767 can take off and land on smaller runways, which would allow it to operate from more locations.

Outlook

The urgency to start replacing the aging planes, which could take more than 20 years to complete, virtually assures a new contract within two years. "We don't know how long they're going to last because nobody has ever flown jets this long before," said Loren Thompson, a defense policy analyst with the Arlington, Va.-based Lexington Institute.

The Air Force has said it will present a report by the Rand Corp. with more details outlining the needs of its refueling program. Included will be criteria on flying range, fuel carrying capacity, cost of operation and targeted initial purchase price.