“Dewey defeats Truman” perfect prediction in KC-X tanker contest

Note: here is the link to the tanker transcript.

Podcast: Richard Aboulafia talks to Addison Schonland.

Richard Aboulafia of the Teal Group said it best: the upset Boeing win over EADS in the KC-X tanker contest is the “Dewey Defeats Truman” moment of this contest.

For those who don’t know this reference, see here.

Aboulafia predicted EADS would win. So did Michel Merluzeau of G2 Solutions in Kirkland (WA). And Loren Thompson, a paid Boeing consultant. We did, too.  So did Daniel Tsang of Aspire Aviation and even the Boeing shills in Europe did.

Boeing officials thought they were going to lose and so did its supporters in Congress.

Norm Dicks (D-Boeing/WA), a strong Boeing supporter, was prepared for the loss and was elated he was wrong.

Here is some good coverage of the surprise decision.

Seattle Times. Reaction, and how Boeing won.

Mobile Press-Register: EADS wants details before making decision on protest. This article contains disappointing comments from the political supporters of EADS.

Bloomberg: EADS loss threatens goal to diversify from commercial, increase US DOD revenue.

Politico: EADS senators slam Chicago politics.

Our take:

We won’t know in detail why Boeing won and EADS lost for some time, but to us there are obvious reasons.

  • First, let’s start with the basic fact that the competition this time was a price shoot-out. Northrop Grumman and EADS, which were still partnered at the time, objected that this put their airplane at a disadvantage to the smaller KC-767. These companies argued that the competition should be based on the “best value” that enabled Northrop to win the 2008 competition that was later overturned when the GAO found the USAF changed in midstream to best value without telling Boeing. NGC withdrew from the 2010 competition. EADS, after being asked by the USAF to compete, took the plunge alone but with the feeling at the time it was an uphill battle.
  • Boeing successfully argued in the public domain that its tanker used 24% less fuel than the EADS KC-45, hammering this message home for two years before EADS responded (Northrop had made a feeble response in 2008). EADS finally countered, conceding that Boeing had the advantage on training and ferry flights but argued it had the advantage on fuel delivery mission costs. Only the debrief will reveal who was right overall.
  • Boeing and EADS agreed that on MilCon (military construction costs), both airplanes would require expenditures. Only the debrief will reveal what the delta was between them.
  • Boeing’s shift to a lean 767 production line in Everett saves an estimated 20% in production costs compared with the line that had been in place since the 767 began production in the early 1980s. This is a huge savings, even when offset some by the normal increase in parts and labor.
  • The lower base price of the commercial 767 clearly was an advantage.

Even ignoring the WTO panel finding that Airbus received illegal subsidies for the A330-200, on which the KC-45 was based, and the withdrawal of Northrop and its reported 10%-15% mark up wasn’t enough to offset the final pricing offered by Boeing. The USAF said the difference was beyond the 1% threshold (but did not say by how much) that would have triggered the best value extra credit considerations that would have favored Airbus.

Based on these key factors, we don’t see a protest. We’ve had a perfect record so far in predicting these contests, however: we thought Boeing would win in 2008 and it didn’t; we thought Boeing would lose the protest and it didn’t; and we thought EADS would win this year and it didn’t.

But at least we’re in good company, as everyone else got it wrong, too.

EADS lost but won, too

EADS lost the tanker contract and with it the grand plan to build a US assembly plant for the A330 that would have reduced its exposure to the Euro and establish a US production footprint.

But the company won, as well. The Defense Department classified EADS as a qualified US prime contract, a huge step for future work. It was the absence of this qualification that required EADS to partner with Northrop in the first place.

EADS also surely won the gratitude of DOD for making the bid. After Northrop withdrew, the USAF was faced with a sole-source supplier situation without competition. This would have put it in an unfavorable position to get the best price and the best product. Having competition assured the best airplane offering and a competitive price. Not only is the DOD better off, so are the US taxpayers.

And EADS has a better airplane to offer future non-US customers.

Finally, though this will be well down the road, EADS might be positioned for a future KC contract.

47 Comments on ““Dewey defeats Truman” perfect prediction in KC-X tanker contest

  1. Now it’s time for Boeing to start delivering a “combat ready” tanker within the schedule set down and at a fixed price. If it cannot then the US tax payer will have been dudded yet again.

    Just look at the delays of Italy & Japan.

