Leeham website update

Our Corporate Website has been updated with in-depth commentary. This week we write about eco-aviation and of technology transfer to Japan and the Boeing 787.

We quickly received a note from Lynn Lunsford of The Wall Street Journal  on the latter subject. We cited a Forbes story in our comment–Lynn points out Forbes picked up the item from his piece on March 27. The relevant except is below:

In what could prove to be an important alliance, Mitsubishi Heavy has persuaded Boeing to participate in the program by working with it to adapt elements of the same carbon-fiber composite technology being used in Boeing‘s new 787 Dreamliner. Mitsubishi Heavy and two other Japanese companies are major financial partners with Boeing on the bigger jet, so they already have experience with these materials. By incorporating composite materials that don’t corrode or fatigue with age, Japanese officials hope to differentiate their product from those of competitors that rely largely on aluminum.

Mitsubishi Heavy and Japanese government officials had hoped that Boeing would sign on as a significant investor in the project, but the Chicago aerospace company declined, saying it needed to stay focused on getting its delayed Dreamliner out of the door. “We will participate in a limited way. Discussions are under way to determine exactly what will be of most value to the program,” said a Boeing executive familiar with the talks.

More on tanker

Here are some new developments on the continuing USAF tanker saga:

  • Human Events publishes a rebuttal to a previous piece supporting Boeing. This one supports Northrop.
  • Opponents to US Sen. John McCain continue to make hay over allegations that he is responsible for Boeing losing the contract to Northrop Grumman. We continue to find this to be not only inaccurate but unfair to McCain. Boeing lost the first contract in 2004 due to its own illegal actions (paying a fine in the hundreds of millions of dollars in the process) and it lost the second round on the USAF’s own evaluation. Boeing’s protest of this decision will determine whether the USAF process was faulty. McCain didn’t select the airplane. Even an editorial board in Kansas, where the KC-767 would be finished out in military configuration, believes McCain is getting a bad rap even as it criticizes the decision and McCain for EADS connections.
  • Boeing hints to us that more of something will be forthcoming on the tanker issue in the coming weeks.
  • Some aerospace analysts believe Boeing has a pretty good chance of winning the protest because the grounds cited–changing evaluation criteria during the process–are similar to the successful protests in the CSAR-X helicopter award. Boeing won this contract only to see the GAO uphold two protests from losers Lockheed and Sikorsky. The USAF is redoing this competition. Interestingly, a similar protest was filed and won by Alabama Aircraft over a contract award to Boeing for KC-135 maintenance. Alabama Aircraft cited changed criteria and the GAO agreed. But in this case the USAF said “stuff it” to the GAO and is going forward with the Boeing contract.
  • Critics of the KC-30 tanker award suggest that France (Airbus) will withhold vital parts for the tanker if a political policy dispute emerges with the US. Charles Horner (a retired USAF general and a consultant to Northrop) makes in interesting point in an op-ed in the National Review. He writes, “why does Boeing not draw criticism for the fact that the engines on its KC-135R refueling tanker are made by a manufacturer half-owned by the French company, Snecma? Never once in our nation’s sometimes difficult relationship with the French has a single engine part been withheld or even delayed because of the disagreements over foreign policy between our countries. If it has never happened before, why would it happen now, as some suggest that it will?” Good point. The full article may be found here.

    Boeing acquires piece of troubled SC company

    Boeing today (March 28) acquired the Vought share of Global Aeronautica, giving the 787 manufacturer a 50% stake in the company.

    The plant in Charleston (SC) has been one of the key trouble spots in the 787 program. Flightblogger’s Jon Ostrower reported the probable move way back in December.

    This is a good move for Boeing in straightening out the program. Although it’s unclear today just how much of the 787 production problems continue to originate at Charleston, the 787 production system still is under major stress. The world waits for Boeing’s program update–the internal assessment continues–and the date for the program update, thought by some to be next week, by some the following week, remains unscheduled and unconfirmed.

    Is the buyout related to the recent news about redesign of the center wing box? The answer, in our opinion, is “no.” Charleston isn’t responsible for the wing box; the Japanese are. Furthermore, we’re told from inside Boeing that the wing box issue was old news (at least one Wall Street analyst says the same thing) and that the redesign occurred quite some time ago for the first six airplanes (or seven, depending on who’s talking).

