Pentagon highlights need for open tanker contest

By Andrea Shalal-Esa and Jim Wolf

WASHINGTON (Reuters) - The Pentagon's top arms buyer on Tuesday underscored the need for a fair and open competition to replace the U.S. military's aging fleet of aerial refueling tankers, given controversy surrounding its previous effort.

"The tanker program has lots of ghosts. A lot of people are interested in their own aspects of it and the national transparency of it," Defense Undersecretary Kenneth Krieg told the Reuters Aerospace and Defense Summit in Washington.

"My view is that it's always better to be more transparent than less. Let the process work. Let us pound through these issues. Let us understand what they are. And we'll get there when we get there," he said.

Boeing Co. (BA.N: Quote, Profile, Research, Stock Buzz), the only U.S.-based airliner maker, is vying against a team of Northrop Grumman Corp. (NOC.N: Quote, Profile, Research, Stock Buzz) and Europe's EADS (EAD.PA: Quote, Profile, Research, Stock Buzz), the majority owner of Airbus, for work that analysts estimate could be worth over $100 billion over the next decades.

Congress killed a previous $23.5 billion U.S. Air Force plan to buy and lease 100 Boeing 767 tankers in 2004 amid a procurement scandal that landed a former Air Force official and Boeing's former chief financial officer in federal prison.

Northrop and EADS, wary of being knocked out of the new competition, voiced concerns earlier this year after the Air Force asked industry to prepare to factor into their bids the impact of a trade dispute over alleged government subsidies.

Some analysts had suggested that Boeing, based in Chicago, could benefit from any Air Force decision to assign significant weight to World Trade Organization issues.

But a top Air Force official on Monday told Reuters this issue was being removed from consideration, and that the Air Force would revert to a more traditional treatment of the Berry Amendment, which requires specialty metals like titanium used in weapons programs to be U.S.-produced, as well as of U.S. export licensing regulations.

"Whatever the outcome (of the dispute before the WTO) is, it will be neutral" in a tanker competition between Boeing and the Northrop/EADS team, Ken Miller, special assistant to Air Force Secretary Michael Wynne, told the Reuters summit.

Krieg said it was critical to fully understand these issues before proceeding with the competition.

The Air Force plans to issue a final request for proposals later this month, and award a contract for a first batch of 179 tankers late next summer.

Krieg emphasized the need to begin soon to replace the existing fleet of 530 KC-135 tankers, which are 45 years old on average, since the process will take a long time, given that the U.S. Air Force figures it has enough funds to buy just 15 to 20 tankers a year.