Politics continue on the tanker

(Special projects precluded us from updating last week, so some of the links below backtrack into then.)

Politics continue to plague the tanker program even though the Bush Administration has punted the decision to the next presidency. Today we play catch-up with selected stories of interest.

Update, September 26:

Inside Defense reports that US Rep. John Murtha (D-PA), chairman of the House Appropriations subcommittee, says a split buy between Northrop and Boeing is the only way to recapitalize the USAF tanker program any time soon.

Murtha generally has been supportive of Boeing’s KC-767 tanker proposal.

He’s added language to the 2009 defense appropriations bill directing the DOD to study the feasibility of a split buy, Inside Defense reports. Murtha, according to the publication, acknowledged that Boeing and DOD don’t like the idea and he didn’t know if Northrop does, “But let me tell you something, we’re not going to have tankers if we don’t do that, I’m convinced,” Inside Defense quotes Murtha as saying.

Murtha predicted that in a re-compete, Northrop is likely to receive the order because its plane is ready to go.

Inside Defense is a paid-subscription service only but readers may register for free and receive three free articles (and then pay a la carte thereafter). This article may be found here, with the registration process the first thing you will see.

Update, September 25:

Be careful what you ask for. US Rep. Norm Dicks (D-Boeing/Washington) announced that he’s inserted language in a new House bill to require the USAF or DOD to review any adverse ruling from the World Trade Organization on the “illegal” subsidies complaints filed by the US Trade Representative and the European Union against Airbus and Boeing. He has said for years that Airbus received “illegal” subsidies and presumes the WTO will back up the USTR complaint. Most objective observers, including us, agree with his biased viewpoint on this one.

But most objective observers, including us, also think the WTO will find Boeing received “illegal” subsidies as well–something Dicks and other Boeing supporters in Congress seem blind to.

The full House has to approve Dicks’ language (likely) and then the Senate has to agree (unlikely).

A decision by the WTO is overdue.

Update, September 24:

Mobile Press-Register: Gates against tanker split buy.

Aviation Week: DOD’s Gates eyed changes to RFP before canceling contract.

JD Crowe at The Mobile Press Register is at it again.

Update, September 23:

Associated Press: DOD Secretary Robert Gates says the next administration should buy the cheapest tanker.

Original post:

Washington Times: [Tanker] Rigged in Boeing’s favor. US Sen. Richard Shelby (R-Northrop/Alabama) writes in an Op-Ed piece that DOD’s decision punting the tanker to the next presidency was nothing more than a sop to Boeing.

JD Crowe at Mobile Press-Register

Business Week: Boeing’s CEO beat the Pentagon, but lost some, too. Boeing CEO Jim McNerney gambled in taking on the Pentagon over the tanker, and won.

Defense Industry Daily: A400M delays creating contract controversies. Airbus’ sole military program isn’t going too well. (We count the KC-330 as a broader EADS program; the A400M is Airbus.)

Washington Post: Defense buyer says Northrop’s bid was $3bn cheaper than Boeing. DOD’s John Young said the smaller KC-767 should have been cheaper to buy than Northrop’s KC-30–but it wasn’t. We say perhaps the US taxpayer was going to benefit after all from all those “illegal” subsidies alleged to be provided to Airbus.

Inside Defense: Flyoff will determine tanker win. The Air Force’s top buyer predicts a flyoff between Boeing and Northrop for the tanker contract. Inside Defense is a paid subscription service but with registration you can get three freebies, including this article.

Los Angeles Times. Northrop entitled to termination fee. The Pentagon says Northrop is due tens of millions of dollars for the canceled tanker contract.

14 Comments on “Politics continue on the tanker

  1. I disagree with Northrop getting a termination fee. They didn’t do any thing to deserve one. The award was immediately appealed and a stop-work order was placed on the contract. NG didn’t break ground or sign any contracts that I’m aware of for winning the award for about a week. About all the money they spent after the award was in a PR campaign against Boeing.
    I do think NG has a case against the DoD for leaking proprietary information about their bid to the public (and Boeing). I’m referring to the recent statement by Young who told us all by how much lower NG’s bid was over Boeing’s. Now Boeing knows exactly what NG’s bid price was.

