EADS KC-X briefing: No protest

Here is a three page PDF of the slides from the Press Conference: EADS-NA Press Briefing Slides 3-04-11.

EADS today confirmed widely reported stories that it will not protest the USAF contract award of the KC-X tanker to Boeing.

Ralph Crosby, Chairman, and Sean O’Keefe, CEO of EADS North America present.

The following are all paraphrased quotations, not word-for-word direct quotes.

SOK: DOD altered from a modernization of tanker program decided to merely replace it. We competed knowing all KC-45 capabilities wouldn’t be considered. We understood what the parameters were. DOD said what it said it would do.

DOD straight-up on how it would evaluate proposal and did not deviate from it. We did not seek to change those rules.

We put our best effort into this.

RC: We decided not to protest. Boeing won this on price. We didn’t get a lot of questions answered from brief debrief.

In the end, we don’t believe the interests of the warfighter, the taxpayer or our company would be best served by a protest. It’s time to put the best interests of the warfighter first, so we are stepping aside.

Our analysis is that our financial analysis had KC-45 ahead of tanker; Boeing beat on price: Total evaluated, present value price for Boeing: $20.6bn, EADS: $22bn, after IFARA and fuel burn, or nearly 10%. Difference had to be within 1% for extra credit of the KC-45 to kick in. This equals $115m per airplane, present value, for Boeing, $122.9m per plane for EADS.

Boeing’s price was lower than we would have gone.

Total differential between fuel burn was $800m, far from $35bn tossed around leading up to this decision.

EADS saved taxpayer $16bn with the competition.

We don’t know what the details of the Boeing offering are. The first flight of their aircraft will be in 2015. It’s hard for me to rationalize how Boeing can have 18 aircraft operational in 2017.

We do know that risk has been allocated exclusively to the contractor.

There are no grounds for a protest.

I offer my congratulations to our competitor. We stand ready to stand in with a plane if they falter.

Under this acquisition methodology we (the USA) are willing to accept a lesser product for a lower price.

What our competitor offered might be viewed to keep Airbus out of the US.

SOK: This starts another chapter of EADS North America. Future of EADS North America is not hinged on this program alone. In this particular case, this particular opportunity looking to in-source work in the US aerospace at a time Boeing, like EADS, is a global company are outsourcing. Net-net, US jobs are about the same. We would have created a second aerospace cluster.

We have proved that we are competitive for any contract of any size.

It was…when you get right down to it, based on price.

SOK: We bid $3.5bn for EMD and they bid $4.4bn to produce four aircraft that meet the operational characteristics for the demonstrator aircraft.

There is no indication that EADS Congressional supporters will attempt to overturn this.

RC: IFARA disclosure had no affect.

We would have inducted the first aircraft for a cargo door this spring. We would have begun validation testing in 2013, two years or more ahead of Boeing. Our risk compared to what we had offered was minimal.

32 Comments on “EADS KC-X briefing: No protest

  1. “Under this acquisition methodology we (the USA) are willing to accept a lesser product for a lower price.”

    First they say how fair and up front the DOD was on the requirements and selection process, then they say the winner is a “lesser product”?

    EADS knew from the day the submitted their bid this was all about price as long as all the mandatory reqirements were met. Their airplane was just to big and just to expensive.

    • i think it should be read as “less capable”, not less worthy of winning this price shootout.
      and in the end it is what the US did – buy the minimum acceptable rather than the best.

      • I guess EADS earns more money today with A330 then they expected back in 2008 due to 787 delays. Airbus wants to raise production to 10 aircraft a month in 2013. Maybe with another line in Alabama.

        On the other side Boeing wants to raise capacity up to 2 aircraft a month and is looking for intermediate costumers to sell some 767 (Maybe UPS – 767-400F?) to keep the line busy until tanker production starts.

        An interim solution could be to rent some tankers from Air Tanker Ltd.

        In case of a tanker shortage (KC-135 problems) EADS won’t be able to provide an aircraft fulfilling all requirements set up for contest won by Boeing today. But EADS can offer a tanker with airlift capacity. The tanker will probably lack network capability and other special features. I also depends on the price to get some civil A330 from production line.

        • Thing is, Boeing has been keeping the 767 on life support since around 2003 or so. Back then, everybodys favourite Boeing Bad Boy (Stonecipher) was trying to put pressure on the Pentagon by stating that the 767 line would have to be shut down by 2004 or 2005 and it would cost that much more to restart it, once the 767 tanker contract were signed.

  2. I’ll put a few dollars down that Boeing will falter with delivery.

    • If a U.S. citizen, you (derivatively) actually might end up doing so.

  3. KC135TopBoom :
    EADS knew from the day the submitted their bid this was all about price as long as all the mandatory reqirements were met. Their airplane was just to big and just to expensive.

