Leeham News and Analysis
There's more to real news than a news release.
Leeham News and Analysis
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KC-X tanker DRFP released
Update, September 28: DOD Buzz reports Boeing is going to offer two bids, one each for the KC-767 and KC-777. Here is the link. We think this is a brilliant move.
Original Post:
Here is the link to the RFP. We’ll add information after we’ve read it, which will take all weekend. One thing we did find right away: the USAF is asking for field performance data on runways 6,000 ft to 15,000 ft. This means the Boeing 777 isn’t zapped on this criteria; the 2006 RFP required 7,000 ft. runways. The Systems Requirements document does include a 7,000 ft. runway requirement. SRD document pg. 26, 3.4.2.2.1.
On another requirement from the 2006 competition: spare engines had to be transportable in the C-130 cargo plane. A 777 GE 90 wouldn’t fit; this requirement has been changed to the C-17. The C-17 has an 18-foot wide cargo bay; the GE-90 is slightly over 10 ft wide (bare engine, without nacelle). SDR pg. 40, 3.6.3.3.1.
Here is Boeing’s statement, issued upon receipt of the DRFP:
“Our next step is to conduct a detailed review of the document. We want to understand how requirements will be defined and prioritized and how the proposals will be evaluated. That information will help us decide which plane to offer or whether to offer both planes. We appreciate that there will be frequent, open discussion with the U.S. Air Force as we go forward. Both the Air Force and the American taxpayer will benefit from the tanker options we can offer. Boeing has a KC-7A7 ‘family of tankers’ available to meet the warfighter’s requirements. Whether it’s the agile, flexible 767-based tanker or the large 777-based tanker, Boeing will deliver a combat-ready tanker with maximum capability at the lowest cost.”
What is noteworthy is the reference to offering the KC-767 and the KC-777. This is contrary to stated DOD intent to buy only one airplane. This is something we suggested Boeing do for the 2006 competition on the theory it would checkmate the Northrop bid. While we think the 777 is too big for the KC-X competition, a dual-offer by Boeing simply cannot be matched by Northrop.
Northrop believes its KC-30 is the right-sized aircraft in the sweet spot.
Here is Northrop’s statement:
“Northrop Grumman applauds the Defense Department and U.S. Air Force for re-starting the effort to replace its Eisenhower-era KC-135 aerial refueling tankers, and the company is looking forward to competing for and winning the contract again.
“Northrop Grumman will review the draft RFP and provide the U.S. Air Force with comments on the draft in short order. We will defer further public comments until we have completed our review.”
Here is the synopsis as publish on the Business Opportunity website.
DOD Tanker Briefing
Updates:
Here is a running update of the Pentagon briefing to reporters, 4pm EDT, 24 Sept.
William Lynn Deputy Sec Def:
- USAF will be source-selection team but overseen by DOD. There will be independent review panels as well, including from other services.
- This is not a re-run of the prior process. GAO found substantial flaws in previous process and we’ve taken pains to be explicit about criteria, scoring system and decision tree.
- This is a Best Value competition, not a price shoot-out. Price is extremely important but not only point. We will look at price, life cycle and war-fighting requirements.
- This is a step forward toward acquisition reform.
- This is not a cost-plus contract, and includes not-to-exceed prices. Will constraint prices considerably and move toward avoiding cost overruns.
- We’ve played this right down the middle.
Refueling Dr. Strangelove
The Draft Request for Proposal for Round 3 of the KC-X tanker competition isn’t even out yet and the procurement process is already perverted.
The DRFP is thought to be ready for release tomorrow (September 24). The USAF reportedly has scheduled briefings for Congress at 11 AM EDT.
In what is clearly an orchestrated effort spearheaded by Boeing, the political focus is entirely on the interim report by the World Trade Organization that Airbus benefited from illegal subsidies for its A-series commercial airliners, including the A330-200 on which the Northrop Grumman KC-30 is based.
[youtube=http://www.youtube.com/watch?v=Qs7EikHQGlA]
Washington State and Kansas Members of Congress demand that the US Air Force include language in the DRFP that considers the launch aid–a reported but unconfirmed $5bn for the A330/A340 sister program–in evaluating the KC-X proposals.
