EADS confirms KC-X bid

Update, 500 PM PDT: Innovation Analysis Group has a 24 minute podcast on this development featuring Flight Global defense writer Steve Trimble, TEAL Group aerospace analyst Richard Aboulafia, IAG’s Addison Schonland and us.

Original Post:

EADS North America and Airbus have scheduled a press conference for 2pm EDT today. EADS NA CEO Sean O’Keefe, former EADS-NA CEO Ralph Crosby (who remains in charge of obtaining the KC-X contract) and Airbus Americas Chairman Allan McArtor are scheduled to appear.

Clearly this is the kick-off for the return of EADS to the competition.

Update, 0945AM PDT: Boeing already is on the offense, issuing a statement that the WTO ruling that Airbus, and the A330-200 on which the KC-45 is based, benefited from illegal subsidies should be considered. The Department of Defense has stated repeatedly that the WTO ruling will not be considered.

The WTO Interim Report on the EU case against Boeing is expected to be issued in June, ahead of the extended deadline of July 9 for proposals to be submitted. It is widely anticipated that Boeing will likewise be found to have benefited from illegal subsidies.

We have all along cautioned about focusing on the subsidies issues because we believed both parties will be found to have violated WTO trade rules. The Airbus report is out and the Boeing report is coming. Boeing and its supporters already have said any Boeing violations will “pale” in comparison with launch aid provided Airbus.

Whether it does or doesn’t remains to be seen, but since the underlying thesis of Boeing and its supporters is that any WTO violation should disqualify a company seeking this contract, then any violation by Boeing would disqualify Boeing. This, of course, won’t happen and therefore neither should it happen with respect to EADS (or Northrop before it withdrew).

Furthermore, DOD has reaffirmed over and over that it will not consider the WTO rulings, so all this is for Congress. This makes a sham of the DOD procurement process. The debate should be on the technical and operational merits of the offerings.

The press conference begins:

Sean O’Keefe (SOK), CEO, EADS North America

Ralph Crosby (RC), Chairman, EADS North America

Allan McArtor (AM), Chairman, Airbus Americas

No surprise: EADS announces it will bid for the tanker, and confirms the Reuters report yesterday that for now it is not joining with a US partner.

RC: We’re doing this for a number of reasons. We have a real tanker doing real work. We have notified the DOD we are going to bid. We have the world’s best tanker. We have won five different times against the KC-767. The KC-45 is flying, it exists. This means substantially less risk. The DOD should not be forced through sole source to buy an aircraft that exists only on paper (the KC-767 NewGen). We are creating new jobs at a time when our competitor is sending jobs overseas.

The economic stimulus that is provided by this tanker is bolstered by our commitment to build freighters in Alabama, too.

DOD sought competition and we are encouraged. Competition is the single best acquisition tool to get the best benefit for the US taxpayer.

We have the only tanker in production today that meets the RFP requirements. We have an advanced refueling boom. We have two flying for the Australian Air Force.

Boeing’s New Generation tanker doesn’t exist in any real form.

Our tanker will have demonstrated refueling through the boom and through hose-and-drogue systems. This has been particularly trying for our competitor. Our tanker has been certified by EASA (the European equivalent to the FAA).

There are going to be multiple attempts by our competitor to distract from delivering real tankers for real warfighters.

We are now in a competition where judgments about our workforce in Alabama and other issues don’t matter. It’s about the technical merits to determine the outcome. The rhetoric needs to cool. We need to talk about the task.

SOK: We are a contractor who has a track record of excellence. We are a qualified primate contractor. This is part of Ralph Crosby’s legacy. Every time we competed on a fair, balanced playing field, we have won. Our Lakota team has delivered more than 100 helicopters. Every one is on schedule and on budget. This has been recognized by DOD has a model acquisition. That qualification and criteria to be able to act and perform as a prime contractor would gives DOD and the public to stand behind the proposals we put forward. We can’t do this alone. Our combined industry team makes this possible.

Our US-based industrial team is made up of over 200 suppliers, made up of some of the most-recognized names in America. These form the past-performance track record to be a prime contractor for the KC-X. We support 200,000 American jobs with $11bn spent in the US every year.

Team members include: GE, Cargo AAR, Eaton Aerospace, GKN Aerospace, Goodrich, Hamilton-Sunstrand and Honeywell among others.

We have a flying tanker. It does perform. It is not an animation. It is the only tanker in production.

Q&A

SOK: About 30 of the 372 requirements in the RFP pertain to classified matters. EADS-NA has the ability to deal with these, to be supplemented by those on the team now.

RC: We wouldn’t be here if we didn’t think we could win. What we see is a competition and an RFP is pretty hard-edged as to what it requires. We obviously believe we can be there. You’d have to ask Northrop why they decided they wouldn’t compete.

RC: There was always a phasing of the work into the Mobile facility. We’re still deciding how this transition will occur. Our own view is that we would modify the fourth aircraft in Mobile and we will stick to that. We know how to do these modifications. The first three potentially will be modified in Spain and flown here.

We are not seeing a major partner in the context that Northrop was. It’s reasonably logical that we would be building our subcontractor team. We are doing the logical thing a prime would do and that is do augment our team.

We couldn’t bid alone before because we had a teaming agreement with Northrop for five years. In 2005 it was early in the gestation of our tanker development. Since then our capacity for demonstrating our skills in design and building a tanker have grown.

SOK: We now have the systems integration capability with the team we assembled we didn’t have five years ago.

SOK: We don’t know what Boeing is going to offer. There is kind of a description. There’s been at least enough commentary offered by the competitors what they may or may not do but the KC-767 NewGen is not an airplane that currently exists.

RC: It doesn’t matter what Boeing thinks. It doesn’t matter what readers think. We are now in a source selection by the US government and it is their call. We’re in it. We’re going to bid. They are going to bid and it is up to the Air Force to decide which tanker is better.

SOK: There is no question about it, the RFP is about replacing the KC-135. We think we will pass all 372 requirements. The prior effort was about an air modernization program. This is very much right down the line here is the criteria you need to pass without going through subjective judgment.

SOK: We are not bidding just to produce more paper. We intend to win. We believe this will be judged on the merits and on the criteria the DOD has laid out. This will positively and will establish EADS North America as an extension of the largest aerospace company in the world.

SOK: Certainly the commentary offered by any member of Congress is their prerogative. As it pertains to any member of our team, they are there as a member of the coalition of the willing.

RC: The answer really boils down to one of price. Our risk is small because our development is advanced. This implies our price for the SDD part of the contract may be lower. Our competitor hasn’t fully defined his airplane, let alone started to build it, their price will be a determinate of what they offer. The risk part of the equation has been assigned to the contractor. The tanker for Australia is virtually identical to what we will offer the Air Force. Based on all data and evidence I have seen, we have a lot less distance to go than our competitor.

SOK: This is a fixed price development contract. This an an area EADS knows how to compete in. [Airbus] delivers 500 aircraft a year on fixed price contracts. We have two [tanker] aircraft flying right now. We have knowns. We’ve been there and done that.

