Update, June 4: Reuters has this recap from Jim McNerney’s appearance at an investors’ conference in which he says EADS could win the tanker competition on price–a key point of our column below.
Note: this is a very long column.
In a previous post, we lamented that the debate over the KC-X procurement seemed to be about everything BUT the attributes of the planes offered by Boeing (the KC-767 NewGen) and EADS (the KC-45, based on the Airbus A330-200).
The public relations campaign and the shrill political posturing has been about the WTO trade dispute between the US (Boeing) and the EU (Airbus) over illegal subsidies to both companies and whether these should be included in the Pentagon’s evaluation; about jobs; about extending the deadline to submit bids so EADS can do so; and about freezing Obama administration appointments in a particularly snitty move by an EADS Senator.
None of these has anything to do with how the USAF evaluates the plane. The USAF evaluates the equipment on the merits of performance, capabilities, life cycle costs, military construction costs (MilCon) and a bunch of technical requirements, 372 in all.
If the airplanes’ costs come within 1% of each other, another 93 discretionary criteria will be scored, including exceeding capabilities.
The reason we lament the [lack of] quality in the debate is because EADS and Boeing both offer, conceptually, good airplanes. The challenge is that they are essentially two different mission-capable airplanes trying to fit into one mission-capable category and evaluation.
The solution, we have said since the beginning of Round 2 in 2007, is that the USAF should buy both airplanes because they perform different missions and today’s Air Mobility Command and USAF require different capabilities than in the past.
Defense Secretary Robert Gates, of course, says no dual-sourcing and in his mind that should end the debate. Of course, he also says no WTO consideration and that did not end the debate. On the contrary, the debate over the WTO led last week to a vote in the US House of Representatives that WTO findings for all defense programs, for all sides, should be considered in the future. Action in pending in the Senate.
We think this is the wrong policy at the wrong time and for the wrong program, as we have written many times. Furthermore, we also believe there is a possibility Boeing could come to regret what it asks for and finally, there is the possibility that the Congressional action may not have all that much affect on the price issue anyway.
But let’s talk about the planes.
We aren’t going to get into the 372 criteria, but rather some over-arching issues. We’ll try to list advantages and disadvantages of each airplane to spur the discussion that we believe should be taking place, and which are relevant to the Air Force and Warfighter.
There is no question: the KC-767NG is closer in physical size and fuel offload to the Boeing KC-135 than is the EADS KC-45.
In the Round 2 competition, Boeing issued illustrations over-laying the dimensions of the KC-767 on the KC-135 and the KC-30 (as it was then known) over both.These were effective illustrations that demonstrated just how much bigger the KC-30 is over the KC-135.
While the KC-767 and the KC-30/45 both require MilCon infrastructure improvements and more capable ground equipment than the KC-135, EADS likes to point out that the difference is the “delta” between the two in evaluating costs. We acknowledge this and note that outside the military, we don’t there are many if any people who have a real handle on how much MilCon will cost to accommodate either the KC-767 or KC-45. But the point is valid and one we thought Boeing failed to capitalize on in the 2008 competition (and so far, in this one).
Boeing Commercial Aircraft has a comprehensive airport-requirement section on its website to tell customers what is needed to support and service Boeing airplanes. Naturally the site doesn’t have Airbus airplanes on it, but we imagine BCA salesman have some kind of information on this.
We suspect that from a commercial standpoint, BCA has run all kinds of analysis for its airline sales team so they can make financial arguments of infrastructure requirements for Boeing vs Airbus. Absent information from the military, the commercial comparisons are a logical one.
Boeing Defense should run these calculations and estimates and use these in their advertisements and public relations campaigns. If their limited statements on this topic are to be believed so far, this number might be significant. If it is, then we think Congress–for whom all these PR, political and advertising campaigns are targeted anyway–might find the data worthwhile.
Airbus actually provided a great illustration during its Innovation Days to conceptually grasp the difference in airplane sizes.
Airbus was talking about the A330-300 and the advantages officials say the airplane has over Boeing’s 777-200ER in size and fuel economy.
Here is the illustration from Airbus, demonstrating how much lighter the A330-300 is compared with the 777-200ER.
We thought this was pretty effective. (This also illustrates why, among other reasons, Boeing was unlikely to offer a KC-777, given the difference between the 777-200 on which a KC-777 would be based and the A330-200.) So we did a little calculating of our own and crudely put together this illustration to demonstrate how much lighter the 767-200ER commercial model is than the A330-200HGW: the equivalent of the maximum take off weight of a McDonnell Douglas DC-9-50.
We can’t imagine the infrastructure costs delta will be 1%, a critical figure described previously.
