Looking ahead for the tanker award

Will it ever end?

This is the question about the interminable KC-X tanker competition.

Unofficial word is now that the USAF is to announce its award in February, after slipping from January, December, November, October and August.

US Sen. Carl Levin announced that he will hold a hearing by February. 1 into the snafu by the USAF over sending Boeing and EADS information about the performance of each other’s tanker. Levin, holding the hearing at the request of Sen. Maria Cantwell (D-Boeing/WA), will try and determine if this is a harmless or fatal error to the procurement process. We have written before that mistakes like this happen and the government has set procedures for handling such errors, but in the highly charged competition, Boeing is taking advantage of the mistake to lay the groundwork for a protest should it lose.

Politico has this interesting article discussing the unexpected split buy for littoral combat ship and how this relates to the KC-X tanker competition. The article is mostly about the Navy’s decision to split the buy for the LCS, but it is worth reading.

Meantime, Airbus and Boeing missed deadlines once again to deliver their tankers to customers. Both said they would deliver their airplanes to the Royal Australian Air Force (RAAF) and Italian Air Force respectively and once again the time came and went.

Airbus missed delivering its KC-30 MRTT—which it boosts as 90% similar to what the USAF wants in the KC-X—because, according to this article, it is writing manuals to meet Australian airworthiness requirements for the refueling boom. The boom, of course, is the first Airbus has ever designed and built.

The KC-30 is now two years late to RAAF.

Boeing, meantime, announced last summer it would deliver the KC-767 to Italy, but there has been no announcement that it has. This airplane is now five years late.

Defense News reports that the Pentagon has been ordered to cut billions of dollars from the budget over the next five years. Wouldn’t that be a kick in the tailpipe if KC-X gets the ax? This is considered unlikely, but we raised our eyebrows over this one when we saw the story.

Given the high-profile reports last month that Boeing is now likely to lose the tanker competition (we have no insight on this one), we’ve been asked by several media what will the impact to Boeing, and more specifically, to Washington State be if EADS wins the KC-X aerial tanker contract. The award is widely expected to be made next month, but the USAF being the USAF, who knows if this timeline will happen?

Our answer has been, there won’t be much of an impact to Boeing or the State.

To be sure, Boeing and the State want to win this contract. Boeing claims there will be an annual benefit to the State of 11,000 direct and indirect jobs and $650m in employment and supplier benefits. ($650m, at 15 airplanes a year, equals about $43m per airplane in supplies and payroll.) Full production wouldn’t kick in until 2015, according to the USAF timetime; aircraft built before then are test airplanes and at a lower rate.

The initial contract for 179 airplanes takes production out to about 2027 at the rate of 15 airplanes a year. Boeing, in a press briefing in advance of the Farnborough Air Show, said it had indications that the USAF would at some stage want to take production to three a month, but a timeline was not revealed to the press if Boeing received one from the Air Force.

With all this as background, why do we feel the impact to Boeing and the State would not be much? Here’s why:

