Tanker canceled (update 9/12)

Update, Sept. 12:

Reuters: EADS threatens no-bid in Round 4. Here we go again. First Northrop threatened a no-bid. Then Boeing. Now EADS. Or not. Now Reuters reports that EADS denies the first story.

Chicago Tribune: Obama slams McCain for ties to EADS, tanker controversy. It was bound to happen: the tanker is now fully caught up in presidential politics.

Mobile Press-Register: McCain ‘just doesn’t get it,’ claims Obama.

DOD Buzz: Direct sale of KC-30 to USAF pondered. Military.com’s blog reports some Northrop supports are trying to figure a way to offer to sell 20 KC-30s to the Air Force on a “commercial deal” that would by-pass the ordinary procurement process. Separately, we learned from two sources that US cargo airline Atlas Air considered a plan to buy the winning tanker and provide fueling services to the USAF.

Update, Sept. 11:

DOD Buzz: IAG does a 16 minute podcast with DOD Buzz, relating a conversation with US Rep. Norm Dicks (D-Boeing) about a possible split buy on the tanker (right at the top of the podcast); and the possibility that Northrop might offer a commercial deal to sell 20 KC-30s to the USAF (about 11:45 minutes).

Steve Trimble at Flight International has one of his as-usual insightful blog items.

Politico: Tanker delay may help McCain.

The Motley Fool takes a whimsical look at the tanker debacle.

Update, 7:00 PM Sept. 10:

Business Week reports that EADS is pondering a legal challenge to the DOD decision to cancel the competition.

CNN/Dow Jones: EADS howls over contract cancellation.

AFP (Europe): Politics charged in cancellation.

Seattle Times: Timeline in tanker saga.

September 9:

The Wall Street Journal reports the Department of Defense has canceled the competition for the KC-X tanker. The report:

The Pentagon cancels tanker competition, saying it’s impossible to pick a winner by January. The Department of Defense is expected to notify Congress and the companies today. Full article to follow.

Bloomberg now also reports cancellation. Here is an update with more information.

Wall Street Journal: Here is the full article, but paid subscription may be required.

This is another stunning twist in the tanker saga. More news to come.

DOD Buzz has this piece.

Our take: We agreed with Boeing that six months was reasonable to do the re-bid, but we don’t know why the analysis could not have transcended administrations. Although the top leadership at the Pentagon might change (even though there has been plenty of speculation that DOD Secretary could stay on, no matter whether McCain or Obama is elected), presumably the evaluators would not change–only the deciders. This development is not good news.

Update, 9:15 AM PDT: Boeing CFO James Bell told a Morgan Stanley conference that the DOD has canceled the procurement and an entirely new Request for Proposal process will begin. This is an important distinction from postponing the competition. See the last bullet point of our post of Bell’s presentation.

Update, 10:45 AM PDT: Here is the statement by Defense Secretary Robert Gates:

DoD Announces Termination of KC-X Tanker Solicitation

Today, the Department of Defense notified the Congress and the two competing contractors, Boeing and Northrop Grumman, that it is terminating the current competition for a U.S. Air Force airborne tanker replacement.
Secretary Gates, in consultation with senior Defense and Air Force officials, has determined that the solicitation and award cannot be accomplished by January. Rather than hand the next Administration an incomplete and possibly contested process, Secretary Gates decided that the best course of action is to provide the next Administration with full flexibility regarding the requirements, evaluation criteria and the appropriate allocation of defense budget to this mission.
Secretary Gates stated, “Over the past seven years the process has become enormously complex and emotional – in no small part because of mistakes and missteps along the way by the Department of Defense.   It is my judgment that in the time remaining to us, we can no longer complete a competition that would be viewed as fair and objective in this highly charged environment. The resulting “cooling off” period will allow the next Administration to review objectively the military requirements and craft a new acquisition strategy for the KC-X.”

Maybe this could be the new tanker:

27 Comments on “Tanker canceled (update 9/12)

  1. I’ve been thinking for while now, far too much has been placed on the pentagon to prevent it literally ‘simply choosing’ a desired airframe. The political fallout and meddling has IMO made a procurement system, where a customer chooses what it wants, into one which is clearly meddled with on a political front (Dicks and Murray),

    IMO this is the equivalent to the Pentagon throwing it’s hands up into the air and saying “we give up” ANd they are right, no matter what happens, protests will be lodged, and hard working people of the airforce will be replaced, due o presumably an impartial GAO – which isn’t really impartial at all.

