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Boeing (BA)
Boeing's Challenge Pays Off
There's an old adage that, "the squeaky wheel gets the grease" and today, Boeing can attest to the truth of that saying. Boeing's complaint that the Air Force unfairly awarded a lucrative contract to a competitor was reviewed by the Government Accountability Office (GAO) and the decision announced yesterday has Boeing cheering. Investors are pleased with the news as well, and have sent the company's share price up with their optimism that more good news is on the way. While Boeing may have won their appeal, winning the contract is another story. Will Boeing's action against their potential client come back to haunt them or will a second chance to get the contract work out in their favor?
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Boeing, or rather Boeing's lawyers, won an important victory in their challenge against the U.S. Air Force after the company failed to secure the deal on a lucrative tanker contract. Boeing was passed over for a $35 billion contract to supply an initial 80 next-generation aerial refueling tankers to the U.S. Air Force. The contract, one of the largest in the Pentagon's history, was instead awarded to Northrop Grumman (NOC: Charts, News, Offers) and their partner Airbus earlier this year, but now that decision is under investigation. Upon receiving the news in February that they did not win the contract, Boeing filed a complaint with the GAO to challenge the decision, resulting in a congressional review that was completed yesterday.
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The GAO mostly agrees with Boeing, though they denied some of the company's challenges, and is now recommending that a new competition for the contact take place. After a full investigation of the process, the GAO reported that, "the Air Force had made a number of significant errors that could have affected the outcome of what was a close competition." More specific ally, the review board found that the Air Force had failed to "fairly judge the relative merits of each proposal," "improperly increased" some of the estimated engineering costs provided by Boeing, and "conducted misleading and unequal discussions with Boeing" on an important aircraft performance measure. So what do these findings mean for Boeing?
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Now the power is back in the hands of the Air Force and, to the possible detriment of Boeing, they are not bound to take any specific action. The GAO's ruling is not binding and is more accurately a recommendation that the Air Force request new proposals for a re-evaluation. The Air Force is highly likely to take the recommendation, however, especially because this case has become somewhat of a public spectacle. Not only has Boeing's complaint drawn attention, but political leaders, including both Presidential candidates, have weighed in as well with opinions as to the fairness of awarding a government contract to a foreign bidder, in this case Airbus. This means that Boeing has a second chance to win all or at least part of the contract back from its rivals, but don't expect to hear any news as to the final victor of the bid anytime soon. The Air Force now has 60 days to review the GAO's findings before making a decision to re-open the bidding.
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Investors will have to be patient but the pay-off could be well worth the wait. The $35 billion contract under scrutiny is just the first of three deals worth up to $100 billion to replace the entire fleet of tankers over the next 30 years. Immediate enthusiasm sent shares up at the close of trading Wednesday and the share price has continued to rise early today.
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