    When a procurement is ‘lowest compliant bidder’ based, you know that you will get the cheapest price (and in many case this is good) but unfortunately you will not get the best value (and for major equipment this is generally a costly mistake).

  4. Scott – Have you come up with copies of Crosby’s charts yet? I can’t find anywhere!

  5. I am glad this saga is over. I believe it was the right decision by EADS. Clearly they achieved the minimum they set out to achieve, push Boeing on price. I found this quote interesting:
    “It was about a competitor that drove to what I consider to be, what’s the right word, an extremely low-ball offer in order to achieve their strategic objectives.”

    Well, for Boeing the work starts now and they need to deliver. Hope more interesting topics will be discussed on this site from now on! 🙂

    • Another round would have, in my understanding, brought on “Total Political War” from the US side of interested factions. EADS nonprotest makes sense in a lot of ways.

      Larry Niven, paraphrased: Don’t stand with people that shoot at each other 😉
      Another one: Don’t get involved in family warfare.

  6. EADS’ post-concession spin is evolving as: B bid to lose to keep EADS out, the AF ran the competition fairly but they stupidly chose to use price not performance as the prime criterion and therefore got a less capable plane, B can’t deliver on time and EADS can, and EADS’ congressional supporters will “ monitor” B’s performance (read, they will obstruct to create circumstances where B will fail.

    1. Did B bid to lose money? We will never know because, as has been the case on this blog for years, anyone can make the numbers say what they want. That said, I think the higher likelihood is that B will do very well on this contract because the 767 is not new, B have been building them for years and making lots of money, Albaugh said they would not bid to lose money, and they have a new lean production line and real prospects of new orders from FedX for the 764F, if Flightblogger is to be believed.

    MOST important, I suspect that B and their unions made a deal re wages etc. so THEY (remember the unions wanted this contract as much as B) could bid very low but not at a loss. Seattlepi quotes Tom Wrobowseki as saying the low bid arose from a “flexible union work force” which worked “hand in hand” with B to create the new line. See http://blog.seattlepi.com/aerospace/20112/03/04/eads-north-america-won. Scott may have info on this.

    2. Was the A330 the better plane? Today, according to KC-135TopB, -135Rs are flying 700 hours/year and doing more re-fueling than ever, but still regularly returning to base with undelivered fuel. So, why didn’t the AF buy an even smaller plane than the KC-46A, like another narrow body? Who knows in the byzantine world in which this contract was awarded. Maybe, in the next round they will go for a smaller plane. In any case, it is clear that a very good case can be made that the AF did not need the A330’s greater capabilities, notwithstanding Gen. Licht’s claims that EADS won the first go round because their tanker was more capable than the 767. In fact, that reality probably explains why the AF went to price shoot out for round 2.

    3. Can B deliver on time? B deserves the highest scorn for the way in which they have handled the 787. But they have executed very well on all of their older programs (737, 747, 767, and 777), including in particular the new variants of the 777F and 747-8 (the latter’s delays are within acceptable range and nothing like those of the 787). This is the highly successful world in which B will build the KC-46A on the 767 line.

    Also, B have worked hard to re-build their relationship with DOD since the K767 lease fiasco, and the unions have worked hard to overcome the very negative fall out from customers resulting from their strike. Among other things, together they have delivered 100s F-18s on time, on spec, at very low prices ($48-65M +/-); have proven with the P-8 that they can convert a civil plane to a military one and save lots of money by building it on the civil line; have finally delivered the Italian and Japanese tankers, which means they have solved a lot of problems that would otherwise have plagued the KC-46A; and in recent years have been on time with all their deliveries of legacy planes except for delays from the strike. EADS cannot say the same thing, particularly re the Australian tankers which are years late.

    4. Will the “good ol’ boys” in Congress sabatoge the KC-46A? I doubt they will try, but they and other members should scrutinize B’s efforts carefully and in good faith to see that they perform their contract obligations to the penny, give or take a million or two here and there. Wash’s Cong Del (to say nothing of the AF) should be able to protect B from bad faith efforts intended to sabatoge their on-time performance made under the guise of budget scrutiny.

    • Couple of items:
      * How current is Mr TopBoom ?
      * There is currently no OtS platform available below B767/A330 that has
      enough delta between MEW and MTOW, A310/B757 are out of production, A321 is below 50t. The brilliance of the A330 is that minimal changes derive it from the civil version. Boeing had to synthesise a platform from various classtype parts ( and new avionics and new engines and …
      keeping that in mind:
      * will Boeing be able to deliver in a timely fashion in view of endless/recurring delays in the last tanker projects for essentially “nothing new for Boeing, its our core competence” ?
      * question on the side: isn’t a bunch of LCD screens a bit of cosmetic curlicue on a plane that is still operated the steam gauge, pushrod and wire way?