51 Comments on “EADS confirms KC-X bid

  1. Technical merits and also bending over backwards to get EADS to bid?

    An extra 60 days and now this?

    The DOD/Pentagon never offered something like this to the NG/EADS team:

    “Thompson said U.S. defense officials had agreed to waive duties on imports into the United States that EADS would need to build its A330-based tanker, although they were insisting the change was part of a package of export reforms that Defense Secretary Robert Gates is due to unveil on Tuesday.

    Officials had also agreed to waive a defense acquisition rule that limits a foreign company’s ability to provide classified communications equipment for U.S. weapons, he said.

    “The Pentagon said it would not change the terms of the solicitation in order to encourage EADS to participate, but it appears that is precisely what they are doing,” he said.”

    http://biz.yahoo.com/rb/100420/business_us_usa_tanker.html?.v=2

    • During the press conference, EADs said there had never been discussions about tariffs, there are no tariffs and they have no idea what Thompson is talking about. EADS is qualified to handle classified material, EADS said.

  2. Here we go again, Boeing repeating recent history, throwing another tantrum and tossing it’s toys out of the pram.

    I propose that if Boeing dedicated half as much effort toward their KC30 offering as they do in lobbying they just might have a workable IFR aircraft.

    I fear political interference may rule supreme in selecting the less capable product.

  3. Why do I have this sinking feeling that Boeing is going to lose again?

  4. EADS is now touting a “real” tanker with an aerial refueling boom that is the “only boom available today that meets the USAF’s requirements”.

    Ironically, the EADS refueling boom was NOT operating as it was designed, according to my personal knowledge with the matter.

    How could EADS make such a misconstrued statement?

    Regarding the WTO issue, both Airbus and Boeing will be found guilty and both of them have to comply with WTO rules thereafter.

    Unfortunately, I don’t see Airbus to have any willingness to forego future subsidies, especially on the A350 XWB program that is around 6 tonnes overweight and being delayed~!

    • WAS not or IS not?

      There is no need for Airbus to forego subsidies. As I understand it, RLI was deemed an acceptable measure by the WTO, i’t’s just a matter of how much below market rates they should be supplied.

      • As best of my knowledge, the A330-200 MRTT boom still suffers from “boom delivery quality” issue, although I am not EADS and cannot publicly disclose it here.

        It was obvious that Airbus had been receiving illegal subsidies. The truth is that Airbus has been receiving illegal subsidies in the form of “launch aid” with much lower interest rates than the market rates.

        This is illegal – why is there no need for EADS to forego subsidies?

      • because the whole RLI format was not deemed illegal by the WTo to the best of my knowledge. They might have to adjust the total magnitude or the conditions attached to the RLI some, but the basic premise is not illegal,

        AFAIK of course.

    • “Ironically, the EADS refueling boom was NOT operating as it was designed, according to my personal knowledge with the matter.”

      Any further info?
      Afaiu the boom had acceptable testing time on the A310MRTT demonstrator.
      The decried by some people “late” refueling demonstration on the 330MRTT
      seems to have been due to qualification ordering (and not integration issues)
      Any corrective input would be welcome.

      Do you perchance have deeper info on the italian and japanese tankers
      acceptance status too? ( Last thing I saw was the customers have them but
      have not taken posession, i.e. Boeing has to man them and do further fixing )

  5. To: Daniel Tsang on April 21, 2010 at 12:25 am

    I guess the first sentence addresses my question.
    “boom delivery quality issue” sounds nice, can I
    later have some of the remedy 😉

    “This is illegal – why is there no need for EADS to forego subsidies?”
    Making capital available was (afaiu, and all that jazz) not deemed illegal. The lending rate was deemed inapropriate. ( so there is nothing to forego.)

    Come to think of it this risk type investment given by the low rate but lifetime royality payment is pure capitalism used to good effect, personally I think objections stem from the US systemic market failure
    for any longtime investment. the instant profit gained from “innovative products” centered around debt bundling have completely ruined that area.

    Further no detrimental effect towards the US aerospace industry was testified.
    ( i.e. any problems they have are homegrown )

  6. All we really know about RLI is that in concept of government loans to private enterprise is legal per Airbus’ own press release, but according to Airbus itself the ruling affects RLI received for all Airbus Aircraft. So it is fair to say that while government loans are legal there is some aspect of the Airbus RLI that is in itself illegal.

    If I were to take a guess I would say the repayment mechanism of tying loan repayments to sales and the forgiveness mechanism of forgiving loans if an aircraft doesn’t sell the projected numbers are illegal and will likely need to be changed. This would be in keeping with the finding that US taxbreaks that were tied directly to export earnings were illegal in a previous trade disbute. Afterall, if the WTO says you can’t tie tax breaks directly to exports, why should you be able to tie loan repayment and loan forgiveness directly to exports. Even if Airbus doesn’t for example make any money off of the A380 they are still profitable and should still have to pay back the loans on a market based time schedule and should pay back all of the loans as long as long as the overall company is healthy, just like any commercial bank would demand.

    What does this have to do with the KC-X maybe nothing, maybe a lot. As the WTO said to the French Government when they complained about US actions in regards to the current KC-X contract, paraphase, “Go jump in a lake, we don’t deal with miliitary procurement”. So far the RLI issue has been very minimal since the Pentagon has declined to consider RLI and according to the WTO it is entirely up to the Pentagon and US Government on whether or not to penalize EADS for the RLI. But all this could of course change if the US Congress demands that the Pentagon factors in the RLI, which is not outside the relm of possabilities. Afterall, the WTO did just say that it makes no difference to them what rules the US adopts for the KC-X contract.

  7. Rumors are that EADS may bid below costs. BTW, that is known as “low balling” to get the contract. Michelle Dunlop, of the Washington Herald, quotes a couple of folks who freely speculate:

    http://www.heraldnet.com/article/20100421/BIZ/704219874/1010/BIZ01#EADS.may.undercut.Boeing.on.tanker.price

    “Hamilton didn’t rule out the potential of EADS submitting a bid below its costs of production just to gain entry to the U.S. defense market.”

    Scott, if they do this would this be tantamount to “dumping”?

    • The question was hypothetical and no, we didn’t rule out the possibility. You omitted the additional quote that it be a heck of a gamble.

      Is it likely? We doubt it.

      If EADS does it, is it “dumping”? That depends on how low the price is. If something costs $1 and you bid 98 cents, we wouldn’t call that dumping. If it is $1 and you bid 50 cents, then it certainly could be characterized as such.

      “Loss-leader” pricing isn’t unknown. Airbus, Boeing, McDonnell Douglas and Lockheed all did deals at one time or another below cost to win a transaction with the expectation that some component later (maintenance, parts, etc.) would bring profits. Back in the MD11 days, we saw a Pratt & Whitney deal in which PW gave (yes, “gave”) the airline the engines coupled with the maintenance and parts costs, where they expected to make the profit.

      Even today, when a publication reports that Airline X bought an airplane for price Y, it’s never that simple. Spares, potentially training, possibly integration costs if a new fleet type for the airline, servicing agreements, even trade-ins all may be factors.

