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.
