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.

Weekend 787 update

Among the many questions we were asked by media Friday after news broke about the likelihood of new delays in the Boeing 787 program is whether Boeing CEO James McNerney or Boeing Commercial Airplane president Scott Carson will lose their jobs. We don’t think they will, nor do we think they should.

As we opined some time ago on our corporate website, the production model and industrial partner selections pre-date their ascensions to their current positions. (McNerney was on the board of directors when these choices were made, however, so at least some of the responsibility does flow to him.) Those in charge at the time are already gone: Harry Stonecipher, then CEO; Allan Mulally, now CEO of Ford; and Mike Bair, former 787 program manager, laterally moved last October following the delay announced then.

Today, however, The Seattle Post Intelligencer reports that Carson’s number two, who had responsibility for the 787 production as program manager Pat Shanahan reported to him, Jim Jamieson, has retired after 32 years with Boeing and five years before mandatory retirement. Questions will inevitably arise whether there is a connection between the new delays and his departure.

The timing is unfortunate, but after 32 years of the daily grind, why not go out and enjoy life? Since Jamieson came to his position when Carson was named to his, and since the roots of the program difficulties pre-date Jamieson’s arrival, we’re going to conclude there is no connection.

Boeing PR on the Tanker Debrief

Boeing: Uncertainty About Process Remains After Air Force Tanker Debrief
Friday March 7, 5:52 pm ET

ST. LOUIS, March 7 /PRNewswire-FirstCall/ — The U.S. Air Force has completed a debriefing for The Boeing Company (NYSE: BANews) during which acquisition officials sought to explain why they selected a team of Northrop Grumman and the European Aeronautic Defence and Space Company (EADS) for a contract to replace aerial refueling tankers.The debriefing on Friday came one week after the Air Force’s surprising announcement that it had chosen the Northrop-EADS team over the Boeing KC-767 tanker offering.

“We spent several hours with Air Force leaders, listening and probing, all in an effort to better understand the reasoning behind their decisions,” said Mark McGraw, Boeing vice president and program manager of the KC-767 tanker. “While we are grateful for the timely debriefing, we left the room with significant concerns about the process in several areas, including program requirements related to capabilities, cost and risk; evaluation of the bids and the ultimate decision.

“What is clear now is that reports claiming that the Airbus offering won by a wide margin could not be more inaccurate,” said McGraw.

Boeing officials said that they will take the next few days to evaluate the data presented and will give serious consideration to filing a protest.

“Our plan now is to work through the weekend to come to a decision on our course of action early next week,” said McGraw. “It will be a very rigorous and deliberative process to ensure we’re balancing the needs of the warfighter with our desire to be treated fairly. For decades Boeing has been recognized as a defense company that never takes lightly protests of our customers’ decisions.”

A unit of The Boeing Company, Boeing Integrated Defense Systems (http://www.boeing.com/ids/) is one of the world’s largest space and defense businesses specializing in innovative and capabilities-driven customer solutions. Headquartered in St. Louis, Boeing Integrated Defense Systems is a $32.1 billion business with 71,000 employees worldwide.

More bad news for Boeing

It’s a busy Friday.

Goldman Sachs’ aerospace analyst reports that power-on for the Boeing 787 will likely slip from March to June and first deliveries from 1Q09 to 4Q09. Production problems continue with airplanes 1-6, with—of all things—wiring being an issue. Remember wiring brought the Airbus A380 program to a standstill for two years. With this latest delay, if correct, we’re now looking at at least 15 months. (We’ve heard 18 months.) Perhaps it’s time to name the airplane the 787-380. Boeing says it is assessing the program schedule and will have an update at the end of the month. This is what we ambiguously alluded to in our previous post about a bad week for Boeing.

Boeing is to get its debrief today from the US Air Force on why it lost the tanker contract. In a news report, tanker spokesman Bill Barksdale says Boeing is leaning against a protest but will decide after the debrief. Maybe what’s best for the war fighter will prevail after all; Boeing set the bar during the competitive phase by saying throughout the competition that the Air Force should do what’s best for the war fighter. The KC-30 award was the USAF’s decision along this line.

We’ve been told one consideration of the Air Force was the production problems associated with the 787. We’re told that the USAF visited the Everett (WA) factory, where the KC-767 would have been built and where the 787 is being built. Given the disarray in the 787 program, we’re told the USAF essentially asked itself that if the KC-767 program had troubles, would Boeing assign the first team to the KC-767 to resolve the issues—or considering the 787, would the first team be assigned to the 787 and the second team to the KC-767? We’re told the Air Force concluded the tanker would take a back seat to the 787, on which Boeing has bet the future of the company. A note of caution on this point: we have a sole source on this score, but we’ve been receiving information from this source for more than a year and the data has always proved correct. Boeing has previously acknowledged that engineers from its defense unit were diverted to the 787 program, thus perhaps lending weight to the Air Force concerns.