    • MOST important, I suspect that B and their unions made a deal re wages etc. so THEY (remember the unions wanted this contract as much as B) could bid very low but not at a loss. Seattlepi quotes Tom Wrobowseki as saying the low bid arose from a “flexible union work force” which worked “hand in hand” with B to create the new line. See http://blog.seattlepi.com/aerospace/20112/03/04/eads-north-america-won. Scott may have info on this.

      IAM and Boeing are in the third year of a four year contract; no economic concessions were undertaken as far as we know. However, IAM 751 is pretty will to do things on the floor to improve efficiency, depending on circumstances. Shifting to a Lean Line is willingness (it does, after all, mean fewer jobs, all things being equal) and there may have been other things. But lower wages? Not a chance, not in mid-contract.

      • Scott – My thought re unionized worker costs to B was related more to going forward for the full life of this contract, which starting now stretches out about 16 years until delivery of the last KC-46A. I was just wondering if B and its unions have some kind of an understanding, perhaps unique to this program, about managing these costs so B makes money, including an unspoken agreement to limit the unions’ strike remedies,

        In addition (and this may be the worst form of wishful thinking), I was also wondering whether B and its unions have been driven closer together by this process of cooperating to get this contract. Perhaps this experience will re-orient them in future from being automatically combative to being more holistic and seeing the necessity that their disputes be resolved win/win not win/lose.

        • A mechanism called “side letters” is permitted during a contract to address specific circumstances but we’re not aware of one with respect to the tanker (one may exist, but we’re not aware of it). Relationships between Boeing and IAM 751 and SPEEA have improved since Jim Albaugh become BCA CEO; this is not to suggest either side has what it wants going into the 2012 contract negotiations, because they don’t, but it is our outsider’s view that all parties are off the low points of 2008 and 2009.

          There is no question that the tanker contest brought the two adversaries (751 and Boeing) closer together, but will this last now that the dastardly Airbus has been vanquished? Only time will tell. IAM 751’s blog has some commentary: http://iam751.wordpress.com/. We’ll shoot a note over to 751 on your question and see if they want to weigh in, so check back Monday or Tuesday to see.

  7. B vs A is a fascinating study in duels in duopoly ; this tanker competition is not a war but a battle in a war. There are other fronts opening up /ongoing.yes, this battle has come to a close.
    First , it is a sound decision on the part of EADS to let go and not protest- they rightly realized that in the price driven competition, B won hands down; but it would have been better for EADS just to leave it at that ,without those comments. Great champions have grace when they lose ( this comment applies to B as well).
    It is fine for A backers to talk of a bigger and better plane; if that is what AF wanted. Right or wrong, AF went in for a cost effective solution ;I thought NG got it right, when they dropped out after seeing the terms of the competition.EADS rightly came in and got the minimum they wanted, forcing B to give away most of the margins ;in that way, this competition has been a win win for all-AF got a great deal from the pricing – that is why market works best with open competition ; B kept EADS out of US manufacturing (atleast for the near term) and ofcourse EADS , making B give up margins ,while developing relationship with the biggest military customer in the world, a worthwhile investment for the future. The tax payer got a good deal as was the war fighter; this talk of them (EADS) getting an inferior plane et al is partisan-the key requirements have been met by both the tenders.
    one more thing on EADS talking about the value they brought to the table ,in terms of lowering the price-which is true. But what about AM 400? if it was a competition, would EADS get all those extra recovery of cost overruns?I am sure, the tax payers in Europe can say a few things on this one-which may not go down well with EADS.
    So, let us keep the emotions out of this,respect the outcome and move on to more interesting battles-the narrow body ,787 vs 350 and 777 vs-1000 and ofcourse the WTO subsidy issue.
    Good show Boeing, you got it right, the third time. Good show EADS, you will win future competition from DOD. After all it is better to slug it out between the two of you ,instead of having a third or fourth player.It works well overall for both the firms.

    • A400M cost:
      interesting question.
      up front:
      RLI has prooven to be a good bet into the future on a regular basis anyway.
      ( much better than tax gifts and other traditional measures of subsidy )

      My understanding is that EADS/airbus absorbing part of the cost overrun is
      a gain for EU tax payers already. ( Looking at V-22,F-22,F-35 )
      If we look over to the civil side and compare to recent projects (B777, A380, B787) delays compounded with cost overuns is at least in middle field. i.e. the 777 had 100% excess cost but was on time, A380 is probably on par and the 787 is
      off at the low end.

      finally: you won’t find an intense and emotional discussions, where informational bits are regularly overstated and presented in strong language, in a european setting.
      This painting in strong Blacks and Whites is a very US way of looking at things.
      It makes things simple, but as Einstein stated : don’t make the model simpler than is allowable.

