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07 Jun 05. THE WALL STREET JOURNAL reported that, pushing trans-Atlantic defense cooperation to a new level, Northrop Grumman Corp. and the parent company of Europe’s Airbus have agreed in principle to join forces in a bid to break Boeing Co.’s monopoly on supplying aerial-refueling planes to the Pentagon.

The decision to pursue the high-profile venture comes amid closely related trade tensions and conflicting political pressures in Congress.

Citing a trade dispute between the U.S. and the European Union over aircraft subsidies, the House voted last month to effectively bar the Pentagon from giving major contracts to Airbus parent European Aeronautic Defence & Space Co., or EADS).

Meanwhile, members of the Senate Armed Services Committee berated Air Force officials yesterday in the latest hearing on the Air Force’s thwarted efforts to acquire $23.5bn of Boeing tanker planes. That saga has become a case study in the potential for abuses when the awarding of a contract involves no competition.

The committee’s hearing focused on a report released yesterday by the Pentagon’s inspector general and its conclusion that several current and former civilian and uniformed officials violated mandatory and “prudent acquisition procedures” through actions that ended up favoring Boeing.

The report provides the most detailed criticism yet of the decision by Pentagon leaders to accelerate the leasing of Boeing’s tanker while failing to consider alternative suppliers and supporting “inappropriate” acquisition strategies. It also lays out how Defense Secretary Donald Rumsfeld and departing Air Force chief Gen. John Jumper supported those strategies.

The Pentagon report could bolster the case for allowing EADS to compete for at least part of a contract to replace the Air Force’s aging, all-Boeing tanker fleet. The Pentagon already has endorsed using foreign aircraft for sensitive contracts, ranging from the future presidential helicopter to an Army spy plane to a pending contract for a small transport aircraft where the only two competing airplanes are European-built.

According to people familiar with the Northrop-EADS talks, the companies have a draft agreement and are considering dates in July to announce the partnership. EADS is forcing the issue somewhat by planning to announce on June 22 where it will build a U.S. factory if it wins work on the Pentagon tanker. Northrop has participated in choosing sites, which so far have been narrowed to four cities in the Southeast.

Any Northrop-EADS partnership would be provisional, given that the Air Force still is awaiting various studies before determining how to replace tankers in its 500-strong fleet. That affords Northrop a grace period to reconsider the venture, which is politically risky at a time when the third-biggest U.S. defense contractor, by sales, needs congressional allies to protect its existing Pentagon programs against budget cuts.

Still, Northrop executives are drawn to the tanker program, betting that the Air Force will divide its tanker purchases between Boeing and EADS. That foothold ultimately could lead to additional Pentagon work, using Airbus planes not only as tankers but also for transport and surveillance missions.

Northrop, of Los Angeles, has said it is discussing a potential venture with EADS, a Franco-German consortium that owns 80% of Airbus. (Britain’s BAE Systems PLC owns the remainder.) Northrop spokesman Randy Belote yesterday declined to comment on a joint tanker bid other than to say the company is “very interested in participating if there is going to be a full, fair and open competition.” He said Northrop continues to assess the “competitive and political landscapes” to see if there will be a sufficient business case for a tanker bid.

An EADS spokesman declined to comment. EADS last year formed a North American subsidiary to expand its business in the world’s largest defense m

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