  1. Boeing has bigger opportunities in Commercial and, frankly, given the current program problems and continuing challenges, the tanker will be a distraction. See #8 and #9 below.
  2. At 179 airplanes for a $35bn program, this is $195m per airplane or about $2.9bn a year in revenue to Boeing, minus the payouts to contractors, suppliers, payroll, etc. If one assumes a 10% profit margin to Boeing, which on this fixed-price contract may or may not be reasonable, this is $290m in profits to Boeing annually. These numbers are nothing to sneeze at, but neither are they make-or-break numbers for Boeing, either.
  3. Production ramp up for the 787 is likely to be slower than Boeing hopes. Some Wall Street analysts are already forecasting Boeing won’t be at the 10/rate until 2015 instead of the year-end 2013 Boeing has announced. Whether it is this slow remains to be seen but we agree 2013 is increasingly challenging.
  4. Jim Albaugh, CEO of Boeing Commercial, told us earlier this year that Everett and Charleston theoretically will have the ability to take 787 production to a whopping 17/mo, but he needs to be sure Boeing can deliver on its promise of 10/mo before taking production higher. And a higher rate is needed to catch up on delays and to offer new delivery slots to customers. The 787 line is sold out to 2020.
  5. Boeing is considering taking the 737 production rate to 42/mo from the announced 38/mo and the 777 line to 8/mo from the announced 7/mo.
  6. Engineering resources remain stretched among 737, 777 and 787 programs. Boeing has to decide what to do about the 737 and suggests it may proceed with a new plane sooner than later. A decision is necessary for the future of the 777 to meet A350 competition. The 787-9 remains in development. The tanker would compete for these resources in the early years–2011-2014–which is a critical time for the commercial programs. Parenthetically, our sourcing tells us the USAF is actually quite concerned about this and the ability of Boeing to successfully manage all this at once.
  7. At the production rates being talked about by Boeing, by 2015 the company would be delivering about 740 airliners a year; 15 tankers are about 2%–a gnat on the proverbial elephant’s rear end.
  8. Expanding the 787 line from 10 to 14 or even 17/mo, replacing the 737 with a new airplane and eventually replacing the 777 with a new airplane provide a lot more opportunity, jobs and economic benefit to Washington State than 15 airplanes a year of a 1970s-design (which is where the 767 has its roots).
  9. Designing a tanker for the KC-Y competition to replace the KC-10 is a good opportunity for which Boeing is keenly positioned. The 777 fits this bill nicely. However, by then the A350 will be operational (one presumes) and this will be stiff competition to the 777; the A350 could also be built at the Mobile (AL) plant Airbus plans for the KC-45. The KC-Y competition could be a re-run of new vs old technology (A350 vs 777) that exists for the KC-X (A330 vs 767). But if Boeing perfects the Blended Wing Body that’s been under development, the BWB will blow away anything Airbus has to offer.

In short, if Boeing loses, it will be a disappointment to the company and the State, but as the cliche goes, when one door closes another opens. Losing the tanker won’t hurt Boeing because there are so many opportunities on the horizon that will require the resources that would be assigned to the tanker, plus a lot more.

Unrelated to the thesis above, but related to the tanker topic in general, Richard Aboulafia and Addison Schonland did a 12 minute podcast on the tanker recently. Aboulafia suggests a dual award to resolve this; he says the WTO has no role in this procurement; and the USAF mistake.

16 Comments on “Looking ahead for the tanker award

  1. many years ago- I speculated that when the smoke clears, a split buy would be the eventual outcome. I based this on the following

    1) by the time the kc-x tanker comes on line, the replacement for the kc-10/11 tanker will be at the forefront. especially in the ‘ asian’ theater if for no other reason than to retain/maintain ‘ parity” with ‘ the other side ”

    2) its not airframe time that is the driver – it is corrosion, parts, and capability issues.

    3) The only thing regarding production rates is $$$ available, since either side could ramp up to 3 to 5 per month given adequate notice.

    4)no matter who wins, there would be a major howl from the loser either by company or political- with the result of more delay.

    IMO – it boils down to a 60-40 split or 70 30 split based on near term $$$ and defined need for replacement or training. The ensuing 5 or more years delays have allowed both sides to sharpen their bids and their engineering/ manufacturing issues.

    5) NOW the ‘ investigation’ will accomplish nothing but further delay-

    6) My very crude analysis of $$$ involved seems to indicate that had BA not hosed up the lease deal, the $$$ then involved would still be less than the best $$$ bid expected, and a dozen or more tankers would be in service. The italIan and japan issues are/were partly the result of the ongoing fiasco caused by the BA mismanagement team.

  2. The Obama administration seems pretty inept with the tanker deadlines despite this being one of the most needed jobs/military programs to help us out of the economic depression. I wouldn’t be surprised if they just punt the decision to the next administration in 2 years. The Obama administration shows little interest in the military or true jobs in this country. They are not smart enough to split the buy and get the planes under production in 2 plants asap creating 100,000 new jobs in 12 months. The leadership vacuum in this country right now is disturbing.