    What made it news is that Boeing didn’t tell anyone and with its in-the-bunker mentality since things went south on the production schedule (a phrase used both inside and outside of Boeing), not being forthcoming, the statement by ILFC CEO Steven Udvar-Hazy that Boeing had to redesign the wing box became news for a news-hungry media.

    Even within Boeing, there is complaint that Boeing isn’t forthcoming and therefore winds up de facto letting others reveal problems.

    But we digress. Today’s news is tangible evidence that Boeing is taking back control of its own destiny. It’s a major step, it’s not the first and it won’t be the last. But for all interested parties, it’s certainly the right step.

    Boeing resorts to more PR/updated

    Boeing placed nationwide advertisements Tuesday about its protest over the USAF award to the GAO.

    This is part of the public relations campaign by Boeing we’ve disliked. Just as we thought the USAF award had to be done on its merits and not some PR campaign, the protest to the GAO should be done on its merits and not on the basis of some PR campaign.

    We’re disappointed with this approach.

    Update, March 27, 0830 PDT: Yesterday the Air Force and Northrop filed dismissal requests with the GAO over portions of the Boeing protest.

    Says a Northrop source:

    “Bottom line is Boeing played super bowl, accepted rules, played game fully expected to win, and lost. Now says rules not fair. Should have said rules were not fair before kickoff. Did not.

    “Legally they had 10 chances to protest before they submitted. They instead said it was fair up to when they lost. Cause they expected to win.”

    Here’s the official announcement from Northrop about its filing:

    Northrop Grumman, today, filed a motion with the GAO to dismiss significant portions of Boeing’s “PR-Plated” protest of the Air Force tanker award.

    Northrop Grumman’s motion argues that much of what Boeing complains about was contained in the KC-X Request for Proposal and should have been questioned, or perhaps protested, before Boeing submitted its final bid.

    We are challenging Boeing’s protest claims on the grounds that:

    – Boeing’s challenge of the KC-30′ superior aerial refueling and airlift capability is untimely and should be dismissed.

    – Boeing’s challenge of the RFP’s Integrated Fleet Aerial Refueling Assessment (IFARA) evaluation structure is too late.

    – Boeing’s claims that its past tanker experience and superior survivability, and the issue of government subsidies were ignored by the Air Force are untimely because tanker experience was not a proposal requirement and the other items should have been challenged by Boeing long before it submitted its proposal.

    – Boeing’s challenge to the Air Forces decision to increase Boeing’s cost proposal is untimely because Boeing knew the basis for the increase long before filing its final proposal.

    – Boeing’s claim that the Air Force improperly evaluated its schedule is untimely because Boeing knew of the schedule issue before submitting its final proposal.

    Filing a protest – especially when it’s a protest seeking to block the deployment of a defense system as vital to our men and women in uniform as the KC-45A tanker – is extremely serious business.

    While Northrop Grumman fully supports the protest process, Northrop Grumman filed this motion as an effort to clear the air and afford the GAO the opportunity to do its job without distraction.

    Boeing responded that it objects to any effort by Northrop or the USAF to limit the scope of the protest.

    We didn’t support the filing of a protest but as long as one was filed, we believe that a vigorous “prosecution” of it is the only way to clear the air. We’re in no position to judge the merits of the protest, and neither is anybody in Congress on either side of the issue. We believe that it’s in the best interests of everyone involved to thoroughly address all points.

    While we think Northrop has some points as outlined above, we’re not sure that dismissing issues on technicalities makes good sense, because it give critics of the award further opportunity to moan. We lean toward letting all issues remain in the protest and letting the GAO affirm or dismiss them, one-by-one, as the best way to answer all the questions and critics.

    Having said that, there is one element to Boeing’s complaint we think is stretching the point. Boeing complains that the USAF did not take into account the first KC-767 delivered to Japan. We think this is irrelevant. The first delivery to the Japanese industrial partner, not even the Japanese Air Force, took place February 19, just 10 days before the Air Force announced its award. The second delivery was March 5, five days after the award was announced. Delivery of the second obviously came too late for inclusion in the evaluation process and this is probably also true for the first. More relevant to the evaluation process was Boeing’s performance leading up to delivery of the first tanker, and Boeing’s track record on the Japanese and related Italian KC-767 contracts was poor.