  2. GasPasser,
    Your vigour is understandable, however when a contract is broken, usually it means that somebody has to pay. The contract of this type may mean that NG/EADS are entitled to the work they had done prior to the award. The contract may also have a termination fee, it may also compensate EADS for having 2 A330s sitting around doing nothing. Do you know how much an A330 is worth in the current climate? Airlines can’t find a spare one, especially due to the 787 delays. I used the word ‘may’ as I have no idea what’s in the contract, if you have some information what NG is entitled to, please share. As well as the price, Young’s interview really showed that NG/EADS had submitted a superior bid.
    As for spin and propaganda… Boeing is in the league of its own.

  3. It’s amazing how much cheaper an aircraft can get when it is subsidized by several large governments. Airbus wanted to break in to the American defense market so bad it seriously undercut the price where Boeing couldn’t reach it. I doubt they would make much of a profit from this contract, but the long term profit outlook from future contracts is what they were looking at I bet. They just wanted a foot in the door.

  4. Keep in mind that Secretary Young’s remarks on cost referred to the first 68 aircraft–the fixed price portion, I believe. Life cycle costs are another matter. Also, the GAO slammed the Air Force for faulty cost accounting. Young got his sound byte, though. The press loves numbers….

    That said, I am surprised that Boeing didn’t take into account the fact that their competitor would low ball this bid to get the work. This is a case of either naivete or hubris at work.

  5. My, what a target rich environment.
    So starting with nearest bogies first…

    “68 aircraft–the fixed price portion, I believe.”

    er, NO. Just the phase that included the development dollars. You know…the $ Boeing hadn’t spent yet to create the product they wanted to sell. The $ NG/EADS didn’t need to spend so much of because they were either already spending it for another tanker program or didn’t need to spend because their product was already close to what the AF wanted.

    “The GAO slammed the Air Force for faulty cost accounting”

    Two things funny (haha) here. One, the GAO also recognized that Boeing had higher development costs, and two: GAO accountants don’t have a better crystal ball than the AF, just a politically-shaded one. If the DoD had a hair they would have disagreed with the GAO and proceeded as the law allowed.

    “I am surprised that Boeing didn’t take into account the fact that their competitor would low ball this bid to get the work. ”

    All the definitions of “low-ball” involves knowingly bidding lower $ than you think you will need to be able to perform the contract. This does not include optimistic estimates if their GR&As are accurately characterized. Defense contractors go above and beyond to get the GR&As out there to prevent such misunderstandings as a matter of good business practice. Your statement is little more than an unsupported and disparaging accusation.

    I’m guessing two of the three predecessors on this thread have never been near an acquistion course and the other may have something to do with the UK.

    On a more positive note, I’d be interested if our hosts have any ideas/guesses as to how the contract RFP next time might differ from this time around. I’ve got a couple of predictions, and wonder if they’re thinking the same things I am – I’ll be happy to share if they post on the matter. [Sticking steel bars in the gyros of Boeing’s spin machine gets a little old at times. ]

  6. I would not bring European governments into this, Ben. The question that is obvious to ask is why did Boeing offer an average price of $226m/frame, based on the 68 a/c order? B767 is a program that is essentially paid for, with nearly 1000 delivered and still in production. With the lessons learnt (allegedly) from the Japanese and Italian developments and already existing facilities, this should represent less risk (as claimed by Boeing) and a cheaper option. Just to put it in perspective, $231m is a list price of 777-200LR, SQ got their first A380 for $198m! It’s hard to see how Boeing thought they could win this tender unless they were extremely naive, probably in thinking it would be too much trouble for USAF to choose NG/EADS, politically if nothing else.
    In my line of work, some contractors undercut other established ones in order to win the work and get a foot in the door. This is the basic business strategy. The way to counter the undercutting is to offer a better product with the lower risk, that an established contractor should have. Boeing, unfortunately, offered none of that, despite claiming that they have God knows how many years of tanker building.

  7. UK, You cannot compare a military purchase order to a commercial one. It’s apples to oranges. Yes, the list price of a -200LR may only be slightly higher, but it is not modified to military specs which add a lot to the cost. Give me a green 767, before mods, and it is way less in price than the A330. Continuing on, I know Airbus is also practically giving away A380’s because they aren’t selling as well as hoped.

    The better product vs risk has already been debated way too much. I’m not getting into that here.

