I'll give Northrop Grumman (NYSE:NOC) this much: They've got gumption.
In an open letter to the Pentagon yesterday, Northrop's current President and soon-to-be-CEO Wes Bush made an apparent last-ditch effort to keep his company in the running for the Air Force's multi-billion-dollar KC-X tanker project. Lamenting the Pentagon's "clear preference ... for a smaller aircraft" in this latest round of the never-ending tanker saga, Northrop threw down the gauntlet:
[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 ... Furthermore, we are aware of how important it is to the credibility of the ultimate KC-X tanker award that it be arrived at competitively.
Translation: We know which way this train is running -- toward a Boeing (NYSE:BA) victory on KC-X [pause for cheers from Boeing partners Rockwell Collins (NYSE:COL), Spirit AeroSystems (NYSE:SPR), United Technologies (NYSE:UTX), and Honeywell (NYSE:HON).] We don't like it. And unless you change the rules of the competition to favor buying our larger KC-30 tanker over buying Boeing's smaller KC-767AT, we're going to do our darnedest to embarrass you. We'll pull out of the bidding, forcing you to award a non-competitive contract to Boeing at a higher price than you want.
Newsflash: It ain't gonna happen
Investors are taking Northrop's threat at face value, bidding Boeing shares up 2.5% on the assumption that this contract is now in the bag. That's a mistake.
In recent months, I've argued that a Pentagon push for more transparent contract allotment and fewer appeals by the losers could usher in an era of efficient Pentagon acquisitions, lower costs for taxpayers, and better profits for investors. Boeing's done its part -- declining to challenge the award of a recent tanker service contract to Northrop. My fear though, based on this week's Pentagon letter, is that Northrop will not follow suit.
To me, Northrop's letter is neither cause for rejoicing among Team Boeing, nor reason for lamentation by Northrop shareholders or team members EADS and General Electric (NYSE:GE). It's not a promise to hand over KC-X to Boeing. To the contrary, I suspect we'll see Northrop bid on KC-X even if the Pentagon rejects its ultimatum; all Northrop's doing now is laying the groundwork for an appeal
When Northrop ultimately loses KC-X (as I've always argued is the likely outcome) it will say this game was rigged from the get-go. The fact that it wasn't -- that Boeing's simply giving the Air Force what it wants, as opposed to telling the Air Force what it should want -- will be irrelevant.
The lawyers are already on their way.