  2. Ultimately, the blame falls squarely on the shoulders of the GAO. Perhaps historically the GAO has only upheld a small percentage of protests lodged, but it has in recent years upheld protests of high profile contract awards such as the CSAR-X and KC-X.

    All during the KC-X process, the Air Force said that it was the most open, transparant bidding process they have ever executed, yet the GAO made it sound like smoky back room deals abounded, to the point that never again can a fair and open competition be held.

    From the start everyone knew that Boeing was offering the 767-200 in some flavor, and that NG/EADS was offering the A330-200 in some flavor. This came as no surprise to either bidder or to the USAF.

    The surprise to everybody was that NG/EADS offered the larger aircraft at roughly the same price as the smaller Boeing offering, and that led the Air Force to go for the larger aircraft.

    With the GAO upholding Boeing’s protests, it has taught contractors that they can protest their way to a win if they do not prevail at selection time.

    Now we will have another draft RFP issued some time next January or February, and have another year long process of objections, re-writes, and final submissions. It won’t be until 2010 that a new “winner” is announced, and then the protests will fly once more.

    The USAF may never get a new tanker unless they ultimately combine the KC-X and KC-Y programs and issue a split buy decision.

  3. In response to John’s well-written piece, it is important to remember that the GAO was legally empowered only to determine whether the AF’s procedure was substantially fair. It made eight (I believe that was the number) specific findings of substantial unfairness to which NG did not object and which the AF said they would adopt in the rebid. Also, this morning Secretary Gates, in connection with his announcement that the DOD was terminating the tanker selection process until after the elections, admitted before Congress that errors by the DOD were partly responsible for the delays in awarding the tanker contract. John’s argument that the whole thing was the GAO’s fault would have been more credible had he supported it with an analysis of why GAO was wrong in each of its findings of unfairness.

    The most damaging finding to NG and the AF was that the AF had given NG extra credit because the 330 exceeded the RFP’s specifications even though the AF had said over and over that they would not give that extra credit. Boeing fairly relied on those repeated representations in presenting its 767-200 proposal. I do not see how the GAO can be faulted for sustaining Boeing’s protest on this ground. It alone would have been a valid basis for reversal because it was so obviously unfair to Boeing.

    The question of course is where do we go from here. In answering the question, we must not for-get the the Europeans are our core allies in this world, the more so in light of Russia’s newly-revealed strategic goal of not only preventing NATO’s expansion into Georgia and the Ukraine, but also reversing its enlargements into Poland and the three Baltic states. The solution must therefore be win/win for us and the Europeans, not one that divides us, because the big Bear is back to sniffing relentlessly for fissures between us and our European allies.

  4. Christopher Dye said:
    “The solution must therefore be win/win for us and the Europeans, not one that divides us, because the big Bear is back to sniffing relentlessly for fissures between us and our European allies.”

    I wasn’t aware the Euros were helping to pay for these aircraft? I would prefer “win-win” for the U.S. Air Force, our own defense infrastructure, and the U.S. taxpayer.

  5. For Boeing, it’s a bit like turning up for exams begging the professor to delay them because they think all the questions have changed and they can’t now get an A++++ (they have been trying to pass an exam in japanese and italian for years). This slightly irritated the other students (twins), who think they have all the right answers. Instead the professor turns around and cancels the exams altogether saying that the parents are putting too much pressure on him plus a new school head is coming in a few months….
    I bet Boeing can’t believe their luck! James Bell saying that they are concerned is just bull, they literally can’t believe their luck!!!!

  6. What’s so hard about this?

    Split the procurement.

    Geeez I got to do the deep thinking for everybody.

  7. Aurora – where did I say the Euros were paying for the tankers? I meant the obvious, that there be some kind of sharing of the program. No matter who wins, the tanker will have parts from Europe and the US and lots of other places.

  8. If you believe the rhetoric of the Francophobes, taxpayer subsidies made the A330 possible, thus Euro taxpayers have paid for some of the airplane (notwithstanding that Airbus has since repaid the loans, however). Thus, one could make the argument that the America taxpayer benefits from the European subsidies by enabling Airbus/EADS/Northrop to offer a cheaper airplane than they would have otherwise.

