KC-X: price dumping and assessing risk

Now that EADS said it will bid after all for the KC-X contract, questions have been raised about the possibility EADS will offer pricing that is below its costs (or “price-dumping”) to win the contract. Boeing supporters, and Boeing itself, have raised this concern.

On the other side, EADS is focusing on the fact its KC-45 is in production and in flight tests while Boeing’s proposed KC-767 NewGen is a conceptual airplane that is a riskier prospect.

How are these two particular concerns dealt with?

The final Request for Proposal issued by the Air Force shifted its rating methodology from a combination of criteria-and-subjective analysis to a pass-fail approach. There are 372 criteria that EADS and Boeing have to pass; if any of the the criteria fails, the offering is disqualified.

This removes the past performance and risk factors in the second round of the competition (won by then-EADS partner Northrop Grumman) in which Boeing was marked down for its conceptual offering of the KC-767 Advanced Tanker and poor performance related to the KC-767 International program (Japan and Italy), which were and continue to be late and plagued with technical problems.

So how does risk get assessed, not only for the Boeing conceptual KC-767NG but for the EADS KC-45?

There are what are known as “ENs” or Engineering Notifications the Air Force routinely issues when it has questions. Somewhat misnamed for the purpose they have, the ENs aren’t exclusive to engineering questions. It is through this that the Air Force asks any question it has.

EADS “came out of the box” aggressively shooting at Boeing’s KC-767 NewGen, noting the airplane is conceptual and asserting this equates to a higher risk than its KC-45. The ENs, we understand, will be the likely method the Air Forces to assess the risk of the KC-767NG.

Boeing is in the position of having to convince the Air Force that all elements of its proposed airplanes, including the insertion and integration of the 787-style cockpit, development of a KC-10 type of refueling boom, resolving of the Italian KC-767 wing-pod flutter issues (with a new control surface system for the wings, we are told) and all other systems can be done within the fixed price bid and timelines specified in the RFP.

Through the questions posed in the ENs and the responses thereto, the USAF will assess whether Boeing’s answers are acceptable, whether further clarification is required or whether the answers fail to satisfy.

As we understand it, it is through this system that the risk factors included in the Round 2 competition for which Boeing got marked down, and which are absent in this Round 3 RFP, can be assessed. Failure to satisfy might result in a “Fail” of a Pass-Fail criteria.

Boeing has been through this little process before with its KC-767 Advanced Tanker. Although there are distinct differences between the KC-767AT and the KC-767NG, the concepts are quite similar. This may or may not be a good thing, since the USAF previously assigned higher risk to the conceptual KC-767AT as part of its evaluation process in Round 2 which resulted in the award to Northrop Grumman, then partnered with EADS.

The same approach is true for the KC-45 systems. Although EADS correctly points out that its airplane is in production and in testing and has transferred fuel on many occasions, it is also equally true the airplane is about 18 months late, it has yet to be delivered and it certainly isn’t operational.

The risk factors of a “greenfield” assembly line in Mobile (AL), with new hires who will require training, also may reasonably be expected to be included in ENs. These questions, of course, would have been dealt with in Round 2.

The ENs may also be used for evaluating whether the price offered by EADS is reasonable and avoids price-dumping. Since this is a fixed-price contract bid, the USAF is clearly interested in a realistic low-bid pricing and not one that results from price-dumping.

Parenthetically, the USAF is certainly cognizant that any price offered by EADS that underbids Boeing is going to be subject to Congressional scrutiny. Thus, the Air Force has real, deep incentive to be convinced that no price dumping occurs.

Thus, there appear to be safeguards in the process for supporters of both sides.

11 Comments on “KC-X: price dumping and assessing risk

  1. I would like to repeat my question from another post: what’s the situation on royalties to RLI providers on any frames potentially going to the USAF? Does anyone know if the RLI providers would be able to forego those; if the USAF would require them not to be paid; how much royalty is due for each A330 frame?

    Many thanks in advance for any light to be shed.