    • Please list for me the outstanding record that EADS has in their latest military projects. How are those A400M deliveries working out? The A330 MRTT deliveries to Australia are a HUGE success too aren’t they! Oh wait, that’s right, those are two years behind schedule and they just had a boom fall off into the ocean after an “incident”.

      Yeah that sure is right, EADS gets it’s right every single time. Take off the horse blinders. Both companies have not looked good the last decade. Pointing fingers just makes you look like a shill.

  2. Well, if it was Las Vegas, somebody would be investigating.
    But it is only the military. Any retired generals around this deal?

    André Arthur
    Quebec City
    Canada.

  3. Well said Scott! I agree with all your thoughts. I think the USAF/DoD got it right this time (it’s about time)! Hopefully there will not be a protest by EADS and the replacement/retirement of the KC-135 can begin.

  4. “This article contains disappointing comments from the political supporters of EADS”
    Sorry Scott but, out of interest, exactly what disappoints you in that article?

      • This is exactly what Dicks said himself happened…

        “This was a real victory of our congressional delegation,” U.S. Rep. Norm Dicks, D-Wash., said after dialing into a Seattle news conference. “This is, I think, our greatest victory in the history of the state. In particular, congressional allies successfully pushed the Pentagon to change its evaluation of life-cycle costs from 25 years to 40 years, greatly boosting the smaller Boeing tanker’s fuel savings, Dicks said.

        Add to that threats against American companies siding with EADS in their bid and the threats not to fund the tanker programme if EADS won…

        If you really want to see ‘bull’, wind the clock back 3 years and read the onslaught unleashed on the NG/EADS team following their win.

  5. “EADS also surely won the gratitude of DOD for making the bid.”

    Yes, because if EADS hadn’t been there to be used, no telling what the hard-working American company and the non-partisan Department of Defense would have come up with.

  6. Welcome to: THE UNITED STATES OF BOEING. THe USAF and BOEING are inseparate partners in the THE MILITARY-INDUSTRIAL COMPLEX that is bankrupting America with useless, redundant and overpriced defence systems like the KC-X. This is just further proof that America has the best Congress money can buy. We simply can not afford the $35 billion price tag which will undoubtedly grow by leaps and bounds as cost overruns mount. Maybe we will get lucky and the KC-X order will be trimmed down later, like the worthless F-22…..Mr President, are you listening????

    Daniel Sterling SAmple
    SPACE DESIGNS
    Los Angeles

    sample.daniel@gmail.com

  7. The contract awarded today is for the engineering and manufacturing development, the EMD phase, which is valued at over $3.5 billion. The overall program is valued at over 30 billion (dollars), with a final amount depending on the options exercised.

    http://www.defense.gov/transcripts/transcript.aspx?transcriptid=4776

    Total Evaluated Cost (TEP) for Boeing offer = TPP – Fuel Cost – MILCON Adjustment
    Back in September I did a crude analysis on the net present value (NPV) cost differential in fuel burn between the 767-200ER and A330-200. I estimated the mean fuel burn differential between the two aircraft to be roughly 2332 lbs per hour (13732 lbs per hour – 11400 lbs per hour); or some 20,5 percent greater fuel consumption per hour for the A332. Based on this data, I estimated that the Net Present Value (NPV) cost differential in fuel burn for a fleet of 179 KC-767s vs. 179 A330 MRTTs, is decreasing from $89,4 million in 2010 to $23,6 million in 2071.For simplicity reasons, I used the year 2040 as the mean indicator value for the entire 40 year life cycle cost evaluation and came up with a rough estimate of $1.88 billion (47 x40) in NPV cost differential in the fuel burn adjustment.

    http://leehamnews.wordpress.com/2010/09/17/kc-767-cost-advantage-over-kc-45/#comments

    Assuming that the actual NPV cost differential in the MILCON adjustment was around $600 million, I’m estimating that Boeing’s Total Proposed Price was around $32.5 billion. This means that the TEP would be roughly $30 billion. 101% of the lowest TEP (Boeing) = $30,3 billion; or the TEP for EADS offer > $300 million more than TEP for Boeing’s offer.

    The $3.5 billion contract signed yesterday was for the R&D of 4 EMD aircraft.

    Subtracting $3.5 billion from $32.5 billion = $29 billion

    $29 billion divided by the remaining 175 aircraft = 165.7 billion per aircraft.