    Boeing may have lots of legitimate grounds for complaining about the award, but failure to consider delivery of the Japanese tankers isn’t one of them. Inclusion in Boeing’s high profile complaining only undermines their other salient points.

    Where does Boeing turn?

    With delivery delays of around 15 months now expected for the Boeing 787 program, where does Boeing turn to help its customers?

    One suggestion was upping the production of the 767, currently at one a month. This won’t work–it takes about two years to do so, according to Boeing. By then the 787 program should be more or less back on track.

    A blogger suggested that the 777 could be the answer. Not likely, either, because the 777 has a four year backlog and is being produced at the rate of seven a month, its highest ever.

    The used airplane market is very tight. Boeing is looking for 777s, 767s and even Airbus A330s and A340s with little luck.

    Boeing and the airlines will have to cope as best they can.

    Here’s the backlog chart for Boeing. The production rates are:

    737: ~30/mo

    747: 1/mo

    767: 1/mo

    777: 7/mo

    787: planned–initially 3/mo, increasing to 10/mo within 18 mo

    Unfilled Orders by Model Through February 2008
    Model Series Orders Deliveries Unfilled
    Total Unfilled Orders 3544
    737-700 1474 921 553
    737-700BBJ 115 94 21
    737-700C 12 11 1
    737-800 2705 1348 1357
    737-800BBJ 17 13 4
    737-900BBJ 6 0 6
    737-900ER 227 15 212
    Total Unfilled for 737 2154
    747-400ERF 40 31 9
    747-400F 126 116 10
    747-8 26 0 26
    747-8F 78 0 78
    Total Unfilled for 747 123
    767-200ER 121 120 1
    767-300ER 538 523 15
    767-300F 82 49 33
    767-400ER 38 37 1
    Total Unfilled for 767 50
    777-200ER 433 405 28
    777-200LR 47 17 30
    777-300ER 354 130 224
    777F 78 0 78
    Total Unfilled for 777 360
    787-3 43 0 43
    787-8 642 0 642
    787-9 172 0 172
    Total Unfilled for 787 857
    Total Unfilled Orders 3544
    Model Series Orders Deliveries Unfilled

    Congressional move ill-advised

    A move in the US House to adopt legislation to overturn the USAF tanker award to Boeing is ill-advised on a number of levels.

    According to a story in The Seattle Post-Intelligencer,  Boeing supporters in the House, incensed over the award by the Air Force to Northrop Grumman and Airbus parent EADS selecting their A330-based KC-30 for the KC-45A tanker, are thinking about adopting legislation to block the award. The details, according to the news story:

    1. Prohibit the award of a US government contract to any company found by the US government to be receiving illegal subsidies;
    2. Direct the USAF to reconsider the competing tanker proposals and “factor in subsidies;”
    3. Direct the USAF to reopen the bidding and allow Boeing to propose a tanker based on the 777;
    4. Cancel the NGC contract outright.

    There are so many things wrong with this approach.

    1. The World Trade Organization hasn’t ruled on the US complaint, so the USA’s interpretation of what constitutes “illegal” subsidies may or may not hold up before the international body charged with adjudicating these things. Apparently this minor legal detail doesn’t matter to the members of Congress who are behind this one. Furthermore, following the same concept, the EU has “found” Boeing to  be receiving “illegal” subsidies (also a complaint before the WTO). If Congress adopts this clause, then the EU would be perfectly justified in retaliating against Boeing by adopting a similar rule. Bad idea all the way around.
    2. We’ve written on this one before. The USAF has no expertise to factor in anything about the subsidies. It needs to stay away from this topic.
    3. Boeing had the option to offer a “KC-777” alone or in tandem with the KC-767. Boeing says it was discouraged from doing so, but as far as we know hasn’t presented written evidence to support this, at least publicly. Presumably this element is detailed in the protest filed with the Government Accountability Office. If so, then the GAO can determine whether the USAF improperly steered Boeing away from offering the KC-777 and equally presumably, this might be grounds to send the competition back to the drawing board (so-to-speak). Congress doesn’t need to be involved on this element.
    4. This is the worst possible interference in Congressional meddling. It sends a message to any foreign defense company, and any domestic company partnering with a foreign company, that it’s a waste of time to compete for Defense business. As we wrote March 22, Britain’s BAE Systems was the sixth largest DOD contractor in 2006. What kind of message would this Congressional action send to BAE? Boeing partnered with Italy’s Alenia to offer the C27J twin-engine turbo prop for light cargo operations. It so happens the Alenia airplane won this contract. The Congressional action proposed on canceling the Northrop deal has all sorts of horror-ramifications.

