In today’s column we discuss the tanker, how much the IAM strike is costing Boeing every day and how long the strike may last.
Out of all the twists and turns in the seven year old effort to replace aging Boeing KC-135 aerial tankers, no one we spoke with predicted that the Department of Defense last week would dump the entire competition in the trash can. What happens next and what are the ramifications for Northrop, EADS, Boeing and the Air Force?
A full re-start by the Air Force/DOD on the competition will probably take anywhere from two-four years before a new contract is awarded. There would have to be a full reassessment by the Joint Requirement Oversight Council (JROC) and the Request for Information (RFI) process; the Defense Acquisition Board reviews and approval of the Request for Proposal; determination of the Source Selection Authority; and the actual evaluation process. Plus any additional appeals of the decision.
Could the new Administration, whether it is McCain or Obama, simply pick up more or less where the Bush Administration left off? We suppose that in theory it could but in practice it’s unlikely. Boeing has been very clear that it views any changed to the specifications for a larger airplane as requiring a compete re-start, and having won its political point and getting DOD Secretary Robert Gates to cancel the Northrop Grumman award, Boeing and its supporters are hardly likely to support anything absent a full do-over.
In the meantime, in what is a reversal of rhetoric by Boeing and DOD, both now take the position that the aging KC-135 tankers are good enough to last while the competition is re-run. Throughout the competition both originally took the position that there was great urgency to proceed with the tanker replacement program because the KC-135s were essentially ready to fall out of the sky. (A separate government-funded study took a different view, arguing there was plenty of life left in the airplanes.) After Boeing protested the Northrop award, Boeing’s spin shifted to “what’s the hurry? There’s plenty of life left in the KC-135s.” Boeing ought to know; it also has the maintenance contract on the KC-135 fleet.
Be that as it may, who are the winners and losers in the decision by Secretary Gates to punt this to the next Administration? Here’s our take:
How much is the strike costing Boeing?
Boeing isn’t saying how much the IAM strike is costing every day, but the media, most analysts and the IAM say $100 million to $110 million a day.
Two weeks before the strike, we estimated about the same amount. Upon further reflection, we know we wrong and we think most estimates are, too. Here’s why:
Boeing delivers ~40 planes/mo. Second quarter revenues were just under $9m, so a straight-line division, rounded up, gives you $3 billion/mo or $100 million/day. That’s where this figure comes from by Wall Street analysts.
But Boeing Commercial Aircraft (BCA) has other units: Aviall (maintenance), Alteon (flight training) and Jeppesen are part of the Commercial Aviation Services division within BCA. Boeing doesn’t segment these revenues. But from public records, Aviall had about $1.5bn in revenues when Boeing bought it in 2006 and Jeppesen was purchased for $1.5bn in 2000. If Jeppesen was acquired for one times revenues (an assumption which may or may not be correct), this gives and indication of this company’s annual revenue.
Alteon was a creation by Boeing, and there is no public information about the revenues from this entity.
Without allowing for any revenue growth (or, conversely, any revenue decline), we’re estimating the non-airplane BCA revenue is about $300 million a month. Subtracted from the monthly BCA revenue of $2.855 billion (based on 2Q08 data), this equals BCA’s loss from airplanes at $2.555 billion a month or $85 million a day. This is 15%-23% below most commonly cited losses.
Goldman Sachs got it right, we think. Its aerospace analyst estimated losses at between $2.4 billion and $2.8 billion a month.
How long will the IAM strike last?
The answer to this question is like reading tea leave at the Kremlin. There are no signs either side is ready to talk.
Most analysts seem to be predicting a 4-6 week strike. Locally in Seattle, the land famous for its incessant rain, September is one of the sunniest and driest months of the year. Wags here suggest that when the clouds return and the rain comes back, the strike will be settled.
On the more serious side, James Wallace, the aerospace reporter for The Seattle Post-Intelligencer, caught up with BCA President Scott Carson at a civic event and talked with him about the strike. We linked the full interview to our daily news site. But here is an excerpt from the interview on point to the duration question:
Carson: I would hope within a couple of weeks we would be in a place where we are talking. I would certainly hope that within a month we would find a resolution. But it is important that it be resolved in a way that allows the company to remain successful and allows us to preserve the important thing to us, which is the right to manage the business.
Let’s dissect this statement.
“I would hope in a couple weeks we would be in a place where we are talking.” This is clear enough. This puts the timing at the end of September, about one month after the strike began.
“I certainly hope that within a month we would find a resolution.” This is a little more ambiguous. A month from when? When Carson made the statement to Wallace (September 13), which would indicate mid-October for a settlement (or two weeks after resuming talks, theoretically)? Or a month after talks resume, perhaps the end of October?
We asked Wallace for clarity and there wasn’t any; so it’s unclear what Carson meant in his timing.
Either way, this doesn’t appear to be headed for an early settlement.
By Scott Hamilton, September 16, 2008
Hi Scott, You forgot to mention that NA KOA also benefits as Boeing originally told us they would not give us the pricing data on the 747-8 because the USAF did not want a large aircraft. We now know they (Boeing) were wrong in that statement.
What will Boeing now say? We have already faxed a letter to Mr. McNerney asking if we can start anew with them. After all, we previously suggested to them (and the USAF) just over two years ago a 767-400 with the GEnx engine or the 747-8 would be suitable platforms.
We can only wait and see how he responds.
With Sec Young releasing information this week that Northrop’s bid was $3B less than Boeing, GAO owes us taxpayers and the Warfighter an explanation of how they decided that if mistakes were not made Boeing had a substantial chance of winning. Let’s see, if Boeing bid a bigger plane (as they said they would if they knew the AF wanted) like the 767-400 or 777 their costs, risks and schedule would have been even larger then Northrop’s. Northrop’s proposals were cheaper, less risk technically and schedule, more capability in fuel and cargo. I don’t understand GAOs decision of how Boeing could have won. Yes AF made mistakes. I am sure every large procurement you can find mistakes if you want to. The question is, do you want to find something and blow it up. It looks like GAO did want to find something. So GAO rules and sends this procurement into a tailspin, I think GAO owes the taxpayers and Warfighter an explanation.
Nortrop’s Bid was lower becasue Boeing had higher developement costs for their ‘derivitive’ 767 airframe.
Nortrhop’s MPLCC was equal to Boeing’s MPLCC because of increased military construction costs associated with the larger airframe.
Northrop’s proposal would have resulted in more aircraft sooner, since the airframe and refueling systems were more mature than the Boeing offering.