Leeham News and Analysis
There's more to real news than a news release.
Leeham News and Analysis
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Boeing’s Redacted Protest on Tanker
Here’s Boeing’s Tanker Protest filed with the Government Accountability Office over the Air Force award of the KC-45A tanker contract to Northrop Grumman. It’s an executive summary and there’s a lot that’s not in it, but it’s the closest thing the general public will get to reading the file.
Leeham.net updated/Looks at Tanker
Our corporate website, Leeham.net, has been updated with an in-depth look at the Boeing protest of the KC-30 tanker award; the surprise doubling of the Northrop Grumman jobs for the KC-30; and a Wall Street Journal story looking at the reasons for the Boeing protest.
Why Boeing protested tanker award
Because we were traveling this week, we’re a little behind on these sorts of things. Boeing’s press releases concerning the tanker protest don’t do justice to their reasoning. James Wallace of The Seattle Post-Intelligencer posted an audio of the 64 minute conference call in which Boeing executives explain why they protested. You may listen to this audio here.
Podcasts on the tanker and Southwest Airlines
Here’s an 11 minute podcast on the Boeing protest of the tanker award to Northrop Grumman.
Here’s an 8 minute podcast on the latest travails of Southwest Airlines and what might this mean.
Northrop’s job figures
As we noted Tuesday, Northrop issued a press release saying that its KC-30 program will produce 48,000 new jobs. This compares with the 44,000 jobs Boeing claims for its KC-767AT.
We find something really odd here. Setting aside for the moment that Northrop for more than a year claimed its tanker would produce 25,000 and accused Boeing of grossly inflating its figure, and setting aside for the moment the methodology described in the press release, here’s the deal:
The KC-30 has only 60% US content by value vs. the 85% claimed by Boeing (Northrop’s analysis of the KC-767 US content is 69% but that’s neither here nor there for purposes of this discussion). Northrop now claims its airplane, with less US content than the KC-767 (using either the Boeing or Northrop claim of content for the KC-767, BTW) will produce more jobs than Boeing claims. (Boeing also has previously said its number was conservative.)
Considering that one key message of the political battle is the “exporting” of US jobs, Northrop’s new jobs claim comes at an interesting time and with an interesting number despite its tanker’s lower US content.
The Politico, a website that follows all things in the political arena, reports that Northrop and EAD lobbyists are focusing on the jobs that they assert will be created by the KC-30 program.
The timing and new number certainly have the appearances of oddity and desperation.
Loren Thompson’s report of Boeing protest
Lexington Institute’s Loren Thompson provides a report of why Boeing protested the tanker award to Northrop.
Until we get through with our travels, this will have to suffice for our readers. We plan a full report Tuesday on our Corporate Website with our bi-weekly update.
First thoughts on Boeing protest
There’s not much to say at this juncture; Boeing says the tanker process was flawed; the Air Force and Northrop say it wasn’t. Boeing’s statements over the last couple of days generally outline its grievances, so we won’t repeat them here.
One thing we can say: the Democratic response, and that of some labor leaders, blaming Sen. John McCain for this is, we think, out of place (and we’re no supporter of McCain in his presidential bid–on the GOP side we actually liked Ron Paul). McCain stopped the 2001 tanker award because he found evidence the Air Force and Boeing acted illegally. Two Boeing executives went to jail over this deal, and Phil Condit resigned as CEO. Political posturing against McCain over this is unfair.
Second thoughts:
We’ve previously gone on record as thinking the best solution for the Air Force all along was a split buy between Boeing and Northrop. In many ways, the two airplanes can accomplish different missions. We still think so. The Congress should double any allocation to double the production rate (which makes more sense in any case). Building just 12-18 tankers a year over 10-15 years to replace airplanes that are 45 years old is too skimpy. Boeing didn’t like the idea of a split buy before. But we still think this is the best solution for the war fighter.
Buzz about Boeing protest
Washington and a major aviation conference is a-buzz with expectations that Boeing will file a protest over the USAF tanker award to Northrop Grumman, perhaps as early as today.
Boeing was debriefed Friday and over the weekend and today issued statements that appear to lay the groundwork for a protest. Boeing said the competition was much closer than had been represented in the press and that it had questions about the Air Force process. Northrop Grumman was debriefed today and issued a statement as well, supporting the press reports that its KC-30 was superior to the KC-767.
Stay tuned.
Boeing’s Golden Opportunity
Boeing has a golden opportunity as it ponders whether to protest the KC-45A tanker award to Northrop Grumman.
By forgoing a protest, Boeing can adopt a statesman-like posture for the war fighter and relieve the engineering pressure that has been and would be associated with moving forward on the KC-767.
Boeing previously acknowledged that the company diverted engineers from the 747-8, 737 and various defense programs to resolving the 787 issues. With a new delay looming, these resources and any production resources that would have been assigned to the KC-767 are better served going toward the 787 and 747 programs.
In fact, consider what’s on the plate of Boeing Commercial Aircraft, which also would have prime responsibility for the KC-767 (which is based on the commercial 767):
787-3 (some work already suspended)
787-8
787-9
787-10 (status unclear)
777F
747-8F
747-8I
[737RS] and [777RS]
Despite the stated value of the tanker program, $35 billion, over 10-15 years, the loss of the contract to Boeing truly doesn’t amount to all that much. As we pointed out in an analysis after the award was announced, the net retained revenue by the winning airframer is far less than the stated value of the total contract because of the money skimmed right off the top to pay suppliers. In the case of Airbus, a European analyst estimates Airbus will only see 40% of the revenue after all suppliers are paid. (We were somewhat higher in our estimate. Boeing, with a slightly higher US content for the KC-767 than that of the Northrop/Airbus-based KC-30, would be expected to have a higher percentage retained revenue.)
But over the next five years, during the ramp-up, Boeing’s defense unit president James Albaugh told an analyst conference Boeing would have seen only a 1% increase in revenues. On $66 billion recorded last year, this is $660 million—over five years—or $132 million a year, depending on whether Albaugh was referring to an aggregate of five years (of $132 million annually) or 1% annually in each of the five years ($660 million a year). Either way, this isn’t much. The $132 million is almost a rounding error on revenues of $66 billion and while $660 million isn’t quite a rounding error, it’s pretty close.
Boeing has also said no jobs will be lost as a result of losing the contract. Demand is so great that suppliers can’t keep up with the commercial aviation production and Boeing is considering ramping up 737 production well beyond the 30 per month currently.
Boeing needs to get the 787 sorted out. This is the flagship. The tanker, at 12, 15 or 18 airplanes a year, is an after-thought.
Boeing should go for the gold with the 787, and its other programs as the bread-and-butter. Once these are sorted out, there are the issues of replacing the 777 and 737. By the time these programs are decided, then Boeing can compete for the KC-Y program.
Boeing shouldn’t miss these opportunities to pursue a protest.
Great analysis of impact of tanker loss
The Puget Sound Business Journal in Seattle has a superb report today on the impact to Boeing (with focus on Puget Sound) of the loss of the tanker contract.
Reporter Steve Wilhelm surveys local Boeing suppliers who work on the 767 program and finds out that, despite to histrionics and hand-wringing by the politicians, the impact won’t be all that much. (Boeing, notably, has said that losing the tanker contract won’t matter, either from a financial perspective.)
This story is worth the read. Not that it will quell the crying from the politicians, and in partiular Sen. Patty Murray and US Rep Norm Dicks. They should be embarrassed.