  8. John Fenech :
    I’ll put a few dollars down that Boeing will falter with delivery.

    I’ll take that bet. How much? NY steakhouse of the winners choosing?

  9. My take on the EADS data – assuming it’s correct – is that Boeing didn’t try particularly hard on pricing for the first competition, but pulled out the stops on the second. EADS however made little effort in further reducing their prices for the second competition, bearing in mind Northrup no longer needed feeding.

    • FF, you are correct. The post-award analysis at the time indicated that Scott Carson, then-CEO of BCA, wouldn’t give Boeing Defense (then IDS) a really good price on the 767. BCA and IDS each had their own profit margins to protect. Going into this round, Boeing’s Elizabeth Lund (at the time the head of the 767 program and now the head of the 747 program) told reporters in a pre-Farnborough press briefing that this time, there was a “one Boeing” profit margin approach. In other words, if The Boeing Co. made a profit, that was the goal, as opposed to BCA and IDS each having a profit margin goal (at least on the tanker).

      This is part of what you hear when execs refer to the “One Boeing” approach.

  10. Hey everyone — I do communications for Machinists Union District Lodge 751 in Seattle, and Scott asked me to respond to some of the questions surrounding the unions’ role in helping Boeing win the KC-X contract, particularly in respect to whether there have been any unannounced deals.

    The short answer is “no.” There have been absolutely no future wage concessions made by union Machinists at Boeing in regards to the KC-46A program, nor any secret “no-strike” agreements, like Christopher Dye suggests.

    The longer answer is that wage concessions by the Machinists Union really wouldn’t have helped Boeing’s tanker bid that much anyway. Total labor costs – meaning both wages and benefits – account for LESS THAN FIVE PERCENT of Boeing’s cost for building each airplane. Given that, every single Boeing employee involved in 767 production, from Jim McNerney on down, could have taken a 20-percent cut in pay and benefits and it would have meant a savings of less than 1 percent.

    Instead, we worked with Boeing on something far more meaningful. After 2008, Boeing management decided to lean out 767 production, which hadn’t been updated since the 1980s. The cost savings was significant – we can’t say how significant, because that’s Boeing proprietary information – but based on what we know, the resulting efficiencies were a major factor in Boeing being able to submit a lower bid than EADS while still turning a profit.

    That’s what Tom Wroblewski was talking about when he said that Boeing’s flexible union workforce had worked hand in hand with management to create the new line.
    Our members had input into this production overhaul during the planning stage (as did our union brothers and sisters at SPEEA), and our members are now instituting on-the-ground changes to make the new system work.

    But while Christopher was flat wrong in speculating there was some sort of backroom deal on future wages or strikes, we too are hoping he’s right in his wishful thinking. We’ve long argued that Boeing should work with us to achieve real-world cost savings through productivity improvements, rather than go to war with us over benefits, pay and outsourcing. That’s exactly what happened with KC-X and it was a win/win. We hope people in Chicago noticed, and that this could set a foundation for the future.

    Based on the things Jim McNerney and Jim Albaugh have said in public lately, we’re hopeful that could happen. However, the key will be whether the company’s actions match the tone of the executives’ words. We’ll just have to see how that develops.

    Hope that clarifies.

    • As we have written here before, Boeing publicly stated the Lean line for the 767 cuts 20% of the production costs; The Everett Herald, also citing Boeing, said the Lean line cuts 20%-30% of the production costs. Add back in the natural cost increases from the supply chain and labor, but the Lean line cost savings in substantial–and Boeing said last year (prior to the bid), this would be factored into the new KC-X pricing.

  11. By the way – can I get in on Joanne’s bet with John French? Based on how our members delivered for the Navy with the P-8 program (they delivered prototypes that have met all requirements and did it on time and within budget), I’m confident they’ll do the same for the Air Force with KC-46.

    Let’s just make it dinner at a Seattle salmon house – preferably during the Copper River season.

    • Your members were also working on the Australian Wedgetail, the Turkish Peace Eagle, and the Italian and Japanese tankers though? 😉

      Should be an interesting bet at least.

  12. Has anyone else noticed a couple of weird things with this award? First, according to EADS’s press conference, Boeing dropped their price a jaw dropping 24% from 2008 (btw Boeing claimed lean cut final assembly costs by 20%, not the whole aircraft, so 20% of 5% of total cost is 1% overall). Secondly, when has a company won and then still kept its configuration a secret? What is up with that? Did they bid the Frankentanker again and are embarrassed to admit it?

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