      So when EADS and Boeing submit a price to the USAF, what will it truly mean?

      • Further–what truly is the “cost” to EADS and to Boeing, as opposed to the cost to DOD?

        (In a famous response to a question from the media, former American Airlines CEO Robert Crandall responded when asked in connection with the exclusive supplier agreement between American and Boeing, “What do the airplanes cost Boeing?” Crandall replied: “I don’t care what it costs Boeing. I only care what it costs me.”)

        How will EADS allocate the costs of the Mobile plant, where it plans to also build 3 A330-200Fs a month to 1 (or 1.5) KC-45? Will the cost of the plant and equipment be proportionally allocated to Airbus commercial and Airbus Military?

        Ditto for Boeing and its 767 facility in Everett. How will the operating costs be allocated? How will the costs for the new lean production line be allocated?

        This was always the question to analysts for the airline-within-an-airline (United Mainline vs Ted: how were the costs allocated?). If you disproportionately allocate costs to one business unit vs. another then you can price your product lower and still report a “profit” than if the costs were allocated proportionately. So, for example, if EADS/Airbus were to allocate 7/8ths of the cost of the Mobile operation to Airbus commercial instead of (perhaps) 3/4s, that would enable EADS to offer DOD a lower price. And so on.

    • Thanks for the answer, Scott. However, I’d have to take exception to the suggestion that if something costs $1.00 to produce in a foreign country, and that producer sells it at $0.98 in the U.S., then that wouldn’t be dumping. Here’s a reference (U.S. Dept of Commerce) which is fairly unambiguous on the subject:

      http://ia.ita.doc.gov/pcp/pcp-overview.html#A_1

      “Dumping occurs when a foreign producer sells a product in the United States at a price that is below that producer’s sales price in the country of origin (“home market”), or at a price that is lower than the cost of production. The difference between the price (or cost) in the foreign market and the price in the U.S. market is called the dumping margin. Unless the conduct falls within the legal definition of dumping as specified in U.S. law, a foreign producer selling imports at prices below those of American products is not dumping. ”

      However, the latter part of this paragraph is where EADS has some “wiggle room”.

      • Aurora, if I understood Scott correctly then that $1.00 would not necessarily represent (metaphorically) the production costs, but rather the unit recurring flyaway (URF) costs (in DoD speak), or average sales price in the civilian world. Remember, OEM list prices are highly inflated. The actual production costs are far lower.

        The current list price for the A330-200 is $191,4 million. The largest A330 customer in the world has apparently been paying, on average, slightly more than $90 million for their planes (buying in bulk); where the price of the green frame (no engines, no systems, only structure) and engines were in the neighbourhood of $40 million and $30 million respectively. NB: These figures do not represent the production costs.

        Fact: The fixed production cost as a percentage of total production costs is significantly higher for the 767 than for the A330 due to the much higher output of A330s.

        If one would compare the production costs between the two aircraft, the first thing one should note is that it’s really only the size of the aircraft structure, which is the main differentiator between the two aircraft while engines, avionics, landing gear, systems (etc) are much closer in “size” (and costs).

        The thrust of the GE engines on the A330-200 is only about 10 percent higher than on the similar GE engines on the 767-200ER (courtesy of the much bigger wing on the A332). The production costs for both engines are virtually the same, although the list price for the more powerful engine is around 5-10 percent higher (engine list prices typically increase linearly with thrust levels for engines of the same generation).

        As for the avionics and flight control systems, one should note that it’s much easier and significantly cheaper (considerably less man hours to install) to route wires for a FBW system (remove weight and complexity as well), than to install the “traditional” mechanical control run (cables, pulleys, cranks etc) input devices for conventionally powered flight control systems. The FBW systems also makes maintenance simpler (and cheaper) as everything associated with sidestick to the flight control surfaces is all-electric and provides self-diagnosis as well. Also, the A330 cockpit and flight control system has a significant hardware (and software) commonality with the A320 which also reduces costs since the OEM can buy many of these systems in bulk. So, based on the above mentioned facts, one can easily deduce that the entire flight control system on the A330-200 is cheaper to buy and install than the equivalent systems on the 767-200. Additionally, the life cycle costs (40 years for the KC-X) for these systems are significantly lower on the A332.

        There’s no doubt that the production infrastructure of the A330 is more efficient than that of the 767. It’s also a fact that that the fixed production cost as a percentage of total production costs is significantly higher for the 767 than for the A330 due to the much higher production output of A330s. Still, the production costs (at the current annual level) for the green 762 (only structure) is still lower than for the A332, but only by about $5-7 million per frame (estimated). Thus it’s not unreasonable to assume that the costs involved for the “remainder” of the A330 and 763 roughly cancel each other out. This would indicate that the real world difference in the production costs for the A332 and 762 would be at a level of just 3 percent of Northrop Grumman’s bid last time around.

        What seems to be clear though, is that the costs for all of the military systems and upgraded avionics will be a far more important denominator in both of the OEM’s offerings than the difference in costs for aircraft structure.

  8. The last two exchanges by Gaspasser and Ikkeman on the previous post as well as the immediately previous two posts by leehamnet just shows how complicated this bidding process is and how difficult it is to reduce it down to a matrix of numbers….at least to my mind

    Gasspasser and Ikkeman discuss the relative advantages and disadvantages of operational matters i.e. parking and availability of booms.

    leehamnet indicates possible issues with accounting and financial allocation costs that could weigh in a bid.

    All of these differences seem valid and terribly confusing. I think these exchanges on particular aspects of the RFP just show how difficult it is to compare two very different planes.

    This is forcing Secretary Gates, DOD and the USAF to make a Solomonic choice. The distinction between a “replacement” or a “modernization” also raises questions of intent, but maybe the revised RFP spelled out that choice more clearly

  9. So, in conclusion, if EADS submits a bid below what it costs to produce the plane, all costs considered including the new “production” facility, then they would be “dumping” the aircraft, according to the U.S. Department of Commerce definition.

    I will sit back and watch the war unfold, and war it will be, when they submit their bid.

  10. OV 099,

    Accepting your information as reasonably accurate, are you indicating that there is at best only a 3% differential in price between the two models and that the military systems and avionics are the real differentiator in cost.

    And if so, do either of these two manufacturers have any costs advantage in these areas over the other?

    I get the impression from your information that allocation and accounting productivity issues can lower the price so that there is a narrow differential. Can that difference be even more closely narrowed to your thinking.

    And, if this costs practice is successful, will it lead to an automatic protest since some of these figures could be challenged

    • BA Investor, the estimated total production cost differential (not “price”) between the 767-200 and the A330-200 (based on the current levels of production) is in the high single digits. Putting this into perspective; the unit flyaway cost of Northrop’s KC-45 offer last time around was approximately $184 million per tanker for the first 68 tankers, so the total estimated production cost differential is “only” 3-4 percent of that number.

      “And if so, do either of these two manufacturers have any costs advantage in these areas over the other?”

      Advantage EADS. Boeing has to develop, among other things, a new boom with a 1200 gallon-per-minute offload rate.

