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.

Priceless Op-Ed in the SEA Times

 

 An editorial writer for The Mobile Press Register has a priceless, satirical op-ed piece in The Seattle Times about the tanker award. Read it here.

 

Business Week to Boeing: don’t protest tanker award

Business Week has an interesting commentary on why Boeing should not protest the USAF award to Northrop Grumman. This may be found here.

Boeing statement requesting immediate de-brief

Boeing Requests Immediate KC-X Tanker Briefing

ST. LOUIS, March 4, 2008 – The Boeing Company [NYSE: BA] today made public a request for an immediate debriefing from U.S. Air Force officials on the KC-X tanker competition.

As of today, the company has yet to receive a briefing on why it was not selected for the KC-X program, a decision the Air Force announced February 29. The Air Force has indicated that the briefing would occur on or after March 12, a delay the company says is inconsistent with well-established procurement practices.
“A delay of this length in the formal debriefing is unusual,” said Mark McGraw, vice president – 767 tanker programs. “Consistent with past practice and recent experience, we would expect this briefing to occur within days, not weeks, of the selection announcement. Given that we are already seeing press reports containing detailed competitive information, we feel that our request is more than fair and reasonable.”
Boeing viewed the tanker competition as a priority and an opportunity to give the Air Force the best tanker to meet its requirements. The company based its proposal on the stated criteria in the Air Force’s Request For Proposal (RFP), the formal document that defined the requirements for the air tanker system.
“We bid aggressively with specific focus on providing operational tanker capability at low risk and the lowest total life cycle cost,” said McGraw. “For instance, based on values disclosed in the Air Force press conference and press release, the Boeing bid, comprising development and all production airplane costs, would appear to be less than the competitor. In addition, because of the lower fuel burn of the 767, we can only assume our offering was more cost effective from a life cycle standpoint.
“Initial reports have also indicated that we were judged the higher risk offering. Boeing is a single, integrated company with its assets, people and technology under its own management control – with 75 years of unmatched experience building tankers. Northrop and EADS are two companies that will be working together for the first time on a tanker, on an airplane they’ve never built before, under multiple management structures, across cultural, language and geographic divides. We do not understand how Boeing could be determined the higher risk offering.
“Initial reports also indicate there may well have been factors beyond those stated in the RFP, or weighted differently than we understood they would be, used to make the decision. It’s important for us to understand how the Air Force reached their conclusion. The questions we are asking, as well as others being raised about this decision, can best be answered with a timely debrief indicating how our proposal was graded against the stated requirements of the RFP,” said McGraw.

Assessing the fall-out on the tanker

In the three days since the USAF awarded the tanker contract to Northrop Grumman, the fallout has been swift and vitriolic.

Before going there, we’ve updated our corporate website with some analysis of our own. We take a look at the financial impact as we see it for Airbus. It’s less than you might think.

We also take a look at why the KC-30 won over the KC-767. We also posted a link to a Mobile Press-Register interview with the Pentagon’s top procurement officer that’s pretty instructive about how the selection process worked.

Now to the up-to-the-minute news.

Predictably, certain members of Congress are apoplectic over the tanker award to Northrop and its prime sub-contractor, EADS, parent of Airbus. This is particularly so for the delegations from Washington State, where Boeing’s KC-767 would have been built, and Kansas, where it would have been outfitted with the military hardware. Boeing’s labor unions are also, shall we say, a bit upset.

The reactions are understandable, but to be honest, misdirected. As defense analyst Loren Thompson pointed out in his report of Monday, the competition wasn’t even close–Northrop won going away in the assessment of capabilities. Northrop, in using the Airbus A330-200 platform, simply had a better airplane and a better proposal than did Boeing. Northrop also has a tanker that’s in testing (for the Australian Air Force, with delivery scheduled early next year), while Boeing’s KC-767 Advanced Tanker is merely a computer airplane (we used to say “paper airplane”). The 767AT is not the same airplane Boeing sold to the Italian and Japanese air forces. Furthermore, those tanker programs were beset by aerodynamic flutter and certification issues, and delivery to each country is years late. The USAF took note of these problems and Boeing lost major ground as a result in the competition.

The Congressional reaction (and the labor unions, too, for that matter) should really be directed at Boeing. Mismanagement of the KC-767 “standard” program, an inferior proposal and a less capable plane resulted in the loss. The critics now implicitly suggest that the Air Force should buy an airplane that doesn’t meet the desires of the Air Force. Boeing, typically, continues its public relations campaign feeding this anger rather than accepting that its proposal simply didn’t cut it.

Admittedly this would not be the first time Congress has imposed an unwanted procurement on a military service branch, should Congress overturn the USAF selection. Washington Senator Patty Murray, the No. 4 ranking Democrat in the Senate, is Boeing’s most vocal supporter and the most vitriolic critic of Airbus. She wants to give the contract to Boeing. Murray’s proclivity for imposing systems is well documented. The local papers reported a recent instance in which she earmarked money for a high speed boat for the Coast Guard to be built by a small Washington State shipyard (which, not so coincidentally, was a campaign contributor). The Coast Guard didn’t want the boats, didn’t ask for the boats and when the boats were completed found that they were totally unsuitable for their intended use. Never put into service, the Coast Guard immediately surplussed the boats.

