During the March 12 edition of Fox News' Special Report, host Brit Hume and a panel that included The Beltway Boys co-host and Weekly Standard executive editor Fred Barnes discussed the controversy over the awarding of a $35 billion Air Force tanker contract to Los Angeles-based Northrop Grumman and European Aeronautic Defence and Space Co. (EADS), the parent company of Airbus, over the American company Boeing. According to Reuters, the contract was described as a “surprise blow” to Boeing, which had previously been the “Pentagon's sole supplier of aerial tankers.” In purporting to explain Sen. John McCain's role in the controversy, Barnes stated, "[H]ere's what he asked for: He asked for the Air Force to take into consideration, which he thought the Air Force regulations required, aircraft -- taking into consideration maximizing cargo and passenger capacity, which are important in a supertanker. Well, they did. And now Northrop Grumman and Airbus won the contract." But McCain reportedly asked for more than what Barnes said. His request was reportedly not merely for what the Air Force should take into consideration, but what he reportedly said it should not take into consideration. McCain reportedly urged the Defense Department to -- in the words of The New York Times -- “not proceed with a plan to consider” the potential effects of a World Trade Organization (WTO) dispute between the United States and the European Union over whether Airbus and Boeing received illegal subsidies for commercial airliners from their respective governments, and those effects were dropped from consideration. According to numerous media reports, the omission of the subsidies dispute as a factor in evaluating the proposals benefited EADS and Northrop Grumman at the expense of Boeing.

Boeing and EADS have been at the center of a WTO dispute after the U.S. filed a complaint -- still pending -- alleging that, according to a March 12 New York Times article, the European Union “provided illegal subsidies to design and develop aircraft, including preferential loans, debt relief and loans and research and development grants” for Airbus. In response, the “Europeans countersued, saying the United States had granted indirect subsidies to Boeing, including tax breaks.”

The Associated Press reported that in initial drafts of the Air Force's request for proposals for the tanker contract in 2006, “bidders would have been required to explain how financial penalties or other sanctions stemming from the subsidy dispute might affect their ability to execute the contract.” The AP then wrote that the provision “was widely viewed as hurting the EADS-Northrop Grumman bid.” Indeed, a March 7 Seattle Post-Intelligencer article reported that the “issue of European government subsidies for Airbus has been raised for years by Boeing supporters who claim that those financial breaks have allowed the Toulouse, France-based company to undercut Boeing's prices and thus gain market share in the global competition between the two aircraft manufacturers.” Aerospace Daily & Defense Report also reported on December 6, 2006, that the provision was “seen as harmful to the Northrop Grumman/EADS team”:

In a Sept. 25 draft request for proposals, the Air Force asked for information from competitors on how an adverse ruling from the WTO over the affect of subsidies on commercial airliner costs could impact the price of proposals from Boeing and a Northrop Grumman/EADS North America team.

[...]

Both competitors have had questions about how the Air Force's position on the WTO issue could impact the outcome of the competition. Scoring teams based on potential pricing impacts is seen as harmful to the Northrop Grumman/EADS team. The Air Force's fear is that an adverse ruling against a competitor could drive the price up and inadvertently pin the service into paying unanticipated costs.

[...]

The Air Force's Sept. 25 draft RFP was the first from the Pentagon to consider how an international trade dispute could impact a procurement there, and it drew criticism from some in industry as well as McCain. Lt. Gen. Donald Hoffman, the Air Force's top military acquisition official, says the Air Force is simply leaving no stone unturned in this massive competition.

[...]

Some industry officials privately say that if the requirement to provide pricing data based on the impact of a future WTO decision is a criteria in the competition that EADS will likely back out before constructing a formal proposal.

According to the Times, in September 2006, McCain wrote two letters to Deputy Defense Secretary Gordon England “urging that the Air Force not proceed with a plan to consider the trade dispute in evaluating tanker bids.” McCain reportedly wrote: “I am concerned that if the Air Force proceeds down its chosen path regarding the W.T.O. issue, the Air Force will risk eliminating competition before bids are submitted [...] I respectfully suggest that Air Force remove any W.T.O. element from its procurement evaluation.”

