Boeing is facing an uphill battle as it tries to overturn the U.S. Air Force's decision to award a $35-billion contract to a competing Airbus design for the KC-X refueling tanker.

Arrogance about its relationship with the U.S. Defense Dept., lack of focus on customer requirements and reluctance to provide detailed pricing data contributed to Boeing's stunning loss late last month of a Pentagon contract to build aerial refuelers. "Boeing 'knew more than the customer' what the customer wanted, and in its arrogance it didn't listen," says a source close to the 767 tanker team. The proposal's executive group spent a lot of time "doing some soul-searching" as a result.

The defeat could bring on a wave of personnel changes for top executives involved in crafting the proposal. And it could reshape Boeing's business strategy for capturing U.S. defense work. The company lost the $300-billion Joint Strike Fighter program to Lockheed Martin in 2001 and, while it still has an active F/A-18 product line, it is unlikely to break back into the fighter market. Last year, Boeing's unmanned combat air system design lost to Northrop Grumman's X-47 in a Navy project.

While the company still has strong rotorcraft, space and missile defense businesses, its place among airframers is unclear.

After the JSF loss, Boeing officials "thought [the Pentagon] wanted Lockheed Martin to have the little airplanes and Boeing to have the big airplanes." With the C-17 line in jeopardy, though, that is not set in stone either.

The outcome of the Air Force's next-generation bomber competition, which is expected to begin in Fiscal 2010, will play heavily into Boeing's outlook. Boeing and Lockheed Martin have teamed against Northrop Grumman for a highly stealthy B-2 follow-on system by 2018.

Boeing's loss in the KC-X competition is twofold. The revenue will not materialize and the likely candidate to be the 767's final significant customer has evaporated, though the commercial side of the house isn't giving up (see p. 13). Without new orders, just four years of work remain. Perhaps more daunting is that its only commercial rival, Airbus, will now have a final assembly foothold in the U.S. And a former Air Force official cautions that the new stateside infrastructure only adds to an already bloated industrial base.

The competition winner, Northrop Grumman/EADS North America, plans to select a contractor within the next month to break ground on new facilities in Mobile, Ala., for final assembly of the KC-45 and A330-200F.

That new facility will begin assembling its first KC-45, the second production aircraft, late in 2010. In 2011, five KC-45s and one A330-200F are expected.

Air Force Secretary Michael Wynne told senators that the winner met the performance requirements "across the spectrum." Boeing's plan was "a little more risky," and Northrop Grumman/EADS offered a better price, Wynne said. "The Northrop Grumman airplane was clearly a better performer," he remarked.