CHICAGO -(Dow Jones)- Boeing Co. (BA) expects to get a debriefing on Friday from the U.S. Air Force on why the defense giant lost a major contract award that it was widely expected to win, Jim Albaugh, head of Boeing's Integrated Defense Systems unit, said Wednesday.

After that, Boeing will decide whether to make a formal protest.

On Friday, the Air Force awarded a contract worth up to $40 billion for new refueling tankers to a team of Northrop Grumman Corp. (NOC) and EADS (5730.FR), the European parent of Airbus.

Boeing's reading of the Air Force request for proposals was different from that of the Air Force, Albaugh said at the Citigroup Global Industrial Manufacturing conference, webcast from New York. "We didn't think they wanted a bigger plane. We thought they wanted a replacement for the KC-135," the current Boeing-made fleet. That's why Boeing based its offering on a similarly-sized aircraft, the 767, he said.

At a press conference Friday, Air Force officials said the Northrop bid, using the larger A330 made by Airbus, offering more flexibility, greater reliability, and lower cost to taxpayers than the Boeing bid. But they said they couldn't discuss Boeing's bid until after the debriefing.

Albaugh said Boeing believes its tanker, based on the 767 commercial aircraft, would be more flexible in flying to smaller airports, more reliable, since it would be built by one company, and lower cost. He said the Boeing bid came in below the final price tag announced by the Air Force. As well, "we were discouraged from offering the 777," a bigger aircraft which would have been more comparable to the winning bid. Albaugh added that "the requirements were pretty clear, in our view," saying he couldn't go into further detail.

Boeing will decide whether to protest the contract award - which surprised almost everyone - after talking with the Air Force, Albaugh said. In many cases, he said, protests cause more harm than good by delaying defense programs. But he called the Air Force Tanker choice was "puzzling," given governments stated efforts to be "transparent" to the bidders.

The loss of the tanker program isn't critical to Boeing's financial performance, Albaugh said, since it would add have accounted for 1% of revenue over the next five years.

Other Defense Business On The Horizon

Albaugh said 2008 will be "a big year for all the defense companies" with a number of multibillion-dollar military contracts coming up, including for satellites and radio communications.

Still, if the Democratic party wins the White House in November, Albaugh expects big domestic defense programs to come under scrutiny, with "limited" new opportunities expected.

If the annual defense budget grows 3% to 5% in the next three years, "we'll be doing very well," he said.

Over the next few years, Boeing will focus on growth in "adjacent" defense markets, beyond traditional Department of Defense contracts, including working with the Department of Homeland Security, and partnering with other contractors.

As well, Boeing plans to add to its international defense business.

Albaugh said that Boeing recently has been looking more closely at acquiring a "big" defense company, and has adequate cash to do so.

In 2007, Boeing's defense business generated revenue of $32 billion, about half of the company's total revenue. The other half came from sales of commercial aircraft.

Boeing shares are currently up 1.2%, or $1.02, to $80.64.

-By Ann Keeton, Dow Jones Newswires; 312-750-4120;