    • Vacuum produced by the GOP from sucking up everything
      constructive and productice.
      The GOP ( Bush lead by his cronies on a leash ) ruined
      the US and are hell bent on keeping it ruined.
      What you seem to see as Obama ineptness is GOP sabotage.

  3. For 2 years the Democrats have controlled the house and senate. What do we have to show for it other than highways being re-asphalted from coast to coast and a soaring national debt. The Dems could have awarded the tanker contract 24 months ago and created 100,000 real jobs in this country while meeting a vital military need. The most interesting thing here is how Boeing testified and publicized the desperate need to get the Tankers asap to the War Fighter TEN YEARS AGO …and yet now there is no urgency at all. I say 1) split the contract and create an economic boon in Seattle, Kansas and the Gulf Coast…..and 2) create home purchasing, real estate and business investment tax incentives and get this country on the upswing economically.

  4. Uwe :
    Vacuum produced by the GOP from sucking up everything
    constructive and productice.
    The GOP ( Bush lead by his cronies on a leash ) ruined
    the US and are hell bent on keeping it ruined.
    What you seem to see as Obama ineptness is GOP sabotage.


    I would like to suggest that you stick to topic and take your rants elsewhere

    Scott – please remove both uwe post and my response !

    Thank you !

    • Unless people cross over a line that is of our choosing (obscene and/or, generally, very personal) we don’t delete comments. We will step in to draw people back, and we have privately emailed a commenter when deemed necessary but otherwise pretty much stay out of things.

    • Another one with delusions of moral leadership, judgement of appropriateness and responsibility!

  5. I personally find the idea of a split buy a little silly. It seems more like a “There! Is everyone happy now?” kind of solution rather than the best option for what the USAF really needs. I hope it goes to one manufacturer.

    • As a means of solving this issue in itself, there aren’t many who will argue with you. The rub is, how to select a single product without causing an uproar, protest and further delays?! Is it merely due to there being a “foreign” bidder in the works? Would this have been near as messy had another “respectable” american company been able to bid with an “in house” designed airframe?

      Back to the issue of a split buy, there is the not so outlandish thought that the two tankers on offer would/could complement each other. Were they to be offered with the same systems and engines, it might not meet as much resistance from the Pentagon as it does now. As far as I can make out, apart from the most rabid politicians, the only ones expressly opposed to a split buy are the Pentagon (including the Secretary of Defense) due to the increased costs of parts and maintenance, including storage of such parts.

  6. The Italian AF 767 is now 5 years late and counting, and my understanding is that this is the closest Boeing iteration of the proposed USAF KC767.
    Is the 5 year delay due to a lack of resources being applied to the technical issues?
    If not, then how do they plan to overcome the problems if they get a USAF contract?

    • Someone elsewhere quipped that Boeing used the lowspeed Cobham wingunits (from the ?KC-130?) on their tankers making the flutter issues obvious and rather unavoidable. The 767 wing obviously does not have the “birthdefect” of two outboard
      Whichever, For the selfdeclared “best address to buy a tanker” the observable project path ( major problems, exceptionally long time to (no?)fix ) indicates
      incompetence and/or disinterest.
      Q: are the japanese tankers actually in JDF use or just sitting around?

  7. AMERICA, we don’t need a new tanker. We don’t even use the ones we have. Okay, let’s refurbish a few of the old birds, as a precaution against the unknown. President Eisenhower warned us against nonsense like this when he warned us of the MILITARY-INDUSTRIAL COMPLEX…..

  8. Daniel,

    My husband flies those tankers you say we don’t need. I’m sure this may be one of many topics that conspiracy theorists may enjoy trading notes about, but the reality is that the KC-135s, arguably one of the greatest aircraft ever built, are long past their planned life expectancy.

    BTW, Mr. Daley, just resigned Boeing’s board to become President Obama’s Chief of Staff. Not very good news for the EADS tanker.

  9. I could be wrong but I believe Mr. Daley has far bigger fish to fry, he just sold all of his Boeing stock.

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