  9. Christopher, with all due respect, the Euros will take care of the Euros, just like they have done since the fall of the Roman Empire. If they feel it is in their best interest, like when the Russians start breathing down their backs, then they will work with us. If not, they will act in what they think is their own best interest. We don’t “owe” them a shot at the tanker, any more than they “owe” us a shot at the engine for the A400, or a competitor to the A400 itself. Likewise with Galileo, they opted to go their own way. I’m not faulting them for acting in their rational self interest. We should take heed and do it as well. Our first priority should be our own industrial base. After all, these aircraft–tankers–are logistical aircraft and both would have filled the role nicely; never has anyone brought out a rational case that the KC-767 could not do the job. Why source an aircraft in Europe, when a home grown one will do? (I’m sure the Germans and French said the same thing to themselves in “agonizing” over whether to buy C-17s or develop the A400!)

    I hope that the USAF realizes that if they really (really, really & truly) want a tanker in our lifetime and want a majority of Congressional support, then they better stick with a tanker that not only full fills the requirements of the RFP, which the KC-767 did and strengthens the industrial base (which the KC-30 will not, despite Northrop Grumman’s protestations to the contrary–we have enough paint booths at the Japanese auto transplants). Otherwise, they might want to just defer this thing until the KC-Y time frame.

    Bottom line, we don’t owe the French, Germans, or Spainairds a shot at this, or any other defense procurement. As for the Brits, our defense industries already do a great deal of work with each other (BAE has figured out how to make vehicles for the U.S. Army in plants on U.S. soil) and there is significant collaboration on the F-35. Plus, the Brits are smart enough to realize that there are key power projection components–like submarines and aircraft carriers–that must be built at home. Otherwise, why wouldn’t they have outsourced these to Newport News shipbuilding years ago? In my opinion, tankers fall into this category. We should not allow this capability to be off-shored.

  10. What is preventing Boeing offering a cheaper price for what is essentially a smaller aircraft if the development of the 767-200 (and the whole 767 program) had been paid off from its entry into service in 1982 and the delivery of more than 1000 aircraft?

  11. Aurora, you made some good points. However…
    You should tell that to the Congress, which has faulted USAF for doing precisely what you suggested they do in the first place!! What the Congress wanted after the scandal was a competition, hence enter NG/EADS. Instead they should have passed a law, which only allows Boeing alone to bid for military contracts. That by the way is doing the rounds in the Congress now.

    It’s quite amusing to suggest that the American tax payer should protect the industrial base of the country when Boeing has been shipping those jobs out on the 787. I agree with you that every Government has the right to protect its critical industries but then they should not bid on foreign defence programs.

    Contrary to the common belief, 767 has not ‘fully’ met the requirements of the RFP. 7000ft runway performance and 9500nm range has not been met.

    As far as the British and the F-35 is concerned, I think you will find that they are not particularly happy with the kind of cooperation that the US is providing on this project.

  12. UKair, the 787 is a commercial program, not a military one. I have some serious reservations with the extent of the outsourcing on that program, but that doesn’t mean we (i.e., the USA) should go down this road even further. I actually sympathize with the IAM on this one; Boeing may have gone too far on that program, but as I noted, it’s a commercial program. Citing the outsourcing extent on the 787 commercial program as rationale to outsource the tanker does not hold water. Just like all the KC-30 supporters noting that the A330 trumped the 767 in commercial service. Not really relevant to the tanker competition, as James Wallace noted in a podcast with IAG.

    As for the 767 not meeting the requirements of the RFP, the GAO noted that the KC-30 didn’t either. We are dealing with logistic aircraft, not the tip of the spear, i.e., high performance tactical aircraft. Either the KC-767 or the KC-airbus will work. It simply makes sense to me that we should pick the one that will provide the most benefit to the industrial baseand is least susceptible to the potential for foreign meddling and embargoes.

    I would hope that the USAF and the Pentagon have learned from this disaster and will prevail upon the Congress (quietly, and in the background) to mandate that the law be followed requiring the Secretary of Defense to give consideration to the health of the industrial base in a major procurement. That will ensure that the Boeing contender is selected.

    As I noted above, we do not have an obligation to compete this.