    Why not bring the european governments into this? It’s been established they provide launch aid and Airbus has always been able undercut Boeing on price because they *have* to due to an inferior product line. The prize for breaking into the US defense market is too big a target to ignore. I never said it wasn’t smart business tactics, but my point was it is a lot easier for a company to undercut on price with very little risk when subsidized by several governments.

  8. Ben, your little rant doesn’t actually explain why Boeing set out to overcharge the USAF, when as you claim a green B767 costs less than an A330.
    I know that comparing commercial products with the military is not easy but it gives a rough estimate of the numbers, which is more than was available previously.

    I suggested not bringing the governments into this because it would open a whole can of worms, which you then, indeed, proceed to do. This is a very tired record you are playing, which belongs in a completely different topic. I suggest we leave it at that.
    Now on to your other points…
    “I know Airbus is also practically giving away A380…”
    Really? Can you provide any evidence with some numbers please? The price I mentioned, is only available to the launch customer, which SQ is, and is the only one I had seen. Enlighten me.

    “Airbus has always been able undercut Boeing on price because they *have* to due to an inferior product line”
    Again, I would like some evidence for that also.
    If you think that Airbus is simply giving aircraft away, then you are seriously wrong. Have a look at the FY 2008 results to see how much money they are making.
    As for ‘inferior’ product line…. again comes from a very tired record and doesn’t give you any credibility by repeating it.

  9. Funny cartoon! With the winglets it appears to be a KC-30 screwing the reciever – the “military”.

    Even funner is that this came from the local newspaper in Mobile Alabama!

  10. One plausable explanation for NG’s bid being much less than Boeing’s is that the USAF did not believe either bidders numbers were correct and increased Boeing’s and reduced NG’s. If I have any memory left, it was one of the GAO findings in favor of the Boeing protest.

    Another is that because Boeing has been the supplier of the USAFs other tankers (KC-135 & KC-10) over their entire service life, Boeing added to their “green 767” all the stuff they knew the USAF needed to make it mission ready at delivery. Whereas NG, not being in the tanker business, only added to their “green A330” enough to comply with the bid. Imagine the sticker shock the USAF would have to later mod the new KC-30 up to the mission ready standards of the existing USAF KC-135’s & KC-10’s. I’m not referring to performance, I’m referring to all the things besides the boom that make it a USAF tanker. Things I cannot mention in a public forum. I suspect NG only put in their bid what the USAF asked for. Boeing put everything in their bid, even if it wasn’t specifically requested…..they know what the USAF wants/needs it.

  11. And how do you know that Boeing put everything in their bid? Or are you just assuming? Maybe Boeing included that $300 toilet seat cover the USAF needed last time aye?

  12. “Boeing added … all the stuff they knew the USAF needed to make it mission ready”

    Is it like when someone goes to a showroom to buy a car and if they are really good at negotiation they can get car mats, full tank of gas, fluffy pink dice on the rear view mirror and an air freshner?
    So when you enter a 767 cockpit you will have a lovely smell of $2000 nuts and bolts. 🙂

    GasPasser, correction (again), Boeing did not deliver KC-10, they just bought the company that did.

    As for the new look RFP, that SMSgt Mac mentioned, I think that if USAF really want what they proposed in the latest revision of the RFP in August, then they can just release that as a new tender. Everybody knows that it is GAO proof, as their recommndations have been implemented and Boeing can’t protest the changes in the requirements as it is a new tender.

  13. The really big thing in EADS favor is that their first A-330’s converted to KC-30 status by the time a new tanker competition comes out will be entering service with the RAAF – Whereas, regardless, little to very minor work will be done on a Boeing Tanker at least until next year, whilst the KC-30 marches towards operational service, and all the benefits that encompasses with a selection panel.

    The really BAD thing for the U.S – is that a political backlash against EADS has more of a chance of hurting Boeing commercially than EADS. Neck and Neck commercially, it has precisely zero to do with launch loans, and everything to do with ‘business opportunity’ in a new country. If you can’t export technology into the U.S – your certainly not going to take much note of trade agreements with a hostile partner when it comes to exporting technology elsewhere, something the U.S holds dear to itself – because a competing company has in effect – an embargoe placed on its product simply because parts of it are made elsewhere, and the company is headquartered elsewhere.

    Nothing about this decision is about cooling off, it reaks of political intervention, and may be disastrous for business relations.

    Mean while “If it’s got Boeing, It’s not Goeing”

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