On MilCon costs, the advantage ought to be Boeing’s. Why not talk about this?
Life Cycle Costs
This is an area where Boeing has the clear advantage; even EADS/Airbus (and, previously, Northrop Grumman) acknowledge this. The question has been over how great the advantage is.
During the 2008 competition, Boeing used the figure that the Boeing 767-200ER has a 24% fuel burn advantage over the A330-200. This number has been repeated in early press releases in this round. The figure comes from data filed by US airlines with the US Department of Transportation.
Airbus claims the difference is just 6%, but the company has never shown us the data to support this claim, nor has the company shown how the DOT data is incorrect. But that’s what the company claims.
Let’s give Airbus the benefit of being correct on this for purposes of this discussion. Six percent is still 6%, and when engaged in a price shoot-out where the low-bid wins, or where the competitors have to come within 1% before extra credit is given, 6% may as well be 24% or 124%; it ain’t 1%.
Furthermore, Boeing proposes putting winglets on the KC-767. On commercial 767-300ERs, the winglets have proved to lower fuel burn by 3.5%-4.5%. Add this to 6% and now the fuel cost advantage is about 10%. Add this to 24% and the advantage is about 28%.
And there isn’t a thing Airbus can do about it. Winglets aren’t available for the A330. (Update, 0930 PDT: We got a quick email from EADS pointing out the A330 already has winglets, which is true. But Airbus is putting a new-design winglet on the A320 family, which improves fuel burn by about 4%, and this solution isn’t available for the A330. This is what we mean when we say there isn’t anything Airbus can do about matching Boeing’s 767 winglet solution.)
Life cycle costs also include maintenance costs, parts, spares, etc., for which we don’t have data to make comparisons. There has been interesting Comment discussion on these items in previous posts the Reader can seek out, but for which we can’t begin to assess for accuracy. So we will stick with fuel.
With or without winglets, the life cycle cost on fuel burn on the KC-767 is better than the larger KC-45–and EADS knows it.
Advantage: Boeing. Why not talk about this?
This is one of those areas where the definition matters. Which airplane is more “capable”?
If you are talking about the ability to fly farther with greater fuel payload, great cargo payload and greater troop-carrying payload, and the ability to off-load more fuel, the answer is clearly the KC-45.
But are these greater capabilities needed?
In the 2008 competition, the USAF came to the conclusion the answer was “yes.” Readers will remember the famous line, the then-named KC-30 offered “more, more, more,” the USAF said in selecting the airplane.
The 2009 competition says “more” isn’t that important. The RFP uses the KC-135 as the baseline and if the contenders meet the baseline requirements, the low-priced airplane wins. Only if the prices are within 1% of each other with “more” be considered.
On this basis, the KC-767 has the advantage. It’s smaller than the KC-30/45. Boeing says it meets the baseline requirements. The pricing theoretically should be better. (More on this below.)
We’ve made a couple of references already to the importance of price. In the 2008 competition, Northrop Grumman submitted a bid of $184m per airplane. Published reports had put this number at about $172m, which was said to be about $12m-$15m less than Boeing. This suggested the Boeing bid was $184m-$187m. The subsequent GAO report upholding Boeing’s protest noted that absent the additional costs assessed by the USAF for risk factors (plus $5bn for Boeing, plus $772m for Northrop), the bids were essentially even.
This demonstrates why Boeing is so focused on getting the WTO finding about illegal Airbus subsidies into the equation. Boeing and its supporters assert the WTO found the A330-200 on which the KC-45 is based received $5.7bn in illegal subsidies. Spread over 1,086 airplanes ordered so far, this is $5.25m per plane Boeing believes should be added to the EADS bid price.
Let’s take this at face value.
Northrop said it bid $184m. This includes the Northrop mark-up and profit margin, which defense consultant Michel Murluzeau of G2 Solutions in Kirkland (WA) estimates to be 10%-15%. This Flight International Special Report on the tanker includes this observation. Thus, subtracting these percentages, you get the following bid price assumptions (using the 2008 numbers), in thousands:
So even adding back in the WTO penalty still provides a low price for Boeing to beat, lower than was bid in 2008.
Then take into consideration the lower Euro-to-Dollar exchange rate and Boeing’s uncertain development costs of the KC-767 NewGen–and finally, the prospect that Boeing will likely be found guilty of receiving illegal subsidies. Thanks to the legislation passed by the House last week, Boeing may well find itself faced with the prospect of these subsidy costs being added back into its bid price.
We talk in detail about these factors in this post.