  13. Christopher,

    Without trying to rehash the same arguments that have already been made on both sides when the GAO first released their findings, let me simply address the finding that you cite.

    Perhaps it is the case that both Boeing and NG/EADS, in their post award debriefing, were given a USAF scorecard that included extra credit to NG/EADS specifically for extra fuel delivery, and that the GAO is in posession of this scorecard, but I have not seen any such document in the public domain.

    The SRD did specifiy minimum fuel offload vs. range through Figure 3-1 in section of the SRD, and did specify that no extra credit would be given for exceeding specified minimum requirements. Therefore the ‘more’ that was quoted in the post-selection press conference by Gen. Lichte should not have translated to extra points for NG/EADS, at least for fuel offload. It can be acknowledged, but not credited.

    However, in section Cargo Compartment, no minimum number of Pallets or Passengers to be accomodated was sepcified. If there were no minimum number specified, then the ablility to carry more falls under “part of the trade space the bidder can use to define the best value system in the proposed System Specification.” as outlined in section 1.1 of the SRD.

    Boeing did raise some troubling objections that were sustained by the GAO, including the lack of documentation for the NG/EADS offering to perform certain ‘breakaway’ maneouvers, and NG/EADS’ lack of documenting a depot level maintenance facility as outlined in the SRD.

    And again I repeat myself: Boeing knew well in advance the exact aircraft that NG/EADS was offering, and it’s capacities and capabilities. NG/EADS knew exactly what Boeing was offering and it’s capacities and capabilities. What won the day for NG/EADS was their price.

    Perhaps NG/EADS lowballed the KC-X in order to gain a foothold into the US Defense market. Perhaps it was also EADS’ intention to use the KC-X as a means of opening up a production/assembly facility in a Dollar-cost market.

    In any case, if Boeing had bid their aircraft at a lower price, they would have won the original bid, and we’d all be praising the Boeing KC-45A. Had the GAO found that minor inconsistancies were found in the bid process, as you could find in almost any complex bid coming out of the Governernment, but that the inconsistancies were minor, unintentional and they were not likely to have changed the outcome of the contract award, we would be awaiting completion of NG’s KC-45A #1.

    Instead, the KC-X procurement process is set back at least two years, if not more.

  14. Aurora:
    As a taxpayer, we believe there is an obligation to compete large defense contracts–if not legally then by common sense. Look at what competition has done in this contract: Boeing cut the price vis-a-vis the lease deal and it offered a better airplane, on least on paper (computer). Competition forced these advances, not sole-sourcing.

    This is one reason why we believed Boeing was reasonable to ask for six months to recompete in Round Three. We thought both sides would have to sharpen their bid prices as well as probably offer better airplanes. Northrop is talking about basing a plane on the A330-200F instead of a passenger-to-freighter conversion (the -200F makes far more sense). Boeing is thinking about a 767-400-based airplane, which is more capable than the 767-200 in many (but not all) respects; or a 777LRF (which we think is way too large for a single fleet type replacement for the KC-135).

    Competition is good. The question is and always has been, who gets the award. But it’s a separate question from whether or not there is competition.

  15. OK, so we agree that the 767, has not met ‘fully’ the requirements.

    A330 and B767 are commercial programs, just like 787 and quite a few pundits had suggested that Boeing should have pitched 787 as the tanker. Indeed Chicago Tribune suggested that Boeing was considering it.

    Would you be happy about the state of the home industrial base in this case?
    If KC-135 stays in service for another 10 years until USAF asks again for the money to replace it (by then there is a law letting Boeing win) and selects 787? That is the kind of scenario, which is very probable.

    I understand your eagerness to protect the American industry but you should not fault USAF for following the law and not taking into account the economic considerations. Indeed the countries to which US doesn’t have ‘obligations’ to, should be considered as home countries under the law.

    But again, I agree with you. Pass the law banning competition, protect the home industry, give Boeing the defence contracts and don’t bid on foreign programs. Then everybody will be happy.

  16. Scott, competition IS good, but not at the expense of one’s industrial base. Should we compete the next generation aircraft carrier and allow the UK to walk off with it? Or how about nuke subs? Let the French bid? There is a common sense element to this.