Boeing spent the last year at least in a well-orchestrated public and political relations campaign raising red-herring issues about the competition that had little to do with the technical merits of the airplanes (ie, subsidies to Airbus and inflated job figures that, in our analysis, bore little relationship to reality). On the few technical merits that were raised, the data was questionable (notably fuel burn claims) and the Air Force itself discounted much of Boeing’s information, according to Loren Thompson.

Boeing went into the competition believing it would get the award, and in this the company was not alone. Right up to the end, every aerospace analyst that weighed in believed Boeing would win. But Boeing’s over-confidence led to an arrogance, we are told, that didn’t play well with the Air Force during its information-gathering. Boeing and Northrop met with the Air Force throughout the process to learn where their proposals were good and where they fell short, allowing plenty of opportunity for additional information to be provided.

With this process, Boeing had a sense of how the competition was going and this could well explain why Boeing engaged in the heated public and political relations battle that it did, concluding that they might well lose on the merits, and this fight would shift to Congress. We opined months ago that this was indeed Boeing’s strategy, though we never wavered in our belief that the USAF would nonetheless find a way to choose Boeing.

There were signs that we picked up, though, that Boeing was worried. We were told directly that Boeing-Everett (WA), where the tanker would be built, was worried about their prospects. We also were told of the existence of a memo from Boeing chairman James McNerney writing that a loss of the tanker project would not be devastating to Boeing. We could never confirm this memo existed, much less that McNerney wrote what was purported. We were also told that Boeing considered the prospects of a win no more than 50-50, late in the game.

In the end, all the political and union posturing, huffing and puffing and threats should be allowed to simply go away. Northrop and EADS won this thing fair and square, it seems, and by a wide margin. Boeing’s proposal simply wasn’t good enough. Why should the war fighter make do with less than the best? We’ve already seen what can happen (in Iraq) when this does happen. Let’s not perpetuate the bad.That’s how the Japanese auto industry overtook the American auto industry.

Boeing should simply cut its losses and apply its energy and talented resources toward the KC-Y tanker program, slated for 2020, and develop the Blended Wing Body for this. The BWB would be a leap in technological advancement that surpasses the A330 (as the A330 surpassed the 767) and even the 787 and the forthcoming A350. Forget offering the 777 in 2020; it will be too old by then. Go with the BWB and Boeing will reclaim its leadership in tankering.

Loren Thompson analyzes Northrop win

Lexington Institute analyst Loren Thompson analyzes the Northrop tanker win in his column today. He has some surprising facts and conclusions. This is a must-read for how Northrop won and Boeing lost.

Here’s a podcast about the future of Airbus, Boeing and the KC-Y program.

Press coverage of the tanker award

Here are some interesting articles about the tanker award to Northrop Grumman:

From the Everett Herald, a look at the new Alabama aerospace center.

From Europe’s AFP news service, US legislators blast award;

From the Chicago Tribune, Boeikng staggered by loss;

We’ll have our own full analysis Tuesday (March 4) on our website.

What does the Northrop win mean?

Every aerospace analyst surveyed by Bloomberg a week ago figured Boeing would win this competition. We did, too.

So what happened? In the end, it came down to what we have been saying all along: did the Air Force want “just” a tanker or did it want a solid, multi-role tanker transport? The Air Force went for the MRTT, saying the selection came down to one word: “more.”

So what does this mean? It’s obviously a big win for Northrop and Airbus and a big loss for Boeing. But perhaps not to the extent some might think.

At a production rate of 12-18 tankers a year, this is the proverbial gnat on the elephant’s rear when you consider that Airbus (or Boeing) deliver around 450 airliners annually.

Depending on the financial assumptions, the revenue to Airbus (or, had it won, Boeing) would have been perhaps around $3bn. This is certainly nothing to sneeze at but when you consider Airbus parent EADS revenue last year was around $55bn (final figures yet to be announced) and Airbus is 80% of this (Boeing was $66bn last year), the figure takes on some context.

Further reduce the $3bn to the airframer, because the engine suppliers grab 25% of this and the rest of the suppliers (avionics, landing gear, etc. etc.) take a portion, and the net revenue to the airframer is far less than the raw numbers suggest.

We’ll have a full financial analysis Tuesday on our corporate website.

Expect Boeing to protest and Boeing’s partisans to take it to Congress.

It’s Northrop Grumman!

Just got word from three sources-Northrop Grumman!

USAF changes specs, may taint process

Incredibly, Reuters reported yesterday that the Air Force changed its criteria at the last minute in the KC-X program that lowered the score of the Northrop Grumman KC-30 proposal. The Mobile Press-Register reports that Boeing’s KC-767 score was also lowered but that the effect was to reduce the cargo-troop carrying capability important of the tankers, which was a major KC-30’s selling point.

This is an astounding development. The USAF has made every effort to provide the appearance of fairness in what is perhaps the most controversial procurement program in decades. By making this last-minute change that undercuts a major attribute of the KC-30 only taints the process and is sure to be a basis of a Northrop protest if it loses. This is also likely to attract the attention of Sen. John McCain, who campaigns on his oversight of the previous scandal of the KC-767 award in 2002.

Furthermore, recall that Northrop nearly withdrew from the competition because the Air Force initially wasn’t going to place a lot of importance to the cargo-troop capability of the evaluation process. For the Air Force to change the criteria at this late date invites a protest–even Boeing might cite this if it loses, on procedural grounds.

This is a dumb, dumb move on the part of the Air Force, no matter how they explain it.