Pricing the KC-X: $163m estimate for Boeing, $169m for EADS

One of our readers, with the screen name OV-099, provided a comment on our Dewey Defeats Truman post calculating the possible prices on the KC-45 and the KC-767.

OV-099 has been a long-time poster and when the occasion arises, does in-depth analyses on financial terms. We’ve cross-checked his work with others and found his numbers-crunching to be pretty spot-on.

With that in mind, we asked OV-099 to take a final look at his original posting with the thought of elevating it to a primary post. He has slightly revised his numbers. What follows is his analysis of how much EADS and Boeing priced their KC-45 and KC-767 in the bids to the USAF. His analysis is below the jump.

Update, 1-:30 am: OV-099 has further refined his analysis; the update is below.

How are we going to estimate Boeing’s and EADS’ bid price?

We have a few metrics to work with.

1)      Northrop Grumman’s final offer price for the 2008 KC-X competition was $184 million in 2008 dollar value; or 188.2 in 2011 dollar value.

2)      In the 2008 competition the IFARA Fleet Effectiveness Value  for the KC-767AT and KC-30 was 1.79 and 1.9 respectively**.

3)      Loren Thompson’s claim that the KC-30 scored ”well ahead” of the KC-767 in the IFARA assessment.

First, let’s calculate the fuel burn differential of the two aircraft.

Boeing has been claiming that the KC-30 burns 25 percent more fuel than the KC-767. If we use that 25 percent figure, the fuel burn differential should be around 2850 lbs per hour in favour of the KC-767 (767-200 fuel burn: 11400 lbs per hour).

We want to calculate the Net Present Value (NPV) for the difference in fuel burn between the two aircraft (using Boeing’s fuel burn figures).

Year Cost of JP8 Then Year $ Discount Factor
A 2010 $3.03 

(44.8 cents per lb)

0.9783
B 2040 

Mean Indicator Value

$5.71 

(84.5 cents per lb)

0.2730
C 2071 

Last KC-X retired

$11.2 

(165.7 cents per lb)

0.0697

A (2010): (2850 lbs per hour) x (179 a/c) x (489 hrs/year) x $0.448/pound x 0.9783 (Discount Factor)

B (2040): (2850 lbs per hour) x (179 a/c) x (489 hrs/year) x $0.845/pound x 0.2730

C (2071): (2850 lbs per hour) x (179 a/c) x (489 hrs/year) x $1.657/pound x 0.0697

Year NPV NPV   (D) 

(2010 + 2040)/2

NPV  (E) 

(2040 + 2071)/2

NPV 

(D + E)/2

2010 $109 million
2040 $57.5 million
2071 28.8 million
$83.3 million $43.2 million
$63.2 million

Not wanting to do the NPV calculation for the fuel burn differential for every year, we’ve used the NPV for the year 2040 as a “mean indicator value”. Using this “mean” NPV figure for the entire life-cycle calculation of 40 years; would seem to indicate that the fuel burn differential  is around $2.5 billion (in favour of KC-767)

Again, this is the number we get when using Boeing’s claim that the A330-200 burns 25 percent more fuel than the 767-200 (presumably the 767-200ER). This is a Boeing “best case” scenario in relation to the NPV fuel cost calculations, and a far cry from Boeing’s claim that the Air Force would likely have to pay up to $30 billion more in fuel cost for operating the KC-30 over that of the KC-767. In fact, Boeing’s claims regarding the NPV fuel burn delta between the KC-30 and KC-767 is way off base by more than one order of magnitude!

2nd, let’s examine the IFARA claims from Loren Thompson that allegedly Boeing officials close to the competition , after reviewing EADs’ IFARA data, had concluded that EADS held a substantial edge in the Integrated Fleet Aerial Refueling Assessment. Of course, he could have been blowing smoke, but it’s not surprising that the IFARA assessment for the KC-46A  would be lower than that of the KC-767AT.

In the previous KC-X competition, the  IFARA Fleet Effectiveness Value was 1.79 for the KC-767AT (Frankentanker) and 1.9 for the KC-30; or about 6 percent better IFARA scoring for the KC-30.