    Let the GAO deal with this, like the law allows. If the GAO upholds Boeing’s protest, so be it. But if the GAO rejects the protest, Boeing and its supporters need to let this one go. In fact, Boeing would be better off calling off the dogs on this Congressional fight. Boeing might win the battle but lose the war. The EU won’t sit back idly if Congress interferes, and Boeing will be the one to pay the penalty, not some member of Congress with a few district jobs to protect.

    As we previously said, Boeing would be far better off to devote its engineering resources to fixing the 787 program and developing the Blended Wing Body for the KC-Y competition scheduled for 2020. A KC-BWB, and subsequent commercial applications of the BWB, would be far more advanced than the KC-30 or anything else Airbus has to offer, and superior to the KC-777. Go for this gold, and the advanced technology that comes with it. Don’t stick with an airplane originally designed in the late 1970s-early 1980s. Think ahead. Be bold.

    Blended Wing Body test model. Source: Boeing 

    Eco-Aviation in the US

    Eco-Aviation continues to gain ground in the US. Environmental forces in Europe have been targeting aviation for several years, and very aggressively. In the US, the issue has been much slower to catch on.

    Airbus and Boeing have been working for years to reduce the environmental impact of their airplanes. The development of the A380, 787 and A350 are manifestations of this effort. In concert with the engine makers, GE/CFM, Rolls-Royce, Pratt & Whitney and International Aero Engines, the manufacturers have worked to reduce CO2 emissions.

    We’ll be taking a more in-depth look at this issue next week on our corporate website bi-weekly update. In the meantime, Air Transport World and Leeham Co. have organized the USA’s first dedicated Eco-Aviation conference.

    This conference has representation of the environmental community, US regulators, airframe and engine manufacturers and the airlines.

    More information about the conference may be found here.

    Reasoned pro-Boeing tanker piece

    Here’s one of the most well-reasoned, pro-Boeing tanker pieces we’ve seen, completely devoid of the histrionics of the Boeing supporters.

    Minimal job loss over KC-767 tanker

    A survey released today (March 22) released by the Pacific Northwest Aerospace Association of 55 companies in the Puget Sound area (Seattle) finds that the loss of the KC-767 contract to Boeing results in the loss of fewer than 250 jobs. Fewer than 400 jobs would have been added.

    Boeing had previously projected the tanker contract would have added 9,000 jobs in Washington State and the local politicians have been in an uproar over the job loss because the tanker contract went to Northrop Grumman. The same PNAA survey projects the KC-30 will 13-22 jobs annually. Northrop projects its tanker contract will add more than 4,000 statewide.

    The full results of the survey are here.

    Separately, as the reader knows there has been a great deal of focus on the fact that a foreign company (EADS/Airbus) is the prime subcontract to Northrop and there are other foreign subcontractors from Europe involved. The stated concern is whether these foreign suppliers will be reliable to the US in time of war.

    We think the concern is less about foreign suppliers than it is about Airbus. BAE Systems of the UK is the sixth largest supplier to our Department of Defense. It builds many of the armored personnel vehicles used in Iraq and Iran and has many contracts to DOD and our Homeland Security department, including contracts involving intelligence matters. Fully one third of BAE’s revenue in 2007 came from the US DOD, equaling the revenue from European defense sources.

    EADS subsidiaries other than Airbus already have contracts with DOD, and EADS is a supplier to the Boeing 787.

    Speaking of job losses, here’s a satirical look at Sen. John McCain’s role in the tanker controversy.

    Northrop’s conference call transcript

    Here’s the Northrop Transcript of Northrop Grumman’s conference call refuting Boeing’s conference call the same day. Boeing did not create a transcript of its conference call, a spokesman told us. But fundamentally, by comparing Northrop’s transcript to Boeing’s redacted protest, the reader can get the full picture.