    UKair, there is another law cited by members of Congress which requires the Secretary of Defense to take into account the industrial base on large procurements. I am not sure why it wasn’t, just that the USAF acquisition folks apparently felt that it didn’t apply. So an argument could be made that if the USAF had followed the law, Boeing would have won. I believe we had a similar discussion here previously on that point of law but it originates in the United States Code. I can dig out the citation if it becomes a point of contention.

  17. Ukair, in answer to your question WRT a hypothetical KC-787.

    As I said in my post, I am very uncomfortable with the extent of the outsourcing here. Even if its Japan, which has a “not insignificant” chunk of the 767 program, and Italy, which has been a staunch ally in the past. At the moment, given the robust order book of the 787, that question is academic. However, for my part, I would like to see Congress mandate a work share that must be sourced in the United States, with U.S. labor, if a KC-787 were to ever see life.

    BTW, would you be happy with outsourcing the RN’s next generation of submarines to Electric Boat or Newport News–even if the reactors were built in the UK?

  18. I have a question for the forum.

    It looks as if the A330 would make a better value tanker than the 767. Or, at least, because it was a competition, it had the potential to be the better value tanker. However, many people in the US are deeply concerned about the implications for the national industrial base and security if this major defense project goes “abroad”

    My question is what would EADS need to do to address this issue? If, indeed, it can. Could it offset the entire revenue from the tanker by buying US stuff for other projects? Should it sell the airplane design somehow to Northrop? Can EADS become more American in some way?

    It doesn’t seem EADS is getting anywhere with the currently proposed arrangement. And they’re going to hit the same issue with A400M.

  19. What industrial base are you talking about?

    Boeing isn’t loosing any manufacturing on a product thats reached the end of it’s commercial life. No industrial base whatsoever is being lost.

    At the same time you could argue all day and night, but the competition also supports industry inside the USA, regardless…

    No industrial base will be lost… only a Boeing opportunity. Personally I think state sponsorship by law for sole source commercial SX listed companies, couldn’t be described as anything other than evil.

    Somebody forgot to step in when Boeing aquired the competition, leaving the situation quite pathetic. What precedent does it say to companies everywhere, get big, gobble up the competition, and prevent outside competition.

    I’ve always supported competitions where someone wins on merit and merit alone.

    From my engineering background, the industrial base claim doesn’t hold much merit in my circles… Somewhere I forgot to read where this was a forum for arguing political points.

  20. Aurora, your point about submarines is just nonsense. Do you think the French will be falling over themselves in bidding for that? There are strict technology transfer laws in both France and Britain and US, for that matter, which will ensure that only a US company will get the work. Plus, if I am not mistaken, isn’t there a law, introduced some time ago, which supports American shipbuilding, by some
    Congressman, whose name escapes me?

    On the other hand 787 IS a prospect for a tanker. But now you are suggesting picking and choosing suppliers (by Congress) for the KC-787, if it comes to that, based on the staunchiness of support given to the US in the past, even if it breaks the supply chain?

    My point is this, one either opens up to a competition, ensuring the best product wins for the best price and also ensuring that your companies have a good chance of winning contracts abroad. By the way both of those scenarios rely on a GLOBAL supply chain. Or you ban competition to protect the industrial base, get charged a premium in the process and not necessarily get the best available product.

    Just in this case, Airbus will be supplying a flying barrel, which NG will convert to a tanker with 60% of the value of the contract staying in the US. Now, I reckon that is not bad by any stretch of imagination!

    On another point, Business Week article suggesting a legal challenge is just silly. What legal challenge? All Gallois meant, in my opinion, is that EADS/NG will be paid off for the contract cancellation, work done to date and possibly part of the 2 A330 built already for the flight test program. That’s what would be an ‘appropriate conclusion’ in this case.

  21. Ukair, I could just have easily said “Brits” instead of “French” in the context of submarines. Or would you have preferred carriers or large surface combatants as an example? And…I was asking the question from the perspective of how a UK citizen would react to the US building the majority of your warships, instead of your own country. You did not comment on this. Of course, this would be the final nail in the remnants of the once great British ship building industry. It is quite understandable that the UK would want to retain this remnant, particularly for defense.

    The situation with the tanker is broadly similar. We are spending our tax dollars and I want them spent at home, not in Toulouse, Filton, or Hamburg.

    As for the hypothetical KC-787, I suggest Boeing propose opening up a line in Mobile, Alabama. That will make everyone happy.