Update 12:50p:

Yvonne Leach, spokesperson for the 787 program, wrote to say the wiring angle reported by Goldman is wrong and requested a correction. We independently have information from two sources along the same lines. While reporting what Goldman had to say, we simply had to go with our best information. But Yvonne’s statement the information is “wrong” is duly noted.

Update 3:06p:

Here’s a further comment from Yvonne Leach on the wiring issue.

In response to what you’re hearing from your two sources, we are not experiencing any more wiring issues than are typical on a new airplane program. Further, compared to the first 777 the amount of wiring work is no different.

While we have had some change in wiring specifications on 787, again it is no more than what we typically experience on any airplane. In fact, I was told that you could go to any airplane program production line as a new customer and the level of wiring change would be similar.

We have in fact, completed some wiring on Airplane #1. For instance, the majority of wiring installations are complete on the wings and the
crown/41 section does have wiring installed.

Remember that engineering changes have to be implemented throughout the fleet so to say we may have to “rewire” airplane #2 could be misleading. We wouldn’t be starting over (as in rewiring) we would simply be implementing a change.

 

Analyst predicts new 787 delay

Call it the Boeing 787-380. Reuters reports that Goldman Sachs is predicting another round of delays for the Boeing 787. See the story here.

Bad week for Boeing gets worse

Only two business days went by after Boeing lost the $40bn KC-X tanker contract to Northrop Grumman when word came down from the Pentagon’s top procurement official, John Young, that the military doesn’t need any more Boeing C-17 transports. This Reuters report sums up the situation nicely.

Boeing has been struggling to keep this program alive while competing for the tanker award. It’s been selling C-17s in ones and twos, hoping that the Air Force would increase its order beyond the 189 contracted for. Not so, says Young. It’s another blow to Boeing.

(A side note: the C-17 is built entirely in the USA at a production rate similar to that of the proposed KC-45 program. Boeing claims 25,000 direct and indirect jobs attributable to the C-17. Boeing claims 44,000 US jobs for its KC-767AT program, which has fewer airplanes (179) than the C-17 program, a similar production rate and less US content (the fuselage is built in Japan, the tail in Italy and other components in the UK). This is one reason why we doubted Boeing’s job claims about the KC-767AT. Another reason was that in 2001 when Boeing delivered 36 767 passenger airplanes annually, a rate two-three times that proposed for the tanker, Boeing claimed 22,000 jobs associated with the 767 program. Finally, Boeing’s claim did not square with the US Department of Commerce formula for figuring jobs created by a program. All the rhetoric by politicians today relies on the Boeing 44,000 jobs claim, which in our view simply is grossly over-inflated.)

By the way, Young used to work for the US Senate committee chaired by Alaska Sen. Ted Stevens. Stevens is the senator who inserted the provision in a 2001 appropriations bill that started the plan for Boeing to lease 100 KC-767s to the USAF. From there the tanker scandal erupted, sending two Boeing executives to jail (including the former Air Force procurement officer Boeing hired after she greased the skids for that 2001 deal). Boeing CEO Phil Condit resigned over the scandal, as did an Air Force official.

The loss of the KC-X contract and the C-17 business is not likely to be all for Boeing in the coming weeks. We have solid information that more bad news is coming in The Boeing Co., and it won’t be too long before it’s public.

Meantime,  here are two interesting news stories of the many about the tanker. Click the links for the full report.

Young Fires Back At Critics of Tanker Decision

Four days after the U.S. Air Force handed a $40 billion contract for aerial tankers to Northrop Grumman and EADS, the Pentagon’s acquisition chief fired back at critics of the controversial deal. Additionally, John Young warned the ongoing backlash against the controversial deal should not drive jilted lawmakers to place restrictions on buying military items from foreign suppliers.

And:

The KC-X Tanker Deal: Tracking the Lobbyists

The $35 billion KC-45 aerial tanker deal has attracted a lot of attention and commentary lately, as one might expect. It has also attracted a lot of lobbying dollars – again, as one might expect. While the Pentagon hopes it can keep a lid on the program’s planned costs, it’s an absolute certainty that the lobbying bill will grow quite a bit before all is said and done.