BAE and Boeing have failed in their bid for a £13bn contract to supply refuelling aircraft to the RAF.
The UK/US pair were bidding against a European consortium led by EADS for the contract to replace the RAF's ageing VC10 and TriStar fleet.
The Ministry of Defence said the European consortium offered better value for money and talks will now take place on a Private Finance Initiative (PFI) contract.
A final decision on whether to go ahead with the project is expected in the next few months.
Under a PFI contract, industry would own and maintain the aircraft as well as providing training, infrastructure and some personnel. The RAF would undertake military operations.
The European consortium, AirTanker Ltd, comprises Rolls-Royce, EADS, Cobham and Thales.
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