Turbulent Skies for Northrop

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Northrop Grumman Corp’s disclosure last week of a debacle with a $1.9 billion Navy shipbuilding contract couldn’t have come at a worse time for the Los Angeles defense contractor.

Northrop’s inability to deliver the LHD-8 amphibious assault ship Makin Island by the end of the year could well be exploited by Boeing Co. in its effort to build the Air Force’s next-generation aerial refueling tanker.

At Boeing’s request, the U.S. Government Accountability Office is already reviewing whether a consortium led by Northrop and the European Aeronautic Defense & Space Co. was given an unfair advantage that led to the Air Force awarding it the $35 billion contract for the KC-45 tanker in February.

Northrop and Eads, the parent of Airbus, will provide the U.S. with 179 modified Airbus A330s over the next several years. The value of the contract could potentially expand to more than $100 billion if more planes are ordered.

“It’s a huge contract that the companies have spent millions of dollars competing over and there’s every reason to hold the Air Force accountable for its work,” said Alan Chvotkin, vice president at the Professional Services Council, a trade group representing government contractors, including Northrop and Boeing. “It’s also understandable that any weakness a competitor might have would be used against it.”

The GAO has until June 19 to make its recommendation on whether the Air Force should reassess the contract with Northrop and Eads. Meanwhile, Boeing’s supporters, including boosters from the hometowns of Boeing’s subcontractors, will be making their case at nearly every defense-related hearing on Capitol Hill over the next several weeks.

Northrop last week warned that it would take a first-quarter charge of $360 million to cover the cost of redoing work and testing on the Makin Island ship. The extra work will likely delay its delivery until the second quarter of next year.

Northrop blamed the mess on Hurricane Katrina in 2005, which damaged its Pascagoula, Miss., shipyard and displaced thousands of experienced workers. Substandard electrical and other work by less-experienced replacement crews was caught during testing several weeks ago.

The contractor will swallow the new cost overruns when it reports quarterly earnings on Thursday. The Navy split the cost of earlier overruns right after Katrina, which had shut down ship construction for several months.


Embarrassing history

The wiring problem is particularly embarrassing for the consortium because Northrop’s partner Eads itself stumbled in 2006 when wiring flaws were discovered in its new A380 jumbo jet. Design flaws resulted in the installation of wiring that was too short for the 238-foot-long jet. The fiasco delayed the launch of the jet by two years, cost $3.3 billion and prompted the ouster of one of Airbus’ co-chief executives.

So far, Boeing is being coy about whether it would cite the LHD-8 issue to support its argument that it not only presented the Air Force with a superior KC-45 bid, but has more experience in building military tankers and delivering them on time.

“Northrop would have to tell you to what extent it might affect their side of the appeal,” said Boeing spokesman Bill Barksdale. “We’re more focused in laying out what went wrong in the Air Force’s evaluation. Since Northrop hasn’t built a tanker before, they may have used other projects like the LHD as an example.”

Northrop dismisses the idea that its performance on the LHD-8 should play any role in whether or not the government overturns the tanker contract.

“There is clearly no connection between the LHD-8 program and the KC-45 Tanker program,” said spokesman Randy Belote. “The Air Force contract is totally independent of Northrop Grumman’s performance in its shipbuilding business.”

For its part, Boeing has reason to be coy: Its own recent track record has been spotty for both military and civilian contracts.

Boeing and Eads/Northrop have competed for military tanker contracts in eight countries since 2001. In addition to the U.S., Eads won contracts in the United Kingdom, Australia, the United Arab Emirates and Saudi Arabia. Boeing was the winner in Japan and Italy.

Eads’ first tankers so far are on schedule to be delivered to Australia in 2009. But Boeing earlier this year delivered its first tanker in Japan about a year late. The contract with Italy, where the first plane could be delivered this summer, is two years behind schedule. Technical problems as well as change orders by the customers played a role in the delays.

The delays undercut Boeing’s argument that it was a less-risky alternative to Eads for the U.S. contract.

In addition Boeing earlier this month admitted that its own new civilian flagship airliner, the 787 Dreamliner, likely wouldn’t be delivered to its first customer until the third quarter of 2009. Its initial flight is more than a year behind schedule.

Paul Nisbet, an analyst at JSA Research Inc., called the Makin Island situation a significant setback for Northrop’s shipbuilding business, especially since resources will have to be diverted from other Gulf Coast projects to fix the amphibious assault ship. But he’s skeptical Northrop opponents could use the incident to undercut the tanker contract.

“They’re two radically different businesses with different customers,” Nisbet said. “Katrina was an unusual event, and though there was a disconnect with management about what was going on there, they took responsibility, are fixing the problem and handling the cost themselves.”

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