Leeham News and Analysis
There's more to real news than a news release.
Leeham News and Analysis
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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.
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
“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.