      “I get the impression from your information that allocation and accounting productivity issues can lower the price so that there is a narrow differential. Can that difference be even more closely narrowed to your thinking.”

      For the airframe: Not by much. I’m not sure about the military systems (boom excluded).

      “And, if this costs practice is successful, will it lead to an automatic protest since some of these figures could be challenged”

      If the OEMs don’t go below the total airframe production costs (i.e. no profits on airframe, but profitable on the military side of the equation), there would be less grounds for a protest.

      • “And if so, do either of these two manufacturers have any costs advantage in these areas over the other?”

        Airframe: It’s still advantage Boeing.

  11. OV 099,

    I am still a bit confused.so let me try to simply the issue:

    Based on the fact that the A330 has a much higher level of production, the costs of the comparative model airframes are only 3-4%difference by your count.

    You are not sure about the military system costs and allege Boeing has additional costs for the development of a specific boom but give the impression that other costs are pretty much equal.

    Are you inferring that the overall cost differential in a bid could be less than the 3-4% differential of the Northrop bid and possible even within the 1% range

    Most following this contest have the impression that since the RFP favors the smaller model that there is a cost advantage for the 787. You are giving the impression that the cost advantage may be alot smaller than thought and possibly challenging.

    I hope you understand the gist of the gist of the question and can be more specific in your response.

    Thanks

    • “Based on the fact that the A330 has a much higher level of production, the costs of the comparative model airframes are only 3-4%difference by your count

      No, the estimated total production differential is in the high single digits (<10 %), or some $5-7 million per frame. This figure is equivalent to 3-4 percent of the cost of Northrop’s KC-45 offer two years ago which was approximately $184 million per tanker.

      "You are not sure about the military system costs and allege Boeing has additional costs for the development of a specific boom but give the impression that other costs are pretty much equal."

      No, the military systems costs was in response to your question if the difference in "accounting productivity issues" can be even more closely narrowed, and I've not been saying, or implying that the other costs are equal.

      Since EADS can reuse almost all of the KC-30 systems (cockpit, avionics, flight control system, boom, under-wing refuelling pods, etc) for the KC-X (with an additional 10-15 percent of customized US military systems), it's pretty clear that the development costs for the militarised systems on the KC-X will be lower for EADS than it will be for Boeing.

      As for the boom, one should note that the current refueling boom on the KC-767 only has a 900 gallon/minute capacity. The mandatory RFP requirement is for a 1200 gallon/minute capacity. That's why the KC-767 NewGen is to be equipped with a brand new boom based on the that of the old MacDac KC-10 boom.

      The $200 million (+) FBW EADS ARBS boom builds on the extensive experience EADS has had with fly-by-wire flight control systems thanks to the Eurofighter and all in-production Airbus aircraft. EADS' lessons learnt from the Eurofighter programme, where flight computers are used to maintain the flight position of the aircraft, has apparently proven to be particularly useful for the EADS boom.

      "Are you inferring that the overall cost differential in a bid could be less than the 3-4% differential of the Northrop bid and possible even within the 1% range"

      No, I've explained how I got that 3-4 percent figure. As for the probability of both bids coming within 1 percent of each other; it's certainly higher than what many people seem to think.

      "You are giving the impression that the cost advantage may be alot smaller than thought and possibly challenging."

      That's my opinion, yes.

  12. OV 099,

    Put even simpler, is there any way that EADS could submit a legitmate bid consistent with normal accounting and bidding practice that would come in at 1% or less of the lowest bid that Boeing could submit using the same conventions

  13. The 1% is the output of the model, not the off-the-factory-line purchase price, as I understand it. So production cost is only one item in that equation.

    In any case, I believe rumour (at least) had it that KC-30 was offered for less than KC-767 in the 2008 round? The move to lean production may have changed the underlying cost for Boeing.

    • The adjusted price of the NG/EADS offer came out below the adjusted price of the Boeing proposal. Boeing had a high risk ascociated to their high level of required engineering that promted the USAF to increase their proposed price by much more than the NG/EADS proposal.

      In the end, I think Boeing finetuned their price to come out at roughly the same number as NG/EADS. That’s the problem with a two horse race – you don’t need to beat the clock, just the other guy. Boeing Bet they could get away with charging up to the EADS price and still get the award. They bet wrong.
      This time they’ll make damned sure their price is significantly (>1%) below the EADS/NG offer.

      They might even forego the traditional 5% bonus margin ascociated to military programs and only charge commercial price…

  14. The difference in the USAF adjusted price for each frame was approximately $15 million US for the first 68 airframes. However, in the MPLCC analysis the USAF added $5.2bn to Boeing’s bid and only $772 to the NG/EADS bid, so I’m not so sure I would put that much stock in last rounds prices. I can’t find a quote source but it has been widely stated that the GAO analysis provided evidence that the actual offered price was $10 million less per frame for the Boeing bid.

    While the final offered prices are anyones guess Boeing has been very active on the cost front announcing they will attack the 3 primary cost areas:
    1) Green airframe prices or supplier costs;
    2) Airframe Production costs, and;
    3) Militarization costs.

    In terms of airframe costs Boeing has publically anouned launch customer pricing for the 767 frames, e.g. Boeing Commercial Aircraft will provide the frames to Boeing IDS for less profit margin than they did in the first round, this is somewhat akin to EADS ditching NG in that their largest supplier will no longer be demanding premium prices for their services. In terms of lean production Boeing will also modernize their 767 assembly line increase production speed by 20 percent, cut labor inputs and replace most of the assembly equipment with more modern technology and lean production techniques such as new automated riveting machines and so forth. All this should further reduce the costs of the basic 767 airframe.

    In terms of third step of militarization of the aircraft Boeing has said they will complete a good portion of the conversion work on the production line ala P-8 such as installing the belly fuel tanks in Seattle as opposed to Kansas. This is important because in the previous round Boeing said they would need around 2,500 workers for the militarization of the 767 vs. only 500 for the KC-30 due to the fact that KC-767s had to be virtually ripped apart to install the belly tanks and refueling system lines and then rebuilt in Kansas. This step alone should yield considerable savings.

    So far EADS has only announced they will be cutting their supplier overhead in terms of getting someone else (themselves or a US partner that Enders says they are still trying to find) to perform NG’s work which amounted to 13 percent of the total value of the airframe. EADS will need to be very aggressive in cutting costs to overcome the 767’s advantage in lifecycle costs.

  15. John, thanks for this overview. In your list you seem to overlook development cost though, and these could be substantial for Boeing, compared to Airbus. I would expect Airbus to price very keenly. But they’ll have to, if the ca. US$50m list price differential for the airliner is in any way related to production cost differentials… It may not be that straightforward however, since in the segment of the market they are in, Airbus should have some pricing power, given the superiority of the A330 over the Boeing 767 in terms of mission, and in terms of availability over the 787.

  16. Another question regarding cost, has it been discussed at all what the situation is regarding payment of royalties to RLI providers on the potential KC-30 order? I would find that quite amusing.

