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)
787-10 (status unclear)
[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.
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: 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.
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.
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.
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.
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.
The political fury over the USAF award of the KC-45A tanker to Northrop Grumman/EADS/Airbus continues.
Sen. Patty Murray (D-WA, our senator, BTW) has made overturning the award her mission in life. We generally support Murray on other issues, but she’s over the top on this one. Her assertions about Airbus are often off target and irrational. But she should not be underestimated, as EADS North America and Northrop often do. She is the No. 4 ranking Democrat in the Senate and knows how to game the system. She’s a real danger to this contract and Northrop/EADS/Airbus better get their allies in gear to protect their award.
US Rep. Norm Dicks (D-WA, but not our Congressman–ours is the lightweight Dave Reichert, a Republican, whose familiarity with Boeing stems more from flying between the two Washingtons on Boeing 737s than anything else) is more rationale and far more dangerous to the Northrop crowd. The Seattle Times has a good story today about Dicks vs. the USAF on this issue. Dicks also released correspondence between Boeing and the USAF over criteria issues that is worth reading. This letter may be found here.
Some members of Congress, including Murray, are complaining that the USAF did not consider the “illegal” subsidies case the US has against Airbus before the World Trade Organization, noting that such consideration was removed from the RFP at the request of US Sen. John McCain, urged on by Northrop. We wrote about this issue at the time and, in response to a reader just yesterday, we wrote the following to him:
The original language asked the submitters (Boeing and NGC) to assess what the penalties would be if found “guilty” by the WTO. At that time, the cases hadn’t even been argued, let alone decided and penalties were anyone’s guess. Furthermore, there was no guarantee that if any penalties were assessed, they’d be enforced or even applied to aerospace. Under WTO rules, penalties may be applied to any industry. I could just see Europe applying the penalties to Washington apples and the US to French wines. In the case of the WTO adjudication of Embraer and Bombardier, the WTO found both parties guilty (which is what I think will happen in the Airbus-Boeing WTO case) and neither country imposed any penalty. The original question was impossible for Boeing or NGC to answer and absurd to include. The clause finally included was that the costs of any penalties assessed could not be passed on to the AF. This was the proper action.
Our link below to a Commentary on 767/777 tanker possibilities also includes the original WTO language referred to above.
It’s important to note that no decision has yet been issued by the WTO even today, although the US case against Airbus and the EU case against Boeing were argued last year.
Note we also said the EU case against Boeing. Although some members of Congress want to insert legislation that no contract should be awarded to a company being sued by the US over trade issues, this conveniently ignores the fact that Boeing is also being sued by the EU over trade issues. (Technically these “suits” are government-to-government complaints, not government-vs-company, but the practical effect is that Airbus and Boeing are the defendants even if this isn’t the case in the strict legal sense.)
Dicks, echoing Boeing’s view (and carrying Boeing’s water in the process), complains that Boeing didn’t know the Air Force wanted a bigger airplane. This is a pretty amazing position on the part of Boeing and its supporters. We expected Boeing not only to offer the 767 but also the 777, which would have checkmated Northrop, and we said so back in September 2006. This Commentary may be found here.
Boeing, and its supporters, continue to point to Boeing’s assertions that the 767 uses less fuel than the A330, on which the KC-30 is based. This is true, but not to the extent Boeing claims. Boeing says the 767 uses 24% less fuel; Airbus says the number it closer to 6%-8%, but that the better productivity of the A330 more than offsets the extra fuel burn.
Boeing retained some obscure aviation firm to arrive at their number. We’ve been involved in commercial aviation since 1979 and we had never heard of the firm Boeing used–we had to look it up on the Internet, and discovered that it’s main focus is corporate jets. Boeing could have chosen well known, and highly respected firms, such as Avitas, Back Aviation, IBA or several others that would have given its figures credibility. But we don’t think any of these would have provided the answer Boeing wanted because quite simply the 24% figure is highly suspect.
If it were true, no airline in the world would have bought the A330, the direct competitor to the 767, for the fuel efficiency deficit of this magnitude would have been intolerable. The reality is that the efficiency of the A330 effectively killed the 767, which has a backlog of about 50 (mostly from cargo airlines). Airbus sold 66 A330 freighters alone last year and has a backlog of several hundred A330 passenger planes. Boeing took nearly 30 years to sell 1,000 767s; Airbus has sold nearly 900 A330s in about 15 years, and sales are still going strong while 767s aren’t selling much at all.
Boeing’s fuel argument, now being repeated, is specious.
Boeing gets its debrief tomorrow. It will decide by early next week whether to file a protest.
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.
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.
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.
Business Week has an interesting commentary on why Boeing should not protest the USAF award to Northrop Grumman. This may be found here.