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