    • Good point – Would Airbus have to pay royalties on the KC-X airframes to teh original RLI states…

      Is that why France is being so fierce on helping EADS get this – the royalties on 179+ airframes???

      :-))

  17. Adjusted cost for KC-X is given by 1) Initial offer price – 2)Fuel burn adjustment – 3) MILCON Adjustment – 4) IFARA Adjustment. There are a number of issues w/regards to initial offer price, and yes Boeing will have a higher development cost, but just like Scott pointed out with the new EADS FAL much of this cost can be assigned to the commercial B767. If EADS is spending $600 million US plus for the Alabama FAL how much will more will Boeing need to spend on development. Even if they spend a little over $1 billion the delta will still only be in the $400 million range of which 2/3rds could probably be charged off to BCA, so the delta w/regards to development costs could be very small, certainly no more than a few hundred million which is in the noise range.

    The more important aspect is the pricing adjustment. In terms of fuel burn the adjustment is given by the equation of [Highest Fuel Burn – Offerer’s]*40yrs*179 A/C *489 hours * adjusted fuel price. Assuming a 24% fuel burn advantage for the 767 and an average price of $5 per gallon for fuel (pretty close to the number that will be used), you get [15,000lbs – 11,400 lbs]*40yrs*179A/C*0.769 cents/lb you get a cost adjustment of $9.69bn for the 767, add in the MILCON and Boeing’s we will have at least a $10bn US price adjustment claim seems very plausible.

    Now start with the IFARA adjustment given as [1-lowest IFARA/Offerer’s] * 179A/C * Avg price Lots 1-13 (let’s assume EADS is real aggressive and use NG’s old $184 million price here and the old IFARA factors of 1.79 B767 and 1.9 KC30) and you get $1.9bn US. In other words using some simple math it appear’s Boeing has an $8bn US cost advantage over the KC-30, and it should be noted that whatever Boeing offer’s is, it will have better fuel efficiency and takeoff performance than the KC-767AT so it is unlikely the IFARA number will get any better than last time for the KC30.

    Given the huge cost advantage already built into the RfP for the KC767 is it any wonder NG bailed on the project? It is very easy to understand NG’s claim that they would have had to lose money on each aircraft produced in order to win. I simply don’t see EADS being able to make up the difference in offering price here. The addititional development work the KC767 requires is not that significant, and there are many things Boeing could to do to reduce it such as sticking with the 767-200 wing and not developing a freighter strength foor but rather sticking with the current pax floor like the KC30 is.

  18. I think for Boeing an interesting question will be how much of the development cost they will be able to load into the civilian line. For Airbus that should be easier – the A330F looks like a decent plane that will sell well. For the 767-200LRF, an airplane not even launched yet, that is a much more open question (and apart from this version and the potential KC-767, the 767 is pretty much dead and buried by now when it comes to sales, wouldn’t you agree?). So I see Airbus having an advantage when it comes to playing with cost attribution to programmes.

    While I take Scott’s point that the cost for manufacturing/development could easily be distributed whichever way the bidder sees fit, one has to remember it is still real cost, and if it can not be recovered from airframe sales, it’ll end up as a charge, impacting the bottom line in the future. Which maybe fine, in order to win the business, but it’s the equivalent to NG taking a loss on each plane for Boeing, if they are not careful, or very successful in selling the LRF – and this in itself will not be helped by the LRF having to subsidise the KC-767 (in the same way that the A330-200F will subsidise the KC-30 if cost is not attributed according to volume).

    Still, if your numbers are correct (no reason or knowledge for me to doubt them), then I don’t think it’ll be easy or even feasible for EADS to beat the KC-767 on price. In which case the best EADS can hope for is to spoil Boeing’s offer, by reducing the margin that Boeing can take home on the contract, and maybe making the LRF less competitive than it otherwise would have been. Whether that’s worth the investment of bidding is anyone’s guess, but it seems EADS seems to have concluded it is.

  19. Andreas,

    Both aircraft are in the same state as far as orders go (767 total vs. A330F), they both have a backlog of around 60 orders, all of these orders will fullfilled before production of the KC-X begins in 2014. It really comes down to pick a reasonable projected production number (or not outrages number like 6 767s per month) and you base your costs on that. It is interesting that Scott mentioned that EADS is projecting 3 A330Fs per month and guess what Boeing is raising the production rate for civilian 767s to 2 a month by the end of the year with a target of 3 civilian 767s per month in later years. Now I don’t think either production line will ever reach those levels (in particular the 767), but if you read the tea leaves Boeing is likely doing this so they can write off the same amount of development costs towards it’s civilian line that EADS plans to write off towards the A330 FAL in Alabama. In other words development costs shouldn’t be that big of a deal. With Boeing spending more but a not a lot more money since they will need more work to get their KC-10 dervied boom tested and working on the 767 and some other military work that can’t be cost shifted.

    As far as my numbers go, the contest is laid out very simply and the math is pretty easy as long as you know the inputs. For example the cost of fuel isn’t that hard to estimate, the flying hours (given) and so forth is easy to predict, what isn’t known will be the final fuel efficiency advantage assigned to the 767 which the DoD will have a role in modifying. Still every 1% difference in efficiency for the 767 adds up to about a $400 mil cost adjustment in the 767s favor. It only takes a 5% efficiency gain over the A330 to wipe out any projected IFARA advantage. I’m sure we’ll be debating this issue for a while, and one question I have is given the benefits of efficiency in this contest, why no GEnx proposal from either manufacturer?

    “Good discussion, by the way. Many thanks.”

    Anyway, very good discussion likewise, and all the best to you. You certainly shouldn’t take my numbers as the final say as their will be plenty of work on the inputs and I predict that in many cases such as the IFARA numbers they will be quite different from the previous round, but I do think they illustrate why the RfP is designed for a smaller more efficient KC-135 replacement like the 767, and not a larger multirole aircraft like the KC30.

  20. John

    Many thanks again for the additional info and thoughts.

    All the best

    Andreas

  21. John, those Boeing figures for fuel burn are more representative of corporate spin than of representing the actual fuel burn delta between the two aircraft. Since the A332 is a larger airplane than the 762 (25 percent higher MTOW), it’s not surprising that the absolute fuel consumption is higher. However, do you really believe your fuel burn figures of 11400 lbs/hour for the 762 and 15000 lbs/hour A332? What you are saying is that an aircraft with significantly better aerodynamics, and with a MTOW “only” 25 percent higher, is burning 30 percent more fuel?

    First, you should note that compared to the 762 wing, the wing of the A332 is in excess of 20 percent more efficient at take-off and initial climb (where you have a higher fuel burn rate), as well as in the final descent stages and landing. At FL 350 (cruise altitude), the A332 wing is about 10 percent more efficient than the 762 wing. Also, in a typical aerial refueling mission profile, the tankers spend much of their time at FL 250 (25000 ft.), as well as with airspeeds of between 330-600 km/h within the refueling envelope. At the refueling altitude and airspeeds, the aerodynamic performance of the A332 wing is better than at FL 350. Therefore, it’s not unreasonable to assume that the weighted average delta in wing efficiency between the KC-767 and the A330MRTT is around 15 percent.