    • I have yet to find a usefull snippet from those contracts.
      The Brits have published data on RLI volumes ( out, back )
      and performance “as expected” 😉
      http://www.publications.parliament.uk/pa/cm200405/cmselect/cmtrdind/151/15106.htm

      nice tidbit on the side:
      EU:”Reimbursable Launch _Investment_” US:”launch aid”
      from the cookbook “how to mince words” 😉

      And that meme was inserted perfectly. Thus both sides
      “discuss” on completely different concepts in their heads.

      • from your exellent link:
        Point 70:

        Does that say the last winner of the US presidential helicopter benefited from RLI/LA???
        also – is the RB 211, designed for and used exclusively by the US market (except for a few tupolevs) 747,767,757 as well as L-1011 payed for in part by the UK govt… Didn’t hear Boeing scream bloody murder back then…

        finally, the 380 received 1BGBP out of a total of 2BGBP (3BUSD). Subtracting that cost, assuming hte A380 has not payed back much in royalties yet, the UK govt received 1.6BGBP on an investment of 1BGBP… not bad. Can I get a piece of that action?

  2. So if the Air Force decides to Fail either comapny on a certain criteria, would said company have a basis to protest? Or even worse, if the Air Force passes one company on a criteria, would the other company have grounds to protest that pass?
    With the recent history of bot companies, how can anybody reliably judge their techinical ability to meet the “claims” they are making?
    Seems like this is not going to be a clean, clear or quick decision in any way, shape or form.

    • How could you protest the fact your competitor got a passing mark when you’re not supposed to know anything about their offer?

      • As I recall, the loser of the last competition got a full debrief. All the info would then be available.

  3. “ENs” are not “engineering notifications”. They are “evaluation notifications.” They replaced the old system of “deficiency reports” and “clarification notices.”

  4. So what happens when both proposals are failed on one or more of the 372 requirements…
    KC-45 can’t fly fast or slow enough (break away & refuel V-22) and the 767 can’t pass gas fast enough (1200gpm required, 900 on offer)

    I know, the USAF may state they are confident either or all deficiencies will be corrected within the set time line and fixed budget, but what if…

    It could be the USAF cop-out for when it looks like they won’t get either award through the political trough, but then again – they won’t be wrong. Whatever choice is made, non-compliance will occur before this saga is finished

    • ikkeman, the CV/MV-22 refueling requirement is non-mandatory in the SRD (Sect J. Atch 1 – SRD 24 Feb 10.pdf):

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

      Quote:
      3.1.1.13.1 KCX Refueling anticipated M/CV-22 at airspeeds as low as 190 knots KCAS and 10,000 ft altitude at tanker weights for 18,000lbs of fuel available to offload and 1,500 nm unrefueld radius range (NON-MANDATORY).

      As for the breakaway maneuver, it seems to no longer be a requirement in the SRD (at least I can’t find any reference to it in the SRD). On the other hand, I can’t really see that this should be a problem for the A330MRTT, since the pilots can, due to the flight control protections of the aicraft, aggressively and very confidently, apply maximum sidestick deflection, roll to 67 degrees of bank while achieving a continous 2.5g load factor. A pilot in a KC-135 and/or KC-767 attemting to maneuver to the same parameters will take more time to achieve such a maneuver while at the same time having difficulty in maintaining these parameters, and finally, might find themselves in more danger by exceeding the limits of the aircraft and/or their own abilities.

  5. I’m more concerned about under-pricing that EADS tries to provide a low enough price to force Boeing to match this price.

    Consider this: If Boeing was the sole competitor to this RFP, they could have set the price they wanted. By having EADS back in the game, the Air Force is now pretty much assured taht they will have a “decent” price.

    I’d love to see/know the manpower EADS is gonna put in this response, as I suspect them to do a theoretical response rather than one made to win.
    As soon as a executive starts to shout all over the world that its company want to do something, you may want to expect the exact opposite. Classical refuting/acknoledging communication strategy.

    So we’ll see how things goes, but in my opinion, EADS is mearly trying to force Boeing to provide a low price (and as a consequence limits Boeing profits on this tanker).

    I’d say that if by spending 200M$ on this response EADS is cutting Boeing profits by 2B$ on the 40B$ contract it’s worth it for them 😉

    All comes down to what’s a price dumping and what’s a regular realistic low price …

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