(Adds details, WTO dispute)
By Jim Wolf
WASHINGTON, May 14 (Reuters) - The head of the U.S. House of Representatives Armed Services Committee is conditionally seeking a review of any illegal subsidies' role in a $35 billion refueling-aircraft contest lost by Boeing Co (BA.N), a committee aide said on Wednesday.
On Feb. 29, the Air Force picked a team made up of Northrop Grumman Corp (NOC.N) and Airbus parent EADS EAD.PA, rather than Chicago-based Boeing, to start building a new fleet of tanker aircraft based on Airbus's A330 aircraft.
Panel chairman Ike Skelton, a Missouri Democrat, has prepared legislation that would mandate an Air Force review if the World Trade Organization finds fault in a subsidy dispute pitting Boeing against Airbus, its rival in the commercial aircraft market.
If WTO rules an illegal subsidy was given to "any large commercial aircraft manufacturer," Skelton's legislation would require the Air Force look at the potential impact of that subsidy on the tanker program's selection process, the aide said.
"If the Air Force determines that the subsidy did impact the competition, then it must find a way to remove the impact from the competition to ensure the fairness of the process," a summary of the plan said.
Skelton's legislation was expected to be adopted by the Democrat-controlled Armed Services Committee in a matter of hours as part of its fiscal 2009 defense authorization bill. The committee was working late into the night.
The Senate Armed Services Committee, for its part, steered clear of the issue in its version of the bill. The two must be reconciled before legislation may be signed into law by the president.
Boeing has formally challenged the Air Force choice of Northrop Grumman-EADS with the Government Accountability Office, an arm of Congress that reviews federal contract protests.
GAO is due to rule in the dispute by June 19. It was not immediately clear when WTO would rule in the trade subsidy matter brought by the United States for Boeing and the European Union, for Airbus. The timetable has slipped because of the complexity of the matter.
Some Boeing backers have charged that EADS received government subsidies for its tanker-related work, unfairly lowering the price of the Northrop Grumman-EADS aircraft.
But Northrop has said EADS received no such subsidies, "only loans, and those loans were repaid in full, with interest, last year."
The Air Force decided early on that the subsidies dispute could not be adjudicated within the tanker program and therefore considered it irrelevant.
European officials have said Airbus receives just a fraction of the research funding that Boeing, the Pentagon's No. 2 supplier by sales, gets from the Defense Department.
The EU is challenging several subsidies given to Boeing by individual states, including Washington state and Kansas, where the Boeing tanker would have been assembled for the Air Force.
The committee aide who described Skelton's plan said the legislation would leave it up to the Air Force to determine if any illegal subsidy had a material impact and if so, what should be done to make the process fair to all.
This did not mean that the Air Force would be required to re-run the competition, said the aide, who asked not to be identified by name before the committee had acted on the matter. (Reporting by Jim Wolf; Editing by Braden Reddall and Louise Heavens)