    So, how do we compare the fuel consumption of the 767-200ER and A330-200?

    First, we take a look at the Breguet Range Equation:

    Range= V/c x L/D x ln(Wi/Wf)

    V= airspeed
    C= propulsive efficiency (e.g.) in lb fuel/ lb thrust /hr
    L= lift
    D= drag
    Wi= initial weight
    Wf= final weight

    If we apply the 15 percent improved aerodynamics (L/D) to the 767-200, we should obtain a roughly 15 percent betterment in fuel consumption. Using your number of 11400 lbs per hour, the fuel consumption is thus reduced to 9690 lbs per hour.

    2nd, from the Brequet range equation, we can see that the specific fuel consumption is proportional to Wf (and OEW). Increase OEW, and the specific fuel consumption increases as well.

    The operational empty weight (OEW) of the A330-200 with CF6 engines is 116,740 kg (257 368 lbs).

    The OEW of the 767-200ER with CF6 engines is 82,377 kg (181610 lbs).

    Therefore, the OEW of the A330-200 is some 42 percent heavier than the OEW of the 767-200ER.

    Multiplying the reduced fuel consumption rate of this “hypothetical” 767-200ER aircraft (having the same wing L/D number as the A330-200) with 1.42, we obtain an average fuel consumption rate of 13732 lbs per hour for the A330-200 (or 20.5 percent higher).

    Now, your stated fuel price of $5 per gallon is the estimated price for JP8 (Then Year $) in 2035 and not in 2010. The data is available here:

    https://www.fbo.gov/index?s=opportunity&mode=form&id=e65e1ab7f225d6454f5fa8a10556cbfa&tab=core&_cview=1

    Section L, Attachment 3, Cost Price Evaluation Workbook (click on fuel cost in the Excel document).

    The correct fuel costs (per gallon of JP8) in the year 2010 (according to the fuel cost chart in the Excel document) is 2,54 dollars per gallon.

    We convert $2.54 per gallon to $/pound by dividing $2.54 with 6.76 lbs/gal (for JP8) which is equal to $0.376 per pound, or 37.6 cents per pound.

    So, (13732 lbs per hour – 11400 lbs per hour) x 40 years x 179 a/c x 489 hrs/year x $0.376/pound = $3,069,999,272 or $3,07 billion.

    The Total Proposed Price (TPP) in the flowchart in Section M, Evaluation Factors for Award, (in the RFP), represents the total System Lifecycle Costs: R&D, Acquisition Price of the Production Lots, Operations & Support, and finally, Disposal.

    Typically, the acquisition costs is close to, or slightly less than one third of the total system life cycle costs.

    It’s fair to assume that the acquisition costs will increase due to the fixed price contract and the new additional requirements in the RFP.

    Let’s assume, for the sake of argument, that the unit flyaway cost is $200 million (Boeing’s offer) and that the flyaway cost for 179 KC-767 tankers is $35.8 billion. Assuming that $35.8 billion represents one third of the total system life cycle costs, then the system life cycle costs will be $107.4 billion. This number represents the Total Proposed Price (TPP).

    The fuel usage rate adjustment to the TPP would be: $107.4 billion – $3.07 billion = $104.33 billion

    The IFARA adjustment = Evaluated Offeror’s Fleet Effectiveness Difference x Evaluated Offeror’s AUP (Average Unit Price).

    Fleet Effectiveness Difference = (1- Lowest Offerors’s Fleet Effectiveness Value/Evaluated Offeror’s Fleet Effectiveness Value) x 179.

    If, for the sake of argument, the flyaway costs for EADS’ offer was $200 million per unit as well, and that we assume that the KC-767 NewGen will have the same fleet effectiveness value as the KC-767AT, the we have:

    Fleet Effectiveness Difference = (1 -1.79/1.9) x 179 = 10.36

    Thus the IFARA adjustemt to the TPP for the KC-30 is: $107,4 billion – (10.36 x $200 million = $2,073 billion) = $105.33

    This means that if both bids are at $200 million per unit, then after the fuel-burn and IFARA adjustments, ONLY one billion dollars will separate the offerors.

    101% of $104.33 = $105.37 billion

    NB: This means that before the MILCON adjustment, EADS’ offer is just within 101 percent of Boeing’s offer!


    As I indicated in an earlier comment, the estimated production cost delta between a 767-200 and an A330-200 is between 5-7 million dollars per unit. If we take the mean value of $6 million, then we have 179 x $6 million = $1.07 billion.

    As I’ve previously indicated, since EADS can reuse almost all of the KC-30 systems (cockpit, avionics, flight control system, boom, under-wing refueling pods, etc) for the KC-X (with an additional 10-15 percent of customized US military systems), it’s pretty clear that the development costs for the militarized systems on the KC-X will be significantly lower for EADS than it will be for Boeing, perhaps close to the relatively small production cost advantage the Seattle manufacturer still possess. However, Boeing still has to put together a frankentanker where, among other things, they seemingly have not yet fully solved the wing pod induced flutter problems. Also, if the KC-767 NewGen is less capable than the KC-767AT, then the fleet effectiveness value will be reduced from the 1.79 value. It’s clear though that, in all likelihood, this will be a very close fought contest, and significantly closer than what the pundits might think.

    Finally, if you who are so certain that this contest isn’t going to be close, why does Boeing and many of its supporters make so much noise about everything not connected with the technical merit of the bids? Because they know that this will be a tough one to win. 😉

    • OV-099,

      FYI, Boeing’s 24% figure is derived from the US Dept of Transportation Form 41 filings in which fuel consumption figures for the 767-200 and the A330-200 are filed by US carriers. People we have talked to in the past have question Form 41 methodology on other issues (our discussion was not specific to this one), so we don’t know if this data is apples-to-apples but that’s where the numbers come from. On this specific issue, Airbus does challenge the data and says the fuel burn difference is only 6% but the company has not provided us with its data to support this claim so we can’t vouch for this, either.

      One piece of data missing from your excellent analysis above is the absence (in your analysis) of winglets on the KC-767NG. On the commercial 767, the addition of winglets so far is proving to reduce fuel burn by about 3.5% to 4%.

      What would this data do to your conclusions above?

      • My understanding from literature is that (large) winglets
        significantly advantage the climb phase. Over longer
        distances the return is diminishing due to parasitic drag.

        The tanker mission looks more like a long distance flight
        even if the covered range appears as short distance flight.
        Initial climb, travel distance to mission area, linger,
        ( refuel, linger some more, .. ), finally return.

        uwe

  22. Scott, the analysis was done for a typical aerial refueling mission profile (sorties as well as Training Aerial Refueling Missions with quite a few touch-and-go maneuvers), and not for a normal medium to long range passenger flight where you want to climb to the initial cruise altitude at FL 350 as soon as possible. The weighted average delta in wing efficiency between the 767-200ER and the A330-200 for a typical flight, should consequently be lower than the 15 percent estimate for the tanker versions by a couple of percentage points. For example, if that number is 12 percent the delta in fuel consumption will, in fact, be around 25 percent. However, one should remember that the analysis is only a very rough first order approximation. In a more thorough (and time consuming) empirical analysis, quite a few other factors would, of course, have been given careful consideration. As for the 6% figure from Airbus, I would assume that that figure is for the difference in absolute fuel consumption between the 767-400 and the A330-200 (in favour of the 764). Of course, the CASM and payload/range capability is much better for the A332.