Boeing has not revealed much about the KC-46A, but Iet’s assume that it’s based on a 767-200ER, a less capable plane than the proposed KC-767 Advanced Tanker  (AT) that Boeing offered last time around.  I wouldn’t say that 6 percent is a “substantial edge”. Sure, it’s an edge , but for it to be substantial, I’d reckon that it must be at least double that; or 12 percent.  That would mean that the KC-46A’s IFARA score would be about 1.7, and doesn’t look unreasonable in regard to the 1.79 scored by the 767-200AT.

Using 1.7 for the KC-46A and 1.9 for the KC-30, we have:

Fleet Effectiveness Difference = (1 – 1.7/1.9) x 179 = 19 (rounded up)

3rd, as for the MILCON adjustment, the best we could do is to make an educated guess, but I’d be surprised if the adjustment is more than $500 million in favour of the KC-46A.

4th, Estimating EADS’s bid price.

It’s not unreasonable to assume that the Average Unit Price (AUP) for EADS’ final offer could have been as much as 15 percent  lower than NG’s final bid in 2008. Northrop Grumman would have had different profit requirments  and added one level of cost to the value chain as well.  Add to that the fact that the KC-30 is almost through certification and that most of the devlopment costs have been sunk.

Now, let’s say EADS was “conservative” and made an offer 10 percent lower than NG’s inflation adjusted offer from 2008 ($188.2 million for first 68 airframes). EADS’  AUP offer would then be $169.38 million and their Total Proposed Cost (TPP) would be $30.3 billion.

EADS’s IFARA adjustment = 19 x AUP = 19 x $ billion = $3.22 billion

EADS’ Total Evaluated Price (TEP) = $30.3 billion -$3.22 billion = $27.08 billion

5th, Estimating Boeing’s bid price.

If EADS’ TEP was $27.08 billion, then Boeing’s TEP would have to be lower than $27.08 billion in order for EADS’s TEP to be one percent  higher than that of Boeing’s TEP. Since Boeing was said to be the “clear winner”, let’s assume that that means EADS’ TPP was around 2 percent  higher than Boeing’s TEP which would lead to a Boeing TEP of $26.55 billion.

Now we would have to add the fuel burn and MILCON adjustment  to Boeing’s TEP of $26.55 billion; or $2.5 billion and $0.5 billion respectively.

Having used Boeing’s claimed fuel burn figures for the A330-200 (and not EADS’ figures), I’m estimating that  Boeing’s Total Proposed Price (final offer) was $29.55 billion.

Since the EMD is allowed to be over budget by up to 25 percent, we have:  1.25 x $3.5 billion = $4.38 billion. $0.875 + Boeing’s TPP = $30.42 billion. This figure is consistant with the statement that the KC-46A program is valued at over $30 billion (EMD phase valued at over $3.5 billion).

If the KC-30 doesn burn as much as 25 percent more than that of the KC-46A, then Boeing’s TPP would, of course,  be less than $29.55 billion. This would seem to suggest that the Average Unit Price for the KC-46A is about $165.1 million.

The $3.5 billion EMD contract accounts for the first 18 aircraft; or $194.4 million per unit.

Boeing TPP –EMD = $26.05 billion

So, the flyaway unit cost for the remaining 161 KC-46As would be about  $161.8 million.

38 comments on “Pricing the KC-X: $163m estimate for Boeing, $169m for EADS

  1. May we suggest there is a mis-calc. in the following;
    If Boeing’s TPP was $30 billion , then the TEP would be $27.5 billion; or a TEP of $149 billion for the remaining non-EMD aircraft.

    • I removed that calculation in the “refined” analysis as it was not a relevant metric.

      However, if TPP was $30 billion and TEP $27.5 billion, then you would have to subtract the 3.5 billion EMD figure from the TEP (i.e. $24 billion / 161 = $149 billion) to get the TEP of each of the 161 remaining tankers.

  2. Why? The USAF said last Thursday the value of the contract to Boeing was now worth $30B. That is for the total contract, which includes the first 18 KC-46s, for $3.5B. That price includes the 3 EMD aircraft.

    It seems to me that OV-099′s price calculations look like an accurate estimate. The price estimate for the 161 tankers (after the initial 18) of some $149M each seems to fit what the USAF said last week.

    Well done, OV-099.

    • Thanks for that KC.

      As I said in my just posted response to REB though; that $149 million figure does not represent a relevant metric. IMHO, the $161.8 million figure still looks reasonable. ;-)

    • Just one point:

      EMD contract DOES NOT include 18, but only 4. Then will come 2 LRIPs of 7 and 12 a/c each. As both KC-X RFP and USAF budget materials show.