    In Northrop’s statement on its no-bid decision, NG CEO Wes Bush disclosed that the final price Northrop would have offered on the first 68 KC-45 tankers was a unit flyaway cost of $184 million, including non-recurring development costs. The R&D for the first 4 EMD aircraft was had a contractual value of $1.5 billion, which means that the remaining 64 KC-45s would have a unit flyaway cost of $172 billion (in then year dollars); or $176 billion in 2011 dollar value. Unit flyaway costs for later batches would have been higher.

    This would seem to indicate that Boeing offered a unit flyaway cost (for 175 aircraft) some 6 percent lower than NG’s offer on the “first” 64 units. One should keep in mind, however, that last time around, the contract was not a fixed price contract and consequently, carried much less risk for the offerors.

    Finally, this would also seem to indicate that EADS didn’t “scupper profits” and “low balling” their bid in order to win, as was predicted by quite a few pundits.

    • Addendum: $29 billion divided by the remaining 175 aircraft = 165.7 million per aircraft.

    • Note:If Boeing’s TPP was “just” $30 billion, the unit flyaway cost would drop to $151,4 million.

      Also, just the cost to Boeing in developing the “green” KC-46A airframe could well be in excess of $1 billion, which is not unreasonable for a derivative. Add development cosrts for boom, pods (wing flutter?) and the other military spec requirements etc, and this is, of course, assuming that nothing goes seriously wrong (unk-unks) with the development of the KC-46A; and based on Boeing’s recent development record, military as well as civilian, this is perhaps a far too optimistic assumption to make.

  8. Great coverage. What is Leeham.net going to do without the Tanker controversy? Assuming this is over, of course. If not, then this story has a life like “Favre Retires.”

  9. … Sigh, I’m so relieved ! I was already fearing, Airbus would manage to win that contest and would have to deliver 179 aircraft to a nearly bankrupt US government.
    Congratulations to the great winner Boeing ! I hope you will never rue the day you won this competition …

  10. I’m a Democrat and a Boeing supporter, but the comments by the Washington congressional delegation (Murray, Cantwell, Dicks, etc.) taking credit for Boeing’s win were breathtakingly stupid. If their political pressure actually influenced the decision, EADS has every right to protest. I’d like to think they had no real influence and are just puffing themselves up for their base. Either way, they look pretty bad.

  11. Trebuchet :I’m a Democrat and a Boeing supporter, but the comments by the Washington congressional delegation (Murray, Cantwell, Dicks, etc.) taking credit for Boeing’s win were breathtakingly stupid. If their political pressure actually influenced the decision, EADS has every right to protest. I’d like to think they had no real influence and are just puffing themselves up for their base. Either way, they look pretty bad.

    I agee.

    • Murray ran successfully for reelection last year and tanker was a key point; Cantwell is up for reelection next year and took over the lead as soon as Murray was reelected. Inslee is expected to declare shortly for the governor’s race for what is widely anticipated to be an open seat in 2012.

      • Please don’t take my agreement to mean I am also a democrat. I am a republican, or more precisely a tea party supporter, as well as a Boeing supporter.

        Oh course, I don’t live in Washigton State, either, I live in Taxas.

    • . .I’m a Democrat and a Boeing supporter, but the comments by the Washington congressional delegation (Murray, Cantwell, Dicks, etc.) taking credit for Boeing’s win were breathtakingly stupid. . .

      ++++

      welcome to the Soviet socialist state of washington. Youve just witnessed the cream of the crop. The problem is the ONLY thing they know is to raise taxes by whatever method to support whatever.

      In this state, the Supremes believed that Unions have better first amendment rights than members- or citizens.

      And we have/had such luminaries as franklin raines to guide our finances.

      Between them, they never met a tax they didn’t like….

      As to their help – the wasl math seems to count 20K to 50 K jobs new or saved by the tanker depending on time of day.

  12. Analysis: EADS unlikely to protest tanker defeat

    http://www.reuters.com/article/2011/02/25/us-usa-tanker-eads-analysis-idUSTRE71O4XP20110225

    And in exclusive comments to Reuters, Airbus Chief Executive Tom Enders looked beyond tankers to stress future business.

    “We have given our competitor a tough fight and forced them to offer a very low price. For Boeing, losing this would have been a disaster, for us it is only a lost business opportunity,” Enders said in an interview by email

  13. “Finally, though this will be well down the road, EADS might be positioned for a future KC contract.”

