Northrop Grumman Corp said it would not bid in the U.S. Air Force's multibillion-dollar aerial tanker competition after concluding the rules favored Boeing Co's smaller 767-based plane.

The company said on Monday it would not protest the final request for proposals (RFP) to avoid any further delay in getting new aircraft to replace the aging fleet of nearly 50-year-old KC-135 tankers, although it felt it had substantial grounds to support a protest or court decision in its favor.

Northrop Chief Executive Wes Bush said Northrop remained convinced that the A330-based tanker it offered with Europe's EADS would be a better value for the Pentagon, but said it had a responsibility to its shareholders to spend corporate money wisely.

Investing further resources to submit a bid would not be acting responsibly, Bush said.

Ralph Crosby, chairman of EADS North American unit, said his company was disappointed, given that the Air Force had chosen the larger A330-based tanker last time around, and it was chosen over Boeing's plane in the five last international competitions.

The Defense Department's RFP ignores the added combat capability that could be provided to our military and, for the first time, ensures that our allies will operate with superior capability in this vital mission area, Crosby said.

The Northrop decision prompted disappointed statements by its supporters in Alabama, where Northrop and EADS had planned to assemble the planes, creating thousands of new jobs.

Representative Jo Bonner said he was disappointed that the Pentagon would now pursue a sole-source contract with Boeing despite President Barack Obama's policy against such deals.

Frankly, I am outraged at the Defense Department's bungling of this contract for what is now the third time, Bonner said. The president must now intervene to protect the interests of the taxpayer and the men and women of our military.

Senator Richard Shelby, also of Alabama, said the Air Force's refusal to make substantive changes showed that politics had trumped the needs of the military.

This so-called competition was not structured to produce the best outcome for our men and women in uniform; it was structured to produce the best outcome for Boeing, Shelby said in a statement.

To win, Northrop would have had to pare its profit to a low level, and then abide by a fixed-price contract for nearly two decades, with only a small adjustment allowed for inflation.

Northrop and EADS won the last competition in February 2008 with an Airbus A330-based tanker plane, but the deal, valued at around $35 billion, was later canceled after government auditors upheld a Boeing protest.

Northrop told the Pentagon in December it would not submit a bid in this follow-on competition unless there were significant changes to the Air Force's draft rules, which Northrop said clearly favored Boeing's smaller 767 airplane.

An earlier sole-source deal with Boeing collapsed amid a major procurement scandal that sent a former senior Air Force official and Boeing's former finance chief to prison for violating federal conflict of interest laws.

(Reporting by Andrea Shalal-Esa and Tim Hepher in Paris; Editing by Tim Dobbyn)

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