    Please do note that the fuel consumption estimate was for the 767-200ER vs. the A330-200, and not between a KC-767 and an A330MRTT, which means that the analysis was consequently skewed towards the KC-767.

    MTOW for the 767-200ER is 179,169 kg with the OEW at 82,377 kg

    MTOW for the “old” KC-767AT was supposedly 187,334 kg (413,000 lbs), but what would the OEW have been?

    It’s not unreasonable to assume that the OEW of the KC-767AT would have been around 2,500 kg heavier than that of the 767-200ER (= 84,848 kg) That is; (i) added wing structure to cope with the (apparently not yet solved) wing pod induced fluttering on the outer wing, (ii) added MLG structure to cope with the higher MTOW, (iii) slightly heavier wing (767-300ER wing) and heavier flap tracks (from the 767-400), (iiii) added weight of three dry auxiliary fuel tanks (etc, etc). This means that it’s reasonable to assume that the KC-767AT would have had a 3 percent higher fuel consumption rate.

    As for the winglets on the KC-767 NewGen, I believe it’s fair to assume that you wouldn’t get the entire fuel burn improvement due to the already mentioned significantly different mission profiles. However, if Boeing wants to keep the fleet effectiveness value at 1.79 the NewGen will, in all likelihood, not be lighter than the AT, as you’ve got to add the extra weight of the winglets + possible additional local strengthening due to unks unks with the winglet/fuel-pod configuration. This means that the winglets will at best only negate the additional weight in structure that is required.

    Finally, it’s worth mentioning that in the total system lifecycle cost for the KC-X, the A330MRTT will in all likelihood have lower support costs due, in part, to the earlier mentioned fact that the entire flight control system on the A330-200 is not only cheaper to buy and install than the equivalent systems on the 767-200, but that the life cycle costs (40 years for the KC-X) for these systems are significantly lower on the A332 as well.

    • Correction: The OEW figure of 82,377 kg for the 767-200ER includes the dry weight of the three auxiliary fuel tanks. It doesn’t change the picture much though.

  23. OV-099,

    Thans for the evaluation, I do have on really big issue though.

    1) “The correct fuel costs (per gallon of JP8) in the year 2010 (according to the fuel cost chart in the Excel document) is 2,54 dollars per gallon.”

    I don’t agree with you on this one, the fuel burn calc is not based on the current value of JP-8, what is being calculated is the average value of the fuel burned over 40 years. An escalation factor for inflation is provided, why would DoD include a whole spreadsheet of price data, when one sentence containing the current price of $2.54 would do as you have done with your calculation? In my calculation I used the midpoint to simplify everything or as you put it used 2035, The fuel adjustment will be well in excess of $3 billion (inflation is real and inlcuded in the RfP). I had originally intented to use the calculation to simply validate Boeing’s $10 billion claim for fuel plus MILCON, I still see no reason to throw too much cold water on the claim. Using the current price of fuel without escalating for inflation as provided in the RfP is simply not a valid procedure. You are right though that there will be a lot of arguements over what the real fuel burn delta is, but you’ve way underestimated the actual adjustment by assuming away inflation.

    Thanks for the IFARA adjustment, as you pointed out the higher the price the greater the IFARA credit will be. Although it is interesting to not that the dela between using $184 vs. $200 wasn’t much more than $100 mil.

    “Please do note that the fuel consumption estimate was for the 767-200ER vs. the A330-200, and not between a KC-767 and an A330MRTT, which means that the analysis was consequently skewed towards the KC-767.”

    Correct, the KC-767AT had an MTOW about 17,000 lbs heavier (or just 5,000 lbs more if you use DoD’s number’s from the last round) than the 767-200ER, plus as has been noted the A330 is relatively more efficient in the climb phase. I simply used the 24% assuming that winglets would make up the difference between the 200-ER and the KC-767NG. Still the Fuel adjustment will likely be the most significant adjustment to the TPP.

    “Finally, it’s worth mentioning that in the total system lifecycle cost for the KC-X, the A330MRTT will in all likelihood have lower support costs due, in part, to the earlier mentioned fact that the entire flight control system on the A330-200 is not only cheaper to buy and install than the equivalent systems on the 767-200, but that the life cycle costs (40 years for the KC-X) for these systems are significantly lower on the A332 as well.”

    I wouldn’t agree with you on this one the flight control system will certainly save money, but it is only a small portion of the total maintenance bill. In the last round DoD assumed both aircraft would be roughly equal although Boeing claimed a 22% lower cost for the KC-767. Anyway unlike the last round the Air Force is not including MPLCC in this contest, only the fuel burn and MILCON. Senator McCain did try to get maintenance included so who knows maybe EADS has something here.

  24. OV-099,

    OK looking at the formula we both made a mistake for fuel economy, I haven’t factored in the Present Value (I simply used the midpoint) and you haven’t factored in the fact that fuel costs will rise faster than inflation, or used an adjusted fuel price as called for in the equation. So I produced an upper bound estimate and you produced a lower bound estimate. The problem for EADS though is still clear Boeing already has advantage of a few billion built in. Especially since once you recognize that your calculation was worst case for the fuel efficiency delta and also worst case from Boeing’s perspective for fuel price (the adjusted price will be higher) the advantage for Boeing will only only increase.

    Thanks again.

  25. John, I’d suggest that you go back and re-examine your analysis. 😉

    The current price for jet fuel is $2.27/gal

    Source:

    http://www.iata.org/whatwedo/economics/fuel_monitor/Pages/index.aspx

    The current jet fuel price average for 2010 is $87.9/barrel or $2.09/gal

    $2.54/gal = $106.68/barrel

    If you’re taking a longer term perspective of price movements (next link), you’ll see that the $106.68/barrel figure is significantly higher than the weighted average of the last 8 years.

    http://www.iata.org/whatwedo/economics/fuel_monitor/Pages/price_development.aspx

    Also, keep in mind that there’s no taxation on jet fuel, so the price is way lower than what you pay at the pump (curent average gas price in the US is about $2.86/gal):

    http://www.gasbuddy.com/gb_retail_price_chart.aspx?time=24

    The DoD has set the price for JP8 fuel significantly higher than the weighted average of the last 5 years. The “abnormal” price hike from early 2008 and to the fall of that year, with a peak price of about $4.29/gal, has not lead the department to set an unrealistically high estimate for future jet fuel prices. In fact, it’s well known that the fossil fuel industry is perfectly aware of the fact that if the jet fuel price climbs above $3/gal, alternatives such as Bio-derived Synthetic Paraffinic Kerosine (Bio-SPK) will in due course start to become very competitive.

    http://www.scribd.com/doc/26566570/Sustainable-Flying-Biofuels-as-an-Economic-and-Environmental-Salve-for-the-Airline-Industry

    NB: Please do note that on page 9 in the above link, the IATA outlook from 2008 (at the height of the fuel price hike and when the industry was panicking), is way off base.