WTO “anachronistic”
We are back from a trip to Europe, where we had the opportunity to sit down with Thomas Enders, CEO of Airbus. We talked about (among other things) the WTO case and the implications for Airbus on funding for the A350. The story we wrote for Commercial Aviation Online is below the jump.
Here is a Reuters report that has some interesting back-and-forth between US Sen. Richard Shelby (R-Northrop/AL) and US Sen. Patty Murray (D-Boeing/WA) over the outcome of the finding of the WTO’s assessment of the US complaint about Airbus launch aid.
Here is a story from Kansas.com with more detail about Boeing’s ambiguity whether its tanker program will include Boeing’s Wichita facility. The only reason we care is because of how loud Kansas Members of Congress have been in support of Boeing’s tanker bid. Placing a question over Wichita’s role in the tanker is, we think, a politically embarrassing move on Boeing’s part.
Here is a story from Business Week taking a close look at the tanker competition and the impact from the WTO finding.
Boeing kicks off tanker campaign
Update, Sept. 17: While looking for something else we came across this old item from Forbes magazine in 2004-5, when Boeing was temporarily led by the late Lew Platt following the fall from grace of former CEO Harry Stonecipher.
Platt, then the chairman and CEO, had this to say about the start of the KC-X competition then. It sounds like what we are hearing today:
Faces In The News
Boeing’s Platt Cheers Airbus, Says CEO Search Narrows
Chris Noon, 06.15.05, 1:49 PM ET
NEW YORK – Doers and doings in business, entertainment and technology:
Boeing (nyse: BA – news – people ) Chairman Lewis Platt plays hard, but fair. Despite the trans-Atlantic spat over subsidies, Platt doesn’t think Airbus should be frozen out of bidding for U.S. military contracts. “What I’m looking for is a level playing field. Part of that means they should be able to compete for business in the United States,” he was quoted as saying in The Associated Press. EADS, which owns about 80% of Airbus, may be disqualified from bidding on a U.S. Air Force contract for refuelling tankers because of a House of Representatives amendment barring the Pentagon from purchasing goods from any foreign companies receiving government subsidies. Brussels countered Washington’s complaint against Airbus subsidies last month with one of its own.
Aviation Week has a long story on the tanker that explains why cargo capability is desired.
Update, September 16: IAG has a 15 minute podcast with Boeing’s Bill Barksdale on the KC-7A7 program.
Separately, Sen. Patty Murray (D-Boeing/WA) and some 45 Members of Congress call on the USAF to consider the WTO findings in the competition for the KC-X contract, and Murray calls on President Obama to penalize Airbus and the KC-30 tanker for the WTO finding. The Members of Congress say the prospect of awarding the contract to Northrop Grumman (Airbus) would reward illegal action.
Don’t these guys get it? (Obviously not.) When (not if, in conventional wisdom) the WTO also finds Boeing benefited from illegal aid, what the devil will these Members of Congress say then?
As for Murray’s call for Obama to act now, Patty needs to read the WTO rules: Article 23 specifically prohibits premature imposition of penalties. Premature means before the case is over, and the case won’t be over until a final report is issued and any appeals are concluded. We know the EU will appeal and we fully expect the USTR to appeal findings on complaints that weren’t upheld. It will be years before these are completed. In the meantime, it would be illegal under WTO rules for the US to adopt any penalties.
On the one hand, Sen. Murray wants to slam Airbus and Northrop for illegal activities. On the other, she wants to do this before the WTO rules say you can, an action that would be illegal. Sen. Murray can’t have it both ways.
Update, September 15: Flight International reports that Boeing is considering moving its tanker finishing work out of Wichita (KS) in order to lower the price. We can’t help but wonder what US Rep. Todd Tiahrt (R-Boeing/KS) and Sen. Sam Brownback (R-Boeing/KS), two of Boeing’s most hyperbolic tanker supporters, might say about this.
Flight also reports in the same piece that Boeing is going to get very aggressive on pricing, having lost on this point to Northrop Grumman and the Airbus-based KC-30. This is going to be watched very closely by Northrop and EADS, because during the Round 2 USAF debrief, the companies noted that their pricing was shared with Boeing lawyers and they fear this sensitive information will put them at a competitive disadvantage in this round.
