With the expectation that the USAF is going to announce its tanker award this week, we’re going to forego our Odds and Ends kick-off and deal with the tanker.
We’re going to try and synopsize many of the issues that are “out there” in cyber-land, to try and make some sense out of what sometimes seems to be a senseless process.
In no particular order, here we go:
Who’s going to win?
The consensus is EADS has the upper hand this time. Boeing executives think they will lose and EADS is optimistic. One noted consultant told us he thinks it is too close to call. We want a split buy; the KC-767 is better for the European theatre and the KC-45 is better for the Pacific. Politically, we think this is the only answer that works. Isn’t this sad?
Split Buy or not
DOD and USAF have said “no,” but the RFP does have a provision to allow for it. Boeing and EADS have said this would be uneconomic, but depending on the split, if any, this may be rhetoric. DOD and the Navy said ”no” on the Littoral Combat Ship and wound up doing it. We’ll just have to wait and see.
Why should a foreign company be allowed to compete for an American contract?
The question should more appropriately be, “Why not?” Competition is good, and it has been in this case. The 2001 lease deal for the Boeing KC-767 demonstrated, if nothing else, what happens when a sole-source contract is arranged without competition. Boeing, at the behest of the late Sen. Ted Stevens, proposed leasing 100 tankers to the Air Force for $200m each, or $20bn. At the end of the term, the USAF owned nothing. Competition leading up to the 2008 contract called for 179 tankers to be purchased for $35bn, or nominally $195m each. Actual bids came in closer to $175m each. There is an expectation that bids this time may be 5%-10% less than that in 2008.
Additionally, the 2008 effort resulted in Boeing improving its airplane from the original offering, and from the International tanker program for Japan and Italy, to the KC-767 Advanced Tanker. While this plane was cleverly if unfairly dubbed the Frankentanker by critics, it unquestionably was better than those previous airplanes.
Since the 2008 competition, Airbus has benefitted by maturing its KC-30A being developed for the Australian Air Force, testing all the systems on that airplane, many of which are common to the USAF KC-45 proposal. A lot of the testing, therefore, comes at the expense of the RAAF and this reduces the risk for the USAF.
Boeing, meantime, developed the KC-767 NextGen, which doesn’t appear to be the same level of mix-and-match as the KC-767AT but which is nonetheless the Son of Frankentanker (said affectionately in this case). Most noteworthy is the addition of winglets in the conceptual artwork, which theoretically further reduces fuel burn by another 3.5% or so, but oddly Boeing doesn’t tout this additional savings in its PR and advertising. So are the winglets part of this offer or not? Boeing won’t definitively say, though it suggests that they are.
So: lower price, less risk, better airplanes. Competition is good.
More to the point, the EADS/Airbus nations are NATO allies and under US law, NATO allies who chose to bid on US defense projects must be considered as if they are US companies.
Even if Boeing wins, US taxpayers have EADS to thank for a lower price and a better airplane than would have been the case without competition.
What about jobs?
Partisans for Boeing say American jobs are at stake. Boeing will support 50,000 US jobs directly and indirectly vs. outsourcing jobs to a European company, they charge.
EADS says it will support 48,000 US jobs, and it plans to introduce a new study this week to further bolster its case. With the difference being only 2,000 jobs, we’re not talking about a great deal in the unemployment scheme regardless of who wins.
Combat ready on Day 1
Boeing has made a tag line about its plane being Combat ready on Day 1, but as good as this line is, it is meaningless. All airplanes submitted are supposed to be combat ready on Day 1. If they aren’t one presumes they would fail one or more of the mandatory pass-fail requirements.
Our plane is less thirsty than your plane
Boeing in 2008 and again in 2010 promoted its KC-767 as using 24% less fuel than the KC-30/KC-45, which would save taxpayers at least $25bn over 40 years. Northrop Grumman made a feeble attempt to refute this in 2008 and EADS was more aggressive last year. EADS concedes that on training and ferry missions, its larger KC-45 is at a disadvantage to the KC-767, but on fuel delivery missions it says the KC-45 is 15%-45% more efficient on a gallon-cost delivery basis depending on the distance, a fundamental data point in the IFARA analysis. Boeing notes the EADS analysis was done by EADS but otherwise doesn’t dispute the figures. Boeing paid two independent companies for its 24% figure, both of which relied upon commercial airline operating figures filed with the US Department of Transportation.
On a pure operating basis, Boeing is right, but this doesn’t take into account payload efficiency. In the absence of the IFARA data and Boeing rebuttal, EADS seems to have the upper hand on this one.
This is the analytical tool USAF uses to score efficiency on several metrics. In 2008, the KC-30 scored 1.92 and the KC-767AT scored 1.72 (the higher the score the more efficient the airplane). The KC-135 was the baseline at 1.00. When the USAF accidentally sent Boeing the EADS IFARA score last year and EADS the Boeing IFARA score, it should have come as no surprise that the KC-45 scored better again (but we don’t know what the scores actually were, though we will at some point after the award is announced).
But it depends on your point of view how it does. Boeing says its KC-767 is closer in size to the KC-135, requiring less military construction costs than the larger KC-45 and the ability to park more airplanes on the ramp than can fit the KC-45. EADS concedes the point.
EADS says its airplane can deliver more fuel, carry more troops and deliver more cargo than the KC-767. Boeing concedes the point but says, “So what?” All the air force wants is a refueler and all the extra capability of the KC-45 is extra cost and no needed benefit. EADS doesn’t concede this point.
Mature workforce, mature plant vs. untrained workers and an open field
This is Boeing’s advantage, no question about it. EADS has to hire employees and train them to assemble the KC-45 at a plant it has yet to build in Mobile. Boeing has a workforce with decades of experience who have been building the commercial 767 from Day 1 at a plant that has been around since 1969. True, the assembly line switched in January from the out-dated one in place since 1980 to a “lean production” system, but this should be of little consequence.
It’s also true Airbus has the recent experience of creating a new assembly plant (in Tianjin, China) that came off without a hitch. But so-called “greenfield” plants and employees are risky—just say “Charleston”—and Boeing has the clear PR and experience advantage on this one. Other than one clever video and some occasional references, Boeing hasn’t talked much about this tremendous advantage. Much to our bafflement.
Decades of experience, Part 1
Well, yes and no. Until the highly troubled Japanese and Italian tankers were delivered in 2008 (two years late) and 2010 (five years late) Legacy Boeing hadn’t delivered a tanker since 1966 and McDonnell Douglas, now part of Boeing, hadn’t delivered one since 1986, and we suspect we’d be hard-pressed to find anyone still working at the companies then who are now who were involved in the tanker production. Promoting the history of the KC-135 tankers as if it were a current event, when the last one was delivered 45 years ago, or the KC-10 (25 years ago by another company at the time), is stretching it. It’s great for the historical record but as a talking point in another age, as a qualification it just doesn’t fly.
The KC-767J is a different version than that sought by the USAF and the Italian tanker—pretty similar to the USAF desires—was a highly troubled development, most notably with the wing pods.
Airbus delivered tankers (A310 conversions) from 2004-2007 to the German Luftwaffe; Canada also flies converted A310 tankers. These have wing pods developed by EADS; the refueling boom desired by the USAF comes with the KC-30A.
In terms of recent tanker experience, this is really a draw, including delays. Just as the KC-767 International program has, and continues to have, delays, Airbus’ KC-30A is now 27 months late and counting for Australia.
Decades of experience, Part 2
Where Boeing wins hands-down is its decades of experiences in tanker maintenance contracts for USAF. But the company doesn’t talk about this. Much to our bafflement. This is something EADS/Airbus cannot possibly match and it’s a real plus for Boeing. This is the talking point about tanker heritage we wish Boeing had used, for on this it is the undisputed leader.
WTO panel rulings
Don’t forget that for all the hubbub and rhetoric on both sides of the issue, the WTO technically hasn’t determined anything—only the WTO investigative panels have found Airbus and Boeing received illegal subsidies. The WTO’s governing body has yet to accept the panels’ findings. At this writing, the Airbus panel finding remains under appeal and the Boeing panel finding is still confidential, and hasn’t yet been subject to appeal.
Setting aside these little niceties, once the WTO governing board accepts the rulings, then remedies must be negotiated. Only after negotiations fail can sanctions be authorized and penalties imposed. This is years away.
Ah, yes, says Boeing, but military procurements are exempt from WTO rulings and Congress could do what it wants.
Now, isn’t this just a little bit of a double standard? On the one hand Boeing and its supporters want to use WTO rules to penalize EADS but on the other they don’t want to follow the rules governing when and how penalties can be imposed. Or they want to exempt the military procurement from WTO penalty rules yet use the panel findings to impose a penalty. We have a hard time following the fair-and-openness of this logic.
And how much should the penalty be? Boeing and its supporters use the figure of $5bn as the amount the A330-200 received (Airbus disputes this figure, saying the WTO panel ruling doesn’t have this figure in the report and the real number identified by the panel is a paltry $54m.) Boeing’s Congressional supporters in Washington State used a figure of $5m per airplane ($5bn divided by 1,000 orders and deliveries at the time of the panel report), a figure more than offset by the withdrawal of Northrop Grumman from the EADS team (see below). At December 31, the number of order and deliveries had risen to slightly more than 1,100, thus reducing the per-plane penalty. If you accept and use the Airbus interpretation, the per-plane penalty is less than $50,000 (fifty thousand), an inconsequential amount.
Furthermore, EADS notes the launch aid has been repaid with interest and Airbus is now paying royalties on the A330, something that has to be priced into its bid and something Boeing doesn’t have to do with the 767.
Lately EADS has pointed to NASA subsidies received in the development of the 767, but this wasn’t part of the European case against Boeing so as far as we are concerned, this is irrelevant.
So it will be interesting to see just how close the bid truly is. If it is $5m or less per plane, look for Boeing and its supporters to scream. If it is a much wider number, they may scream anyway but EADS and Airbus will be able to piously say inclusion of the penalty wouldn’t have made any difference—and we think they will have a valid point.
Are the WTO panel findings relevant? People with no skin in the game say no: Richard Aboulafia of the Teal Group, Michel Merluzeau of G2 Solutions, Jim McAleese of McAleese Assoc., all respected independent analysts, say no. So do we. At a panel a few months back, of five on the panel all five said no (including us and a consultant to Boeing). Loren Thompson, who was paid by Boeing to write a report about the illegal subsidies and the tanker competition, says yes. Boeing’s workforce and political backers say yes while EADS workers and political backers say no.
Be careful what you ask for
After winning the protest in the 2008 competition, Boeing and its supporters all but demanded the USAF base the new round on price rather than best value. With the USAF having chosen the KC-30 in 2008 on “more, more, more,” Boeing and Co. felt the life cycle costs—asserted to be 24% less than the KC-45—would lock in a win for Boeing this time. Northrop Grumman, which had not yet dropped out of Round 3, complained that such a competition wouldn’t unfairly disadvantage its tanker. When the USAF stuck to its guns, Northrop dropped out. And Boeing was hoisted on its own petard because with Northrop’s cost-and-profit basis (estimated by some to be as much as 15% of the 2008 bid price) now eliminated, EADS had a lot more pricing flexibility, more than enough in our estimation to offset the penalties of the WTO case even should the USAF take them into account. Take the 15% (or even 10%) off the $175m bid price and the WTO penalties are more than offset.
Boeing may well have been sunk by the best value approach again, but once Northrop was gone, Boeing suddenly was faced with bidding a price that might not allow enough room for a profit.
Doubtful? Recall that early on, executives began warning that they would not bid a price that wasn’t profitable or which was detrimental to shareholders. This came was recently as a February 2 Excellence Hour presentation by BCA CEO Jim Albaugh to employees.
What else affects the price?
There are a couple of other important factors that affect the cost of the Airbus and Boeing airplanes and therefore the price bid and these are:
These are all factors that have nothing to do with illegal subsidies and the advantage goes to EADS/Airbus.
Will there be another protest?
EADS says it won’t unless there is something especially egregious in the methods used, which to date it hasn’t seen. Boeing has obviously been laying the groundwork for a protest. But we certainly hope not. We’re tired of writing about the damn thing and the USAF needs a new airplane. Let’s get on with it.
When will the award be announced?
Expectations are Friday, Feb. 25, after the 4pm EST close of the stock market. It should be webcast on the Defense Department channel.