      Donley said 3.5bn$ for EMD contract. Donley said program will deliver the first 18 aircraft by 2017. But nowhere it connected the 2 points saying EMD covers 18 a/c.

      As said: EMD contract, then 2 different LRIP lots, then 11 FRP lots (from 3 to 13). Alltogether will make the ~30bn$ OV-099 estimated. If you want to take an average for all aircraft in the contract: ~30bn$ / 179 = 168M$/ac; if you want to exclude EMD contract from the average, then ~26.5bn$ / 175 = 151M$/ac.

  3. A first class estimate. In time, the real numbers will be available. My only suggested tweak would be a delta of 1.5 percent instead of the 2 percent estimate.

  4. The real interesting question is: how much money did EADS cost Boeing, or how much money has the Air Force saved due to Boeing having to compete with EADS?

    I guess the DoD owes EADS a little favor in return…

    • The winning Northrop bid in 2008 was $184 million per airplane. This means USAF may have saved about 10% in this round with the price competition with EADS, if the estimates are correct.

  5. So how does this wonderful mirage of numbers equate to the cost for the baseline a/c. List price a332 ~200m, 762er ~145m.
    I see several numbers quoted for both a/c – but one trend is clear. the a330 was offered at below list price and the 767 was sold for more.

    does this indicate the widely rumored gap between what airbus asks and gets per plane, or did Boeing not really have to try very hard to beat the bigger boy?

  6. regarding the rebate ” list”

    many moons ago I posted the details of a study done in 2000-2001 regarding subsidies, in preparation for filing at that time a Countervailing duties petition. Then came 911, and the tanker, and subversion of the union brass by Boeing which scotched the filing.

    I had done virtually all of the comparisons and analysis, being retired and having the time plus a few other ‘ attributes ” including at that time a very knowledgeable person who had been present at GATT92 and was a very close friend. ( since deceased )

    It might be interesting to compare my 2000-2001 analysis with the data posted by leeham at

    http://www.leeham.net/filelib/Excess_Baggage_AB_Boeing_pricing.pdf

    http://db.tt/ZXk772F will download a pdf file of several pages

    for 767/a300 series comparisons of prices I would suggest going to page 4 and the boxed area labeled ( years later ) as tanker.

    keep in mind this was for the commercial versions- and that I was aware of typical 10 to 20 percent discounts from so called ‘ list price ”

    Don

    MY initial cost data came from a call to airbus ;-PPP

  7. I pose this question because I am somewhat cynical and ask if Boeing deliberately underbid?

    It is after all a fixed price contract, and Boeing could be fairly considered a strategic asset to the USA.

    Having seen what has happened with banks, GM, Chrysler etc, what if in a couple of years time our friendly Chicago based airframer announces that they are unable to fulfill the contract under the existing terms?

    Who pays?

    What then?

    • Certainly a lesser risk for Boeing than for EADS/Airbus, same with potentially vanishing funding. ( See which banks were saved or not )

      You can be certain that if this happens there will be no lack in experts elaborating on the core differences and the moral gulf between wanting to take another beak wetting for the tanker and having to recoup externally incurred excess cost for the A440M. (SCNR)

  8. SOP is to underbid, but “JOBS”, not price, is the principal factor with the KC-X decision. The good news is more jobs will be staying at home. The bad news, the unneeded and redundant KC-X should never have been allowed off the drawing board,,,,

    Daniel Sterling Sample
    SPACE DESIGNS
    Los Angeles

  9. boeing will be smiling its way to the bank

    via a low cost low risk

    usaf milspeced

    kc767a italian air force version

    as the kc46a

  10. Rene :boeing will be smiling its way to the bank
    via a low cost low risk
    usaf milspeced
    kc767a italian air force version
    as the kc46a

    There are big differences between the USAF KC-46A and the ITAF KC-767A. The USAF version will carry some 40,000 lbs more fuel, and has a 1200 GPM flow max rate through its updated KC-10 Boom. The KC-767A/J Boom on the ITAF version has a max flow rate of 900 GPM. The USAF version also will have a much higher MTOW compared to the ITAF version.

    The larger fuel load allows the KC-46 to fly fighter deployments across the Atlantic Ocean without having to be refueled itself. The KC-767A cannot do that until it gets bigger body fuel tanks.