We had asked Boeing about this at the time, and Boeing’s tanker team told us the pricing information stopped with the Boeing legal team, precisely because of the proprietary nature of this information. Northrop and EADS aren’t convinced (they haven’t seen any proof on this point one way or the other) and could take action if they come to believe Boeing has an unfair advantage in this round.
Original Post
Boeing is wasting no time kicking off its campaign to win Round 3 of the KC-X tanker competition.
This Reuters story says Boeing won’t get fancy in its proposed KC-777 or KC-767 (marketed, for the moment, under the generic name KC-7A7, until Boeing understands what the US Air Force wants and then decides which tanker to offer). Boeing won’t offer a tanker based on its proposed KC-767 Advanced Tanker, the so-called Frankentanker that was offered in Round 2 as a paper concept combining major components from the 767-200, 767-300 and 767-400.
WTO rules prevent exclusion of Airbus in tanker bid
Update, Sept. 10: When the WTO Interim Report finding Airbus violated certain rules against certain subsidies under the WTO, Boeing supporters were quick and prolific to jump on leaked reports and briefings and some called for the US Defense Department to exclude the Northrop Grumman/EADS/Airbus bid from the KC-X tanker re-compete.
Airbus supporters were strangely quiet, we thought.
Today, Sen. Richard Shelby (R-Northrop/AL) made public a letter to Ron Kirk, the US Trade Representative, on the issue. The full letter may be found here. A key excerpt:
As we discussed, many press reports are not accurately describing the complete results of the report. In fact, on every Airbus airplane there was a claim against, the loan mechanism used was ruled legal under the WTO. It is also my understanding that Reimbursable Launch Investment or “launch aid,” was determined to be an acceptable funding mechanism by the WTO. Reimbursable Launch Investment was used on the A330-200, the airframe that will be offered for the tanker contract. The A330-200 was found to have received investment aid within the permissible benchmarks under WTO guidelines – meaning that the funding received was not found to be a prohibited subsidy. Most importantly, as you stated in our meeting, Boeing was not materially injured by any action taken by Airbus.
Trying to make sense of WTO ruling
This Reuters report tries to make sense of the conflicting claims by the EU and Americans over who won what in the finding issued Friday by the WTO three judge panel.
Here is a somewhat different version of the Reuters report with additional detail.
Other stories of note:
Bloomberg has this report about the massive amount of aid the US pumped into various industries and how this might affect the Airbus WTO finding.
EurActiv.com provides this European perspective, including a suggestion that negotiations to settle the dispute could begin in March.
Metal Miner, a trade publication that follows the metals industries (of no small importance to airplanes), has this take on the WTO stuff, in the same format of our take below.
Below is our take on the whole matter.
A few days have passed and the initial frenzy over the WTO finding that Airbus benefited from illegal aid has died down. Still, since the finding itself has not been made public and we’re all reacting to leaks and “briefings” of partisan interests, trying to make sense of the finding is challenging at best.
EADS short sales
A while back we published the short stock sales for Boeing. We’ve been trying to find short sales for EADS and the best we could do is find, through one of the US aerospace analysts, the EADS short sales in the USA, where the stock is traded Over The Counter (OTC).
The problem is that there are only an average of 230 trades per day, a volume that is so small as to be almost meaningless. Our analyst friend could not find any data in France about EADS short sales, but neither he nor we know if this is a function that the US data base used doesn’t find it or if by regulation this doesn’t have to be disclosed. If there are any Europeans who can fund the EADS short sales in France, Germany or any other market in which EADS stock is heavily traded, please send us the data on an Excel spreadsheet.
Meanwhile, here is the short sales record on the OTC market. Because the average daily trade is so small, the short interest ratios are huge.
EADS announces earnings
We’ll provide analysis later today (PDT) but here is the 27 page earnings statement and accompanying presentation.
Update, 10:30 PDT: Here’s a synopsis of the EADS earnings call and our comments.
EADS Earnings Preview
EADS, parent of Airbus, announces its 2Q09-1H09 earnings July 28. Here are some topics that ought to be covered and questions analysts and reporters should ask: