Once upon a time, somebody wrote that: "The customer is always right." But it seems Northrop Grumman (NYSE: NOC ) never got the memo. This week, it got a cold dash of the water of reality instead … right in the face.
Back in December, if you recall, we discussed Northrop's latest ultimatum to the Pentagon. Complaining about how the military has been running the KC-X aerial refueling tanker project, the aerospace titan lamented the department's "clear preference ... for a smaller aircraft." Northrop made a thinly veiled threat, alluding to "how important it is to the credibility of the ultimate KC-X tanker award that it be arrived at competitively."
And then Northrop made its play: "[A]bsent a responsive set of changes in the final RFP, Northrop Grumman has determined that it cannot submit a bid to the Department for the KC-X program."
Take that! And this!
In other words, unless Northrop's "customer" agreed to give more preference to "buy" what Northrop wants to "sell," Northrop would drop out of the competition, allowing Boeing (NYSE: BA ) and its team of subcontractors -- Rockwell Collins (NYSE: COL ) , Spirit AeroSystems (NYSE: SPR ) , United Technologies (NYSE: UTX ) , and Honeywell (NYSE: HON ) -- to claim the prize uncontested. And presumably, due to the lack of competition, to overcharge U.S. taxpayers in the process.
It was a bold move ... and apparently, a fatal miscalculation.
You said what?!
Yesterday, Secretary of Defense Bob Gates informed Northrop in no uncertain terms that it had overplayed its hand. Responding to Congressional inquiries on how KC-X is progressing, Gates testified: "Obviously, we would like to have a competition for it and we hope that both companies will agree to participate. ...But should that not prove to be the case, we ... have to move forward ... [KC-X] been delayed too long. We need to get this thing started."
So give Gates credit for this much: He's blunt, but he's clear. There's no room for ambiguity in his statement. (Alan Greenspan he ain't.) We're going to finalize the terms on this thing by month's-end, Northrop. If you like the terms and want to bid, fine. If you don't ... then go jump in a lake.
Foolish takeaway
Advantage: Boeing.
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