  11. KC-10, C-5, C-17, KC-30, B-1, B-2, KC-46, KC-767, E-767, and E-4/VC-25 can all on-load fuel at 1200 GPM. Additionally, the B-52, EC/RC/KC-135, E-3, E-6, E-8, AC/EC/C-130, and E-737 can all on-load fuel at 1000 GPM.

    As individual fuel tanks in the receiver fill and the valves close them off, the fuel transfer rate drops off. This also happens when the tanker reduces the number of pumps it is using.

    • Thanks.
      collecting some other replies:
      Could Boeing have gone for a minimum change offer and compensated
      lower ifara rating via price ? Looks like it.

      When will final specs from Boeing be available?

      • “When will final specs from Boeing be available?”

        Around 2014, then first KC-46A takes off.

        A minimum change offer could be a short -300F without a cockpit update. I think public gets the information after the 10 days period for protest.

  12. Hi OV-099,

    I’m surprised by different parts of your calculation :
    - your calculation of actualization of FUEL costs dont seem compatible with the criteria of the RFP. For example, as I can remember, the fuel cost is supposed to grow faster than inflation, which is not the case in your calc, since the NPV decreases as the time goes. As I can remerber, there were 3 scenarios of growths of these costs, and you take only one. What is the base for calculation of NPV (what rate ?) Why did you calculate in 2040 and 2071, since the calculation is supposed to be done during 40 years ? (would it be a tip to calculate NPV, but why ?)

    - MILCON ; it seems for me the adjustment would more than 1 Billion.

    [- with no effect on your calculation, just to understand : Estimated EADS's bid price. Why do you speak of the price for 68 airframes, since you take the mean price for 179 (184, actualized to 188.2, point 1) ]

    - Why do you add 25% over budget for EMD phase to Boeing’s TEP, since what counts is the total budget ? (and why only to Boeing ?)

    Laurent

    • Hi Laurent,

      Please read my NPV analysis/calculation in Scott’s latest post:

      http://leehamnews.wordpress.com/2011/03/03/tanker-updates-more-financial-analysis-2020-market-share/

      As for the 68 airframes; Northrop Grumman revealed their offer price for the first 68 frames only. No idea about the remaining 111 frames though I would presume they would have been priced higher as in the earlier competition, Northrop’s contract for development was structured under a cost-plus contract. For simplicity reasons, therefore, I used the $188.2 billion figure for the entire offer of 179 kc-30s.

      As for the EMD phase, the US government will pay up to 25 percent of EMD cost overrun. Anything above that will have to be payed by the contractor. I added the 25 percent of $3.5 billion (EMD) contract to the estimate for Boeing’s Total Proposed Price (TPP), an not the TEP, because then I got the TPP for Boeing to be over $30 billion. And as I said, this figure is consistant with the (USAF) statement that the KC-46A program is valued at over $30 billion. However, this might be true when seen from the customer’s point of view, and not the contractor’s point of view, if government-furnished equipment is included in the total amount.

      • Thanks a lot !

        With your answer, and your ‘full NPV for fuel consumption’, I now better understand (fuel calc, and the ’25% of EMD cost overrun’ which I didn’t know).

        I simply wonder what rate for your NPV calc ?
        And some words are missing in your last recent update : “Finally… put together. The .. that they” ???? could you complete your update ?

        Thanks a lot again !

  13. Uwe, yes, Boeing could have offered the ‘minimum changes’ as long as those changes were within the 372 mandatory requirements in the RFP.

    BTW, Boeing wil not release the final specs. on the KC-46A. That will be up to the USAF, who now ‘owns’ the design.

  14. Uwe :
    Hi javier, thanks for the numbers,
    do your numbers take down payments in advance into account?
    ( Or how does Boeing or Airbus present their numbers in that context ? )

    As I mentioned in the post, I took a figure that appears in a public source. Scott mentions other intermediate payments scheme, but I haven’t got knowledge about those.

    • We commented on Javier’s blog in response to his comment below that when a customer orders a Boeing, there is a 1% down payment and progress payments at set intervals of between 3% and 5%. The intervals and amounts vary by contract but by the time the airplane is delivered, 30% of the cost have been made in down payment and progress payments. Airbus is similar.

  15. Pingback: EADS North America to Host Press Briefing Regarding Air Force Decision in KC-X Aerial Refueling Tanker Competition « Business & Finance News and Press Releases

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