On December 1, 2006, according to Aerospace Daily & Defense Report, McCain sent a letter to then-Defense Secretary nominee Robert Gates urging him “to withhold release of a controversial request for proposals for the Air Force's tanker replacement program until providing assurance that a number of competitive issues are addressed.” From the December 6, 2006, article:

Sen. John McCain (R-Ariz.) is asking Robert Gates, the nominee to take over as Defense Secretary, to withhold release of a controversial request for proposals for the Air Force's tanker replacement program until providing assurance that a number of competitive issues are addressed.

McCain, a senior member of the Senate Armed Services Committee, sent the letter to Gates Dec. 1; Gates' confirmation hearing took place Dec. 5.

One of McCain's concerns is whether the Air Force plans to make its decisions based on the hypothetical impacts of a pending trade dispute between Boeing and Airbus on pricing of their offerings for a refueling tanker. “I remain troubled that, without clarity on how answers to this provision will be evaluated, this element ... may risk eliminating competition before bids are submitted,” McCain says. Each company accuses the other of unfair pricing based on government subsidies.

Aerospace Daily & Defense Report reported that four days after McCain's letter, the Air Force showed “signs of reversing its position” and quoted an Air Force special assistant stating: “The Air Force has revisited its position on WTO on the tanker replacement program based upon discussions with the offerors and will in the next [request for proposals (RFP)] update add a clause that hold all harmless to any future WTO claims.” In the Air Force's final RFP, according to a January 30, 2007, Agence France-Presse article (retrieved from the Nexis database), “the Department of Defense dropped any link between the bidding and a legal tussle over aircraft subsidies being waged by the US and European Union at the World Trade Organization. The draft 'WTO clause' was seen as penalizing EADS, whose commercial aircraft unit Airbus is the target of the US government case at the Geneva-based referee of the global trading system."

The Post-Intelligencer reported that “Boeing advocates say McCain was a major force behind the Air Force decision to ignore the issue of government subsidies to Airbus when the tanker contract was put up for competitive bidding last year.” The AP reported that “Rep. Norm Dicks, D-Wash., said the field was 'tilted to Airbus' because the Pentagon did not weigh European subsidies for Airbus in its deliberations -- a decision he blamed on McCain.”

Los Angeles Times staff writer Peter Pae, in a March 10 article, wrote that experts believe “three key moves by the Northrop-Airbus consortium may help explain how it won.” Among the moves were the proposing of tankers that “could also be used to carry cargo and troops,” which Barnes mentioned during Special Report, and that “Northrop executives made sure there would be no language in the Air Force's competition documents that would hinder their bid and undermine 'a fair and open competition,' ” such as language inquiring about the “lingering World Trade Organization dispute between the U.S. and the European Union” over subsidies.

Additionally, Agence France-Presse reported on March 11 that “Gates assured Senator John McCain last year that the tender process for a billion-dollar aircraft tanker contract had been changed in line with his concerns, the Pentagon said Tuesday.” A January 26, 2007, letter released by the Pentagon “allude[d] to changes made in a draft of the request for proposal, but does not say what they were or specify what concerns McCain had raised.” From the March 11 article:

“You have expressed to me on several occasions your concerns with the Air Force's Tanker Replacement Program,” the letter said.

“A quick check tells me that the Air Force has already modified the draft RFP (request for proposal) in response to a number of concerns.

”I understand that these modifications have now been shared with industry and briefed to your staff and that they are responsive to the concerns identified in your letter."

From the March 12 edition of Fox News' Special Report with Brit Hume:

[begin video clip]

McCAIN: Executives went to jail, CEOs were fired because of a corrupt practice that I fought against and fixed. And I have a long record of fighting against the special interests. I'm proud of that record.

And, obviously, the record is very clear of me having saved billions and billions of dollars for the taxpayers.

NANCY PELOSI (D-CA): Senator McCain intervened, and now we have a situation where contract may be -- this work may be outsourced.

[end video clip]

HUME: What Nancy Pelosi and John McCain are both talking about is a contract to build the Air Force's new and much-needed supertanker. It was originally awarded to Boeing under a deal so corrupt, as John McCain described it, that people went to jail and the CEO of Boeing lost his job.