    What does that exactly mean? It’s not as if the US won’t just buy American again if there was ever another Boeing v. EADS tanker war.

  14. I mentioned previously that an EADS win had the potential to be a poison chalice as Boeing would have had resources freed up for 797 and whatever they decide to do with 777.
    The situation has in my view completely reversed itself in that Boeing now have to apply those resources to the KC46A perhaps to the cost of new civil projects for a while.

  15. leehamnet :
    We won’t mind a rest, Ken….

    You can forget about the WTO as well. Want mean a thing now; at least from Airbus’ point of view. They will ask for RLI for their next aircraft (“A360”) and just ignore any “noise” coming from Boeing :-).

  16. In common with many who were suprised at the choice, I cannot help but wonder that the US with its forced & voluntary declining worldwide role & its consequence on USAF transport & tanker operations means that in the longer term the taxpayer might well benifit at the AF cost.

    A repeat of a scenario reminisent of the RAF from the fifties to the eighties as the UK signed back territories & countries in ist continued colonial withdrawl process exiting the reminants of its empire, a process during which the RAF still strived to keep as many IFR & Transport Command squadrons operational. When the cuts finally came they were too deep, witness the Falklands war where range was the RAF’s achillies heel.

    Consider in such a scenario today which knowing current published tanker specifications the EADS product would be the only choice with the legs to complete the mission.

  17. Phil :In common with many who were suprised at the choice, I cannot help but wonder that the US with its forced & voluntary declining worldwide role & its consequence on USAF transport & tanker operations means that in the longer term the taxpayer might well benifit at the AF cost.
    A repeat of a scenario reminisent of the RAF from the fifties to the eighties as the UK signed back territories & countries in ist continued colonial withdrawl process exiting the reminants of its empire, a process during which the RAF still strived to keep as many IFR & Transport Command squadrons operational. When the cuts finally came they were too deep, witness the Falklands war where range was the RAF’s achillies heel.
    Consider in such a scenario today which knowing current published tanker specifications the EADS product would be the only choice with the legs to complete the mission.

    Well, the US has no empire to defend. We do have territories, such as Guam, but that’s about it. When it comes down to fighting a war, the US has always preferred to fight it in their country, or area of influence. During WWII, there were a few incidents like the German U-Boats sinking ships just off the US east and gulf coasts, a few Japanese submarines that actually shelled the US west coast, and of course the few Japanese ballons that managed to dift from Japan to the western states (including killing a family in Oregon in 1943) and a few sips sabataged in New York Harbor. But that is about it.

    The worst cases of attacks on US soil came on 9/11/01 and 12/7/41. But in both those cases we took the fight to their door step.

    Somehow, I think the USAF knows what it needs, what it can afford, and which airplanes will do the best intended job they want it to.

  18. My illustratiom merely emphasised the weakness that would exist should the US be inclined to broaden its defence horizon, with the continued world enthusiasem not to support such ventures the US unfortunately becomes more isolated & could well be caught short.

    However as you clearly identify the USAF condidered this aspect, which still bodes the question why, alas only time will tell.

    By the way thank you for your quite irrelevant potted history of external attacks on the US.

  19. As an American, I am happy to see that our tax dollars will mainly stay within the US, even though Boeing outsources large pieces of the 767 outside the US. As a taxpayer I am also happy that this is a fixed price contract. I just hope the Government PCOs (Procuring Contracting Officers) hold Boeing’s feet to the fire and don’t allow Boeing to Change Order this contract to get whole. It will be very interesting to follow Boeing’s progress on this contract and see how they maintain cost and schedule. If history is any indication of the future, Boeing and their shareholders are in for a rollercoaster ride. What is the saying “Good news you won, bad news is you won now you have to deliver what you signed up for”. I am also glad that EADS decided to stay in the competition, even thought the RFP was stacked against them. Boeing’s political army did its job. Let’s hope for the American defense workers, Europe does not take reprisals that will cost American jobs.

    • If Boeing executes this program half as well as it’s P-8A program, then the American taxpayer and warfighter will have been the ultimate winners.

      Congratulations to Boeing and its employees, especially in Washington state. I’m sure everyone there is ecstatic. They’ve earned it.

  20. Well, I think we all have beat this horse to death. The current bottom line is Boeing won and EADS lost. So the only questions remaining is will EADS appeal to the GAO, and if they do will they be successful?