  22. How come the Francophobes don’t complain that Britain’s BAE Systems in 2006 was DOD’s sixth largest defense contractor (we haven’t seen 2007 rankings)? BAE supplies armored vehicles for our troops in Iraq and software for the Department of Homeland Security. Nobody complains about these British jobs taking away American jobs.

  23. Scott, BAE has two factories in the U.S. where they make most of the vehicles for the U.S. Armed Forces. If this is incorrect, please let me know.

  24. Aurora, just a thought, you are not named after the great Russian ship, that signalled the beginning of the revolution in 1917? I remember that lot had some good ideas about patriotism! 🙂 You keep swinging the debate in shipping direction.

    OK, lets continue this ship building exchange, when you actually give me an example of when a foreign builder came anywhere near a bid on either a carrier or a submarine project in the US? If you don’t find any that means there is no precedent for it to happen in the future, hence close this topic. As for UK… the last carrier competition was between BAE and Thales (oh yeah, a French company). From what I heard of my friends, Thales’ design was actually better. I am not sure but I think they went with it and incorporated BAE as integrators of systems. The ship is to be built in UK. You can read more about it here.

    So BAE Systems has two factories in the US building trucks? Would it be those they bought when they purchased Armor Holdings in 2007? So perhaps EADS can buy Long Beach facility, will it make it more American for you?

    As for American tax dollars, I understand that you want a Boeing badge on the side of the aircraft, apparently that makes it more American. It’s a bit like me wanting a German VW. It doesn’t matter if the car is made in Mexico and parts arrive from all over the place but it’s a German car because it has a VW badge on the front.

    As I said before, I understand that you want to protect the American manufacturing base (whatever that means) and you can. I suggest you write to you elected Congressman and ask him to put forward a bill, which will award the contract to Boeing without competition. There is plenty of time for that. Perhaps we can call it…. mmmmm….. Dicks’ Law, after good old Norm? Perhaps even Patty will sponsor it? Who knows. I will support you all the way.

    All I see is lack of clarity in this competition:
    1. Congress should not insist on a competition
    2. Rand should not provide studies, where apparently among the Boeing aircraft, A330/340 are also suitable models.
    3. DoD should not approve the project.
    4. USAF should not invite bids.
    All of the above will avoid a ‘highly charged environment’.

    I predict that Boeing will finally push the aircraft through in time, fleece the taxpayer and USAF will end up with an aircraft less capable then its allies. But the dollars will be spent in US and the Japanese and Italian workers will also be very happy, US’ staunchiest supporters!

  25. Boeing has a very successful commercial line up. The 767 is clearly at the end of it’s commercial life, but it is NOT critical to Boeings survival. If it was Boeings main product, and it relied on it for revenue for other projects, then yes, Boeing loosing a contract would result in “No U.S Headquarted airline manufacturer”.

    But this is VERY FAR from the truth.

    Very unfortunately for some, the need to bring up the fact that Airbus was started up and floated by the French Government as a competitor to Boeing, is brought up again and again, no matter how irrevelant it is to good procurement processes.

    Far from it the U.S has a fantastic opportunity whilst it’s dollar remains weak to – recapture work it has lost from it’s ‘industrial base’ it’s unions have been bitterly complaining about over the past 15 years for the exact same reason – dollar strength, at a time where a Boeing Product that has lost favor commercially is at the end of it’s success.

    Some would say you don’t & won’t get a golden opportunity any bigger than that handed to you. Some things come at a price to establish, rarely is this price so small as workers get transferred from one line to another within an existing body, and where the suppliers in many cases are common.

  26. Great blogging. I regret I have been out of the loop for a couple of days.

    The main problem delaying the tanker contract is that two regions of the country with powerful congressional delegations are fighting over it, and the congressional delegations will not compromise in large part out of fear that they will loss their jobs at the polls.

    The solution may lie in the creation of a purchasing commission for large, hotly disputed and politicized Penatagon contracts, similar to the base closing commission. That commission was intended to deal with same problem of Congressional inability to act on needed base closings. A purchasing commission with the same power to decide these questions independently and without fear of reprisal might be attractive now because our war fighters acutally need the tanker, rescue helicopter and other weapons. Thus, Congress is loath to be seen as denying them those weapons because it cannot act, particularly given the lower than low regard in which the public holds Congress.

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