Boeing’s Jim Albaugh, CEO of Boeing Commercial Airplanes, was CEO of the Defense unit in 2008. The major portion of the cost of the KC-767 comes from BCA. At the time, Scott Carson was BCA CEO, and we were told after the GAO protest was filed that Carson had not been willing to cut Boeing Defense a low price for the 767-200ERF (a conceptual airplane) needed by Albaugh at Defense. Now that Albaugh is at BCA, he has vowed not to be the person who loses the tanker competition twice and we expect him to be more aggressive on price than was Carson.
Boeing is also switching the 767 production line to a Lean line, which will reduce costs significantly.
Still, Boeing doesn’t truly know what its development costs will be since it is offering a conceptual airplane based on the troubled Italian tanker program, where structural and aerodynamic problems still have to be resolved before the airplanes can be delivered. These are now four years late.
EADS, with KC-30s in production, says it knows what its development costs are–there is less risk and greater certainty on a bid price for EADS compared with the Boeing challenge, EADS contends.
And the USAF fixed price component of the USAF contract worries Boeing (as it did Northrop). Because Boeing doesn’t have a good track record with the KC-767 International program and because it is offering a conceptual airplane that isn’t in production, the cost risk to Boeing has got to be high. Remember, the USAF added $5bn in 2008 to Boeing’s cost for these reasons. (This is not possible under the 2009 RFP.)
Boeing, as recently as May 20, reiterated its concern over fixed price and said it must prepare a “financially responsible” bid. Boeing even floated the idea that it might not bid, though it subsequently said it “INTENDS” to bid (emphasis is Boeing’s).
To use the apt analogy, What is the bottom line on price?
We think that even allowing for the WTO finding, EADS may well have the advantage on pricing.
In 2008, past performance was a discriminating criteria and Boeing was marked down significantly because of the International tanker program. Past performance isn’t a discriminating factor in this round, although Evaluation Notices from the Air Force can accomplish much the same thing.
Boeing doesn’t have an in-production airplane and EADS does, which officials say is a major advantage. But the KC-30 is two years late to the launch customer, the Royal Australian Air Force. EADS, and the RAAF, acknowledged that six months of this was due to customer-requested change orders. This means the balance of the delay is due to EADS.
Last month, we asked the RAAF about some of the issues. Here is the e-mail interview, with answers provided by a spokesperson with the Australian Defense department.
1. We understand that the MRTT will now be two years late in delivery to RAAF. What is now the targeted delivery date, please?
Defence expects to achieve delivery of the first two aircraft by end-2010.
2. We understand that there continues to be issues with the aerial refuelling boom, specifically flight envelop issues. Please detail what these issues are and how these are delaying delivery.
The delay to delivery is primarily due to the additional time required for the conversion and testing of the whole of the military modifications for the first-of-type A330 MRTT; not the boom refuelling system per se. Airbus Military has now completed important milestones in the final testing of the military avionics, underwing pod and boom refuelling systems. A Supplemental Type Certificate for the A330 MRTT was granted by the European Aviation Safety Agency on 17 March 2010 for civil certification of the military modifications to the commercial A330 airliner. Military certification and qualification testing is currently underway, including final testing and certification of the performance of the new boom refuelling system. Based on the substantial testing conducted to date, the DMO does not anticipate that the boom will delay delivery and entry into service of the A330 MRTT.
3. Please identify any other issues with the MRTT that have to be resolved prior to delivery.
The test program is now entering the final certification and qualification stages after over 12 months of developmental testing of the new military avionics and refuelling systems. At this stage of the program, there are no known technical issues that are anticipated to impact the completion of the military certification and qualification program.
When we were at the Airbus Innovation Days, a spokesperson for Airbus Military advised us that the two aircraft will be delivered in the third and fourth quarters. One of our peers attending the briefing was an Australian defense reporter, who says he has been told by a high-level RAAF source that there remain flight envelope issues with the refueling boom. Readers can see we asked RAAF about this (above) and the response. The Airbus Military spokesperson denied the report as well.
With this column, we have on a macro level tried to talk about the airplanes. To summarize, we think:
A final word:
If the Senate concurs with the House and requires the Air Force to take into account the WTO findings on Airbus (and Boeing), and should per chance EADS still win on price (including life cycle and MilCon costs) and meeting the 372 pass-fail requirements, there will be no excuses Boeing and its supporters will logically be able to fall back on to protest this award. (Unless the USAF screws up yet again in the evaluation process, an outcome that can’t be ruled out.)
Boeing could still wind up being hoisted on its own petard. For all the effort to get the WTO factors considered, our analysis suggests it is a long shot that EADS could still win on price, but it might. Boeing is certainly worried EADS could. And that’s the ballgame.