Then a new process was begun, and Boeing appeared to be the only qualified bidder. That was when McCain weighed in and said, “Wait a minute, you gotta at least have a competitive bid here.”

They did. The Air Force then awarded the contract to a consortium, partly it's Grumman, an American company, and the parent company of Airbus is part of that. And it is a European company.

Now the Democrats, on Capitol Hill in particular, are screaming that this was unfair, improper, a national security issue, and so forth. You heard what McCain had to say about it. Who's right here?

MORTON KONDRACKE (Roll Call executive editor): Well, there are a lot of moving parts, and I am glad that the GAO, the Government Accountability Office, is investigating to see which is the best plane at the price, and so on. And in the case --

HUME: Is there some doubt about that?

KONDRACKE: Well, the Air Force said one thing, the Boeing Company is saying that they started out with a request for a bid for a smaller plane, and it got changed.

In the case of McCain, the question is, politically the case is, one, were he surrounded by some lobbyists who worked for this Airbus contract -- what about them? I think that that's not gonna be a real problem.

The second is, is he so -- was he so angry at Boeing that he created this competition?

HUME: Is there any evidence of that?

KONDRACKE: No. I don't think so. I mean, he --

BARNES: Wait a minute. What did he ask for, Mort?

KONDRACKE: He didn't; he wanted to have read the letter.

BARNES: Just -- wait a minute. Just think if the Air Force had only had one bidder and gave it to a company.

KONDRACKE: I agree.

BARNES: People would be raising Cain -- why don't you get another bidder?

And here's what he asked for: He asked for the Air Force to take into consideration, which he thought the Air Force regulations required, aircraft -- taking into consideration maximizing cargo and passenger capacity, which are important in a supertanker.

Well, they did. And now Northrop Grumman and Airbus won the contract.

Look, why are they -- they're mad because they think jobs are being outsourced. Well, look, most of the jobs are gonna be here. They're gonna be in Alabama.

And here's what makes a lot of them mad: They're gonna be non-union.

MARA LIASSON (National Public Radio national correspondent): Look --

HUME: Quickly, Mara.

LIASSON: There is nothing easier to demagogue when a foreign company gets a big contract, or even with an American partner in the United States. This happened with the Dubai ports deal; it's happening now.

It turns out that they're gonna look at this, they're gonna see if this contract was awarded fairly, and they'll make a determination.

HUME: What do you think will happen?

LIASSON: I think it'll stand.

From the January 30, 2007, Agence France-Presse article:

The US Air Force Tuesday cleared the way for European aerospace company EADS to bid against Boeing Co. for a lucrative contract to supply a new generation of refueling tankers.

The Pentagon said it was committed to an open bidding for the checkered “KC-X” project, which aims to replace the Air Force's aging mid-air tankers under a deal that could be worth up to 200 billion dollars.

The contract is under intense scrutiny from the US Congress. A year ago, it was re-opened after a procurement scandal sank an initial Air Force deal to buy Boeing tankers without a competitive bidding process.

“The Air Force remains committed to a full and open competition,” said Sue Payton, the Air Force's senior acquisition executive.

“The KC-X is the Air Force's number one acquisition priority and will continue to be conducted in a transparent and deliberate manner,” she said.

Payton stressed: “We don't really want to go to a hypothetical situation relative to only having one provider here, one proposal (from Boeing).”

In its “request for proposals” (RFP), the Department of Defense dropped any link between the bidding and a legal tussle over aircraft subsidies being waged by the US and European Union at the World Trade Organization.

The draft “WTO clause” was seen as penalizing EADS, whose commercial aircraft unit Airbus is the target of the US government case at the Geneva-based referee of the global trading system.

The Air Force's invitation for bidding also appeared to take account of objections lodged by Northrop Grumman, the US partner of EADS for the massive mid-air refueling plane contract.

Northrop had threatened to pull out unless the terms were altered to give priority to more than just cost in the Pentagon's decision-making, which would have favored a cheaper offering from Boeing.

Northrop said it was “deferring comment” until its project team has completed a “thorough review” of the RFP.

Any withdrawal by Northrop would leave EADS without a US partner and so unable to proceed with the bid, which the European company sees as pivotal to its ambitions to take on the world's biggest military market.