Northrop Grumman Corp. was remaining upbeat last week that it would retain a $35 billion aerial refueling tanker contract despite a scathing report by government auditors who picked apart the awards process.

However, defense industry analysts who read the report were not so sanguine.

During the competition between Northrop and Boeing Co., the Air Force made "a number of prejudicial errors," including changing evaluation criteria without informing Boeing and incorrectly identifying Northrop's plane as the less expensive option, according to the Government Accountability Office, the investigative arm of Congress.

Paul Nisbet, an analyst with JSA Research, said there was a hint in the redacted GAO report that Northrop had not adhered to all the proposal requirements, which could disqualify the plane from a new competition. The Air Force may seize on the opportunity to disqualify Northrop in order to avoid a costly and drawn-out new competition.

"That would be the easy way out for the Air Force," he said.

In February, Los Angeles-based Northrop, the nation's third largest defense contractor, and its partner, the European Aeronautic Defence and Space Co., won the contract to build 179 tankers. Chicago-based Boeing, which had been considered the heavy favorite in the competition, filed a protest in March. Among its complaints, Boeing said the Air Force did not make clear its preference for a large plane.

The GAO has recommended that the Pentagon put the contract back up for bid. The decision, which is not binding but is likely to be followed, has been considered a win for Boeing and many buy-American proponents in Congress that questioned the choice of a team that included a European company.

Though Northrop recently said it is suspending the local hiring of engineers for the program, the company released a statement last week saying it still believes it stands a good chance of winning the tanker contract. The report faulted the Air Force, the company said, but did not reflect negatively on the capabilities of the Northrop plane.

"Northrop Grumman offered the superior tanker and nothing in the GAO analysis contradicts this essential truth," said Paul Meyer, Northrop's tanker program manager, in the company statement. "We look forward to a prompt assessment from the Air Force concerning what happens next."

The Pentagon has 60 days to respond to the GAO's decision.

Last week, Defense Secretary Robert Gates said he would personally oversee the decision-making process as the department moves forward with the tanker program.


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