    Conclusion: The $2.54/gal figure is indeed correct.

  26. OV-099,

    Nope my last response was correct. I needed to look at the spreadsheet closer. $2.54 is not correct. The discount factor is provided for each year in the spreadsheet. The FURA adjustment is given by # aircraft in service for a given year * fuel cost * 489 hours * the discount factor. In other words for 2020 if you have 65 aircraft in service the calculation is 65 aircraft * 489 hours * hourly fuel burn (11,400 lbs per hour for KC-767) * $3.55 * 0.6299 (discount factor) giving about $811 million in yearly fuel cost. You do this for each year the aircraft in service, starting to retire them after 40 years.

    I did some rough calcs, and I still think I am missing something since at a 24% fuel burn the numbers were real ugly, well real ugly if your EADS much worse than $9 billion. Again I think I am missing something here, but the number is not $2.54 per gallon, there is a fuel cost and discount factor for each year spelled out and a $3 billion delta is definitely a lowball number. Anyway we could argue all day about this but just take a look at the cost spreadsheet it is very clear by looking at the formulas that $2.54 is the base year fuel costs and since no KC-Xs will be in service in 2010 the number will appear nowhere in the Fuel Adjusment calc.

    Assuming a 24% fuel burn difference again and plugging in some assumed numbers for # of aircraft in service fog a given year

  27. John, with all due respect, do you ever look at your numbers before pressing the submit button; you know just to check if your numbers make any sense?

    You are saying that a fleet of 65 tankers in 2020 burn fuel for $811 million in yearly fuel costs. OR that 65 tankers will burn fuel for $32.44 billion ($811 x 40) over 40 years, or that the full fleet of 179 KC-X tankers will burn fuel for $89.33 billion (2020 then year dollars) over 40 years?

    In your calculation, you should, of course, have converted $/gal to $/pound by dividing $3.55 with 6.76lbs/gal = $0.525 per pound. This means that the correct figure in your calculation should have been: $120 million and not $811 million.

    Also, it’s worth mentioning that discounted, Present Value dollars are being used for evaluation purposes in the KC-X source selection. So, what does “Present Value” mean?

    Quote from Text of OMB Circular No. A-94 in HTML or PDF (22 pages, 78 kb)

    “The standard criterion for deciding whether a government program can be justified on economic principles is net present value — the discounted monetized value of expected net benefits (i.e., benefits minus costs). Net present value is computed by assigning monetary values to benefits and costs, discounting future benefits and costs using an appropriate discount rate, and subtracting the sum total of discounted costs from the sum total of discounted benefits. Discounting benefits and costs transforms gains and losses occurring in different time periods to a common unit of measurement. Programs with positive net present value increase social resources and are generally preferred. Programs with negative net present value should generally be avoided. (Section 8 considers discounting issues in more detail.)”

    http://www.whitehouse.gov/omb/circulars_a094_a94_appx-c/

    NB: it looks like the data we have been using is from the Excel spreadsheet that was released last fall. In the latest version of Section_L_Atch_3 the cost of JP8 for 2010 is set at $2.84 per gallon.

    Now, here’s the calculation of the PV of the fuel burn delta between the KC-767 and A330MRTT for the years 2010, 2020, 2040 and 2070.

    Year 2010

    The correct fuel costs (per gallon of JP8) in the year 2010 is 2,82 dollars per gallon.

    Year..Cost of JP8 (Then_Year_$)..Discount_Factor 2010………………$2.82………………….0.9783…..

    We convert $2.82 per gallon to $/pound by dividing $2.84 with 6.76 lbs/gal (for JP8) which is equal to $0.417 per pound, or 41.7 cents per pound.

    (13732 lbs per hour – 11400 lbs per hour) x 40 years x 179 a/c x 489 hrs/year x $0.417/pound x 0.9783 (discount factor) = $3,330,876,542, or $3,33 billion in Present Value.

    Year 2020

    Year..Cost of JP8 (Then_Year_$)..Discount_Factor
    2020………………$3.70………………….0.6299….

    The correct fuel cost (per gallon of JP8) in then year dollars in 2020 is 3.70 dollars per gallon.

    We convert $3.70 per gallon to $/pound by dividing $3.70 with 6.76 lbs/gal (for JP8) which is equal to $0.547 per pound, or 54.7 cents per pound.

    So, (13732 lbs per hour – 11400 lbs per hour) x 40 years x 179 a/c x 489 hrs/year x $0.547/pound x 0.6299 (Discount Factor) = $2813256702, or $2.81 billion in Present Value.

    Year 2040

    The correct fuel cost (per gallon of JP8) in then year dollars in 2040 is 5.73 dollars per gallon.

    Year..Cost of JP8 (Then_Year_$)..Discount_Factor
    2040………………$5.73………………….0.2612….

    We convert $5.73 per gallon to $/pound by dividing $5.73 with 6.76 lbs/gal (for JP8) which is equal to $0.848 per pound, or 84.8 cents per pound.

    So, (13732 lbs per hour – 11400 lbs per hour) x 40 years x 179 a/c x 489 hrs/year x $0.848/pound x 0.2612 (Discount Factor) = $1808503911, or $1.81 billion in Present Value.

    Year 2070 (final year in the evaluation)

    The correct fuel cost (per gallon of JP8) in then year dollars in 2070 is 11.00 dollars per gallon.

    Year..Cost of JP8 (Then_Year_$)..Discount_Factor
    2070…………..$11.00……………0.0697….

    We convert $11.00 per gallon to $/pound by dividing $11.00 with 6.76 lbs/gal (for JP8) which is equal to $1,627per pound, or 162,7 cents per pound.

    So, (13732 lbs per hour – 11400 lbs per hour) x 40 years x 179 a/c x 489 hrs/year x $1.627/pound x 0.0697 = $925914229, or $0.93 billion in Present Value.

    Conclusion: The Present Value (PV) of the annual fuel burn delta between the KC-767 and A330MRTT (according to my fuel burn estimates), is decreasing from $3.33 billion in 2010 to $0.93 billion in 2070.

    • Correction:

      Silly me, I should also have done a reality check before pressing the submit button. I multiplied by 40 (years) for annual PV, which is pretty dumb. 🙂

      So, the PV delta between the KC-767 and the A330MRTT (according to my earlier fuel burn estimates) for 2010, 2020, 2040 and 2070 should be:

      2010: ($3,33 billion)/40 = $83.25 million
      2020: ($2.81 billion)/40 = $70.25 million
      2040: ($1.81 billion)/40 = $45.25 million
      2070: ($0.93 billion)/40 = $23.25 million

      Conclusion: The Present Value (PV) of the annual fuel burn delta between the KC-767 and A330MRTT (according to my earlier fuel burn estimates), is decreasing from $83.25 million in 2010 to $23.25 million in 2070.

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