    Assuming the first is no, then the next question will never be asked. But if the first is yes, than the answer to the second is 0%.

  21. I do wonder if EADS might bring up the question of USAF disclosing its and NG pricing during the last round’s feedback to Boeing, if they do protest.

  22. UKair :I do wonder if EADS might bring up the question of USAF disclosing its and NG pricing during the last round’s feedback to Boeing, if they do protest.

    They could, but it is a non-issue. When Boeing lost the 2008 compitition to NG/EADS, they asked the USAF for a debriefing. The debriefing is intended to point out to the loosing bidder how and why they lost. That includes pricing information, which after the award becomes public record, anyway (unless it is a “black” project). NG’s adjusted bid was about $175M per KC-30, Boeing’s adjusted bid was about $175.05M, or some $50,000 more than NG. That was where the USAF screwed up, well one area they screwed up, anyway. The USAF adjusted Boeing’s submitted prive as they said they did not believe that Boeing could offer the KC-767AT at that price. The USAF also did not consider MilCon or LCC costs for either bid, and played games with the IFARA scoring.

    Boeing getting NG pricing data, from the USAF is perfectly legal. If EADS requests a debriefing, they will get Boeing’s pricing, and adjusted pricing information for 2011.

    I am sure the USAF is standing by with a prepared power point presentation.

  23. The contract fr the first 18 KC-46s, including 4 flight test aircraft is valued at $3.5B. Of that about $1B is for the 4 flight test aircraft, including costs to certify it with the FAA, and reconfiguering them to production standards after testing. The 14 block 1 aircraft will costs about $178.5M each, and costs decrease rapidly beginning with block 2. This is the same contract that would have been handed to EADS, had they won the contract.

    • It will be interesting to see how much the price reduced on the second competition compared with the first.

    • “The contract fr the first 18 KC-46s, including 4 flight test aircraft is valued at $3.5B.”

      As I remember costs for A320 NEO are about $1 Billion just for a new engine option. Boeing has to build a new aircraft version.

      I also think EADS is going to protest just to have a closer look at Boeing’s data. E.g. how Boeing adjusted the price after the IFARA figures were sent to the wrong competitor.

      The competition didn’t assessed all mayor requirements. The contest was labeled as tanker replacement but within the RFP a cargo and troop movement requirement was set up but nowhere assessed. What about federal law?

  24. FF :It will be interesting to see how much the price reduced on the second competition compared with the first.

    I guess you didn’t read this from me;

    ” NG’s adjusted bid was about $175M per KC-30, Boeing’s adjusted bid was about $175.05M, or some $50,000 more than NG.”

    MHalblaub :“The contract fr the first 18 KC-46s, including 4 flight test aircraft is valued at $3.5B.”
    As I remember costs for A320 NEO are about $1 Billion just for a new engine option. Boeing has to build a new aircraft version.
    I also think EADS is going to protest just to have a closer look at Boeing’s data. E.g. how Boeing adjusted the price after the IFARA figures were sent to the wrong competitor.
    The competition didn’t assessed all mayor requirements. The contest was labeled as tanker replacement but within the RFP a cargo and troop movement requirement was set up but nowhere assessed. What about federal law?

    First, both Boeing and EADS had a chance to adjust their bid pricing in the FPR, which came AFTER the IFARA screw-up.

    Second, have you even read the SRD/RFP? It clearly states the refueling requirements as a priority over cargo requirements. But there are mandatory cargo requirements, and they were assessed. Here is the RFP, enjoy reading it before you make such statements.

    https://www.fbo.gov/download/253/2538827bd21adb15bed0d01bab0f2dde/Sect_J,_Atch_1_-_SRD_24_Feb_10.pdf

    Pay perticular attention to sections 2 and 3.

    • Airlift is a mandatory requirement, SRD “3.2 Airlift”. Where Air Force did considered the “Weapon Systems Acquisition Reform Act of 2009” (6 January 2009)? Especially the section “Consideration of trade-offs among cost, schedule, and performance objectives in Department of Defense acquisition programs”.

      Air Force asked for airlift performance without considering cost and performance related to this task. This capability is nowhere assessed within your link to the System Requirements Document (24 February 2010). I found no rule how to assess the competing aircraft within the SRD. Just the average of 8 take-offs for one mission are described there. Did I miss the IFARA score within the SRD?

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