Let's Play Boeing Ball!

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Warning: Flagrant disregard of proper sports metaphor-matching lies ahead.

For weeks, airplane magnate Boeing (NYSE: BA  ) has complained about the Pentagon's planned rebid of a contract to build scores of new KC-X aerial refueling tankers for the Air Force. After the military moved the goalposts by emphasizing the plane's carrying capacity over other factors, Boeing argued that this gave an unfair advantage to rival Northrop Grumman (NYSE: NOC  ) .

This smacked of poor sportsmanship on Boeing's part. After initially losing the KC-X contract to a Northrop-EADS-General Electric (NYSE: GE  ) -Honeywell (NYSE: HON  ) coalition, Boeing won a reprieve for both itself and partners United Tech (NYSE: UTX  ) and Rockwell Collins -- a promise from the Pentagon to re-examine the matter, and to partially rebid the contract. All indications at the time suggested that such rebidding would take place in a politically charged atmosphere almost guaranteed to favor Boeing.

Sour grapes
Why did Boeing put up such a fuss when it was already the odds-on favorite? Well, it's worth remembering that Boeing is no stranger to sob stories. Two years ago, the plane maker publicly lamented Congress' failure to fund all of the C-17 transport planes Boeing wanted to build. Threatening to shut down production, Boeing ultimately parlayed a losing proposition into a $2.1 billion contract to build the planes.

So it seems that Boeing decided to go the political route once again. Faced with the possibility that its "sure thing" might not be quite 100% certain after all, Boeing threatened to take its ball and go home -- to refuse to bid at all.

This, of course, would leave Northrop the happy recipient of a de facto no-bid contract to build the plane -- the Pentagon's worst nightmare. Before Boeing would agree to play, it demanded that the military change the rules. Whereas the military wanted to set an Oct. 1 deadline for the rebid, and award the contract by Jan. 1, Boeing demanded six months to redraft its bid. (The extra time, we presume, would be necessary to allow Boeing to substitute its current 767-based aircraft with a larger Boeing 777 to address the Pentagon's capacity concerns.)

Now, faced with Boeing's intransigence, the Pentagon could have said: "Deal with it. Bid or don't -- but you gotta play to win." Or it could have played the role of the nice prof: "It's cool. Take as much time as you need." But the Pentagon didn't say either of those things. In fact, it made no decision at all.

Pentagon punts
Rather than obviously caving to Boeing's demands, or calling Boeing's bluff and accepting the political storm that would ensue, the Pentagon punted. As Defense Secretary Robert Gates put it: "We can no longer complete a competition that would be viewed as fair and objective in this highly charged environment." So it canceled the contract outright.

Wall Street fumbles the ball
In response, Wall Street sold off Boeing stock by more than 3.6% yesterday -- which was entirely the wrong call. Boeing won this round decisively, Fools. It should have been rewarded with a price bump. 

Here's why: If the military had called Boeing's bluff, maybe Boeing would have bid, and maybe it wouldn't have. Maybe it would have won, and maybe it would have lost. We'll never know. But we do know what would have happened if the Pentagon had caved to Boeing's demands: It would have postponed the deadline for rebid to about March 2009 and given Boeing six months to prepare.

And now? By canceling the contract outright, the Pentagon tosses the ball into a future administration's lap. The next president will enter office in January, reopen the contract, and then decide whether he wants one of his first acts as commander in chief to be the "outsourcing of thousands of American jobs to France." That's an unfair way to describe an open and unbiased bidding process -- but it's the way the media have played it so far, and it won't change a whit next year.

You don't have to be a genius to predict how that's going to go.

Boeing runs up the score
In the meantime, Boeing wins the six-month delay -- maybe more -- that it demanded. It gets to compete (probably) after the resolution of its embarrassing machinists' strike. Why, by next year, it might even have made progress on its Dreamliner issues, such that heckling from impatient airline customers such as Northwest (NYSE: NWA  ) and Continental (NYSE: CAL  ) will be muted. To top it all off, as Gates made clear in his statement, Boeing gets to continue raking in revenue, upgrading and maintaining the existing tanker fleet all the while.

Boeing didn't just win this round, folks. It went up 40-love, pitched a no-hitter, and then ran up the score.

Still, don't forget to stay abreast of the other continuing story at Boeing: its Dreamliner nightmare.

Fool contributor Rich Smith owns shares of Boeing. The Motley Fool has a disclosure policy.

Read/Post Comments (5) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 12, 2008, at 8:54 AM, airplaneschool wrote:

    Why is it sour grapes on the part of Boeing when they exercised their right to protest the award to the GAO? How is it sour grapes when the GAO found in Boeing's favor? How is it sour grapes when this is one of the few if not only GAO protests in the last 10 years whereas Lockheed and Northrop have a track record of protesting nearly every loss? When you have been asked to respond to a set of specs and do so but then the specs get evaluated to a heretofore new set of points; don't you think that maybe you have the right to raise your hand and suggest that there is something wrong?

  • Report this Comment On September 12, 2008, at 9:35 AM, 1KoolKat wrote:

    I agree with airplaneschool. One must look at all the facts to get the real story. The facts in this case do support Boeing.

  • Report this Comment On September 12, 2008, at 10:12 AM, Timskier wrote:

    I agree too. This isn't a schoolyard swap. This is a government procurement that is governed by very specific rules, as outlined by the FAR, or Federal Acquisition Regulations. The procurement process, in this case, was severely flawed, such that the GAO responded with the most severe criticism it has ever given, according to Loren Thompsen.

    Those laws do not just protect government contractors, but also the taxpayer. The RFP that both parties responded to outlined the requirements for a certain tanker, which had been gone over by all their experts. By changing the methods of evaluating midstream, without a new full analysis without siloing the changes, they opened themselves up to maybe a better tanker... or maybe a worse one. Ask any procurement agent, they can tell you that.

  • Report this Comment On September 12, 2008, at 10:35 AM, fixin2go wrote:

    I totally agree with the other comments. Let us not forget also that Northrup played the "it's not fair, so I don't wanna play card" first when this whole mess started. The move by Northrup tilted the contract in their favor. Who knows, with the way things are going with the Boeing Machinists, there may still be a tanker built in Mobile, just not the Euro-Tanker made by EADS and their American front company Northrup.

  • Report this Comment On December 25, 2008, at 12:09 PM, longearl wrote:

    Motley fool you are losing your credability. This country needs all of its excellent defense contractors. Bad mouthing Boeing without facts and balance is bad journalism. I won't be taking your advice on any defense contractor. Your personal vendetta will probably change next week.

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