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 The Government Accountability Office upheld Boeing's protest of the refueling tanker contract and recommended the service hold a new competition. The congressional watchdog said it found "a number of significant errors" in the Air Force's February decision, including its failure to fairly judge the relative merits of each proposal.
While the GAO decision is not binding, it puts tremendous pressure on the Air Force to reopen the contract and could pave the way for Boeing to capture part or all of the award from Northrop and Airbus parent European Aeronautic Defence and Space Co. And it gives ammunition to Boeing supporters in Congress who have been seeking to block funding for the deal or force a new competition.
The decision also is a setback for Sen. John McCain, the Republican presidential nominee in waiting, who was instrumental in the Pentagon's long attempt to complete a deal on the tanker.
The Air Force will determine its next steps after completing a review of the GAO ruling within 60 days. The service will select the "best value tanker for our nation's defense, while being good stewards of the taxpayer dollar," said Air Force Assistant Secretary Sue C. Payton.
Boeing said it looks forward to working with the Air Force on the next steps in this "critical procurement for our warfighters." Northrop said it continues to believe its plane was the best option for the military.
The GAO decision marks the second big blow to the Air Force this month, coming on the heels of the ouster of its two top officials over mistaken nuclear shipments.
The Air Force also is trying to rebuild a tattered reputation following a 2003 procurement scandal that sent its top acquisition official to prison for conflict of interest and led to the collapse of an earlier tanker contract with Boeing. McCain played a key role in exposing that scandal.
McCain sent two letters in 2006 urging the Defense Department to make sure the bidding proposals guaranteed competition between Boeing and Airbus. Months later, Airbus's parent company retained the firm of a McCain campaign adviser to lobby for the tanker deal.
McCain on Wednesday called the GAO decision "unfortunate for the taxpayers," saying Air Force officials "need to go back and redo the contracting process and ... hopefully they will get it right."
Democratic presidential nominee-in-waiting Sen. Barack Obama, D-Ill., lauded the GAO decision and called for a "fair and transparent" rebidding of the contract.
With a leadership vacuum, a concerned Congress and an upcoming change in the White House, the Air Force needs to act quickly, said Jim McAleese, a defense industry consultant in Virginia.
The tanker contract has sparked a fierce backlash among lawmakers from Washington, Kansas and other states that stand to gain jobs if Boeing succeeds in landing the award.
"The Air Force will have no choice but to rebid this project," said Sen. Maria Cantwell, D-Wash.
Sen. Pat Roberts, a Kansas Republican, said he would introduce legislation requiring a new competition if the service does not reopen the process.
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 The tanker contract also has touched off a heated debate over the military's use of foreign contractors because the Northrop tanker would be based on an Airbus plane largely built in Europe. Backed by union officials representing Boeing workers and "Buy-American" proponents, Boeing supporters on Capitol Hill have painted the competition as a fight between an American company and its European rival.
Boeing estimates the tanker contract would support 44,000 new and existing jobs with more than 300 U.S. suppliers. The company would perform much of the work in Everett, Wash., and Wichita, Kan.
Northrop said its tanker would support four new factories and 48,000 jobs with 230 U.S. suppliers, including more than 1,500 new positions in Mobile, Ala., where the tanker would be assembled.
Sen. Richard Shelby, R-Ala., said it is "very disturbing" that the Air Force "will likely have to go back to square one on the warfighter's No. 1 priority."
The contract for 179 aerial refueling tankers is the first of three deals worth up to $100 billion to replace the Air Force's entire tanker fleet over the next 30 years.
Although the GAO denied some parts of Boeing's protest, it offered a lengthy rationale for why the contract should be re-competed. Among its conclusions was that the Air Force awarded the Northrop team improper extra credit for offering a larger plane that could carry more fuel, cargo and troops. It also found that the Air Force improperly increased the likely costs of the Boeing bid and failed to show that Northrop's tanker could refuel all necessary planes.
"The GAO has issued a sweeping denunciation of Air Force acquisition practices that raises fundamental questions of fairness," said Loren Thompson, a defense industry consultant based in Virginia.
Boeing's backers in Congress also maintain that illegal European Union subsidies to Airbus gave Northrop/EADS an unfair advantage. Those subsidies are at the heart of U.S. Trade Representative complaint against the EU before the World Trade Organization.
Sen. Patty Murray, D-Wash., stressed that Congress needs to examine more than just the narrow technical issues raised by the GAO review, including the role of subsidies and American jobs in defense contracts.
Shares of Chicago-based Boeing Co. rose 27 cents to $74.65 Wednesday, while Los Angeles-based Northrop Grumman Corp. fell $1.08 to $70.01.
[Associated Press; By JOELLE TESSLER]
Associated Press writers Sam Hananel and Jim Kuhnhenn in Washington contributed to this report.
Copyright 2008 The Associated Press. All rights reserved. This
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