Leeham News and Analysis
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Leeham News and Analysis
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Politics continue on the tanker
(Special projects precluded us from updating last week, so some of the links below backtrack into then.)
Politics continue to plague the tanker program even though the Bush Administration has punted the decision to the next presidency. Today we play catch-up with selected stories of interest.
Update, September 26:
Inside Defense reports that US Rep. John Murtha (D-PA), chairman of the House Appropriations subcommittee, says a split buy between Northrop and Boeing is the only way to recapitalize the USAF tanker program any time soon.
Murtha generally has been supportive of Boeing’s KC-767 tanker proposal.
He’s added language to the 2009 defense appropriations bill directing the DOD to study the feasibility of a split buy, Inside Defense reports. Murtha, according to the publication, acknowledged that Boeing and DOD don’t like the idea and he didn’t know if Northrop does, “But let me tell you something, we’re not going to have tankers if we don’t do that, I’m convinced,” Inside Defense quotes Murtha as saying.
Murtha predicted that in a re-compete, Northrop is likely to receive the order because its plane is ready to go.
Inside Defense is a paid-subscription service only but readers may register for free and receive three free articles (and then pay a la carte thereafter). This article may be found here, with the registration process the first thing you will see.
Update, September 25:
Be careful what you ask for. US Rep. Norm Dicks (D-Boeing/Washington) announced that he’s inserted language in a new House bill to require the USAF or DOD to review any adverse ruling from the World Trade Organization on the “illegal” subsidies complaints filed by the US Trade Representative and the European Union against Airbus and Boeing. He has said for years that Airbus received “illegal” subsidies and presumes the WTO will back up the USTR complaint. Most objective observers, including us, agree with his biased viewpoint on this one.
But most objective observers, including us, also think the WTO will find Boeing received “illegal” subsidies as well–something Dicks and other Boeing supporters in Congress seem blind to.
The full House has to approve Dicks’ language (likely) and then the Senate has to agree (unlikely).
A decision by the WTO is overdue.
Update, September 24:
Mobile Press-Register: Gates against tanker split buy.
Aviation Week: DOD’s Gates eyed changes to RFP before canceling contract.
JD Crowe at The Mobile Press Register is at it again.
Update, September 23:
Associated Press: DOD Secretary Robert Gates says the next administration should buy the cheapest tanker.
Original post:
Washington Times: [Tanker] Rigged in Boeing’s favor. US Sen. Richard Shelby (R-Northrop/Alabama) writes in an Op-Ed piece that DOD’s decision punting the tanker to the next presidency was nothing more than a sop to Boeing.
JD Crowe at Mobile Press-Register
Business Week: Boeing’s CEO beat the Pentagon, but lost some, too. Boeing CEO Jim McNerney gambled in taking on the Pentagon over the tanker, and won.
Defense Industry Daily: A400M delays creating contract controversies. Airbus’ sole military program isn’t going too well. (We count the KC-330 as a broader EADS program; the A400M is Airbus.)
Washington Post: Defense buyer says Northrop’s bid was $3bn cheaper than Boeing. DOD’s John Young said the smaller KC-767 should have been cheaper to buy than Northrop’s KC-30–but it wasn’t. We say perhaps the US taxpayer was going to benefit after all from all those “illegal” subsidies alleged to be provided to Airbus.
Inside Defense: Flyoff will determine tanker win. The Air Force’s top buyer predicts a flyoff between Boeing and Northrop for the tanker contract. Inside Defense is a paid subscription service but with registration you can get three freebies, including this article.
Los Angeles Times. Northrop entitled to termination fee. The Pentagon says Northrop is due tens of millions of dollars for the canceled tanker contract.
Week 3, IAM-Boeing strike
Boeing and the IAM entered the third week of the strike last Saturday and there is no sign of any progress. As of last week, the two sides weren’t even talking about talking.
Update, September 24:
Seattle Post-Intelligencer: Columnist Bill Virgin has an interesting piece speculating what happens to Boeing in the Puget Sound (Seattle) region when the strike is over.
Reuters: Boeing CEO calls IAM strike a “standstill.”
Bloomberg: Boeing CEO cites economic downturn, sees risk to backlog and need for Boeing to finance customers. There is also some reporting on the IAM “standstill.”
Original Posting:
We spoke with the IAM and Boeing and each side is waiting for the other to pick up the phone and ask to talk. The mediator is staying in touch with each side, but there’s little for him to do as present.
Boeing insists that the IAM narrow down its “wants” to two or three items from the three pages presented at the last-ditch Florida talks immediately preceding the walk-out. For the IAM, it’s not that simple and without resolving the list of issues, these elements would become part of a contract.
We remain pessemistic about any early settlement.
Boeing stock down in ILFC issues
As any aviation advocate knows, the future of International Lease Finance Corp. is uncertain due to the problems at its parent, AIG. The US government has bailed out AIG for $85 billion (which would fund the acquisition of 360 USAF tankers, BTW, but that’s a different issue) and plans to have an orderly sale of AIG assets.
ILFC’s CEO and founder, Steven Udvar-Hazy, is trying to arrange financing to buy the company back from AIG, which bought it from Hazy and his co-founders in 1990.
Today, Boeing stock is down on fears ILFC’s troubles will lead ILFC to cancel orders for 74 787s and some 30 737s. (Disclosure: we have a long-term holding in Boeing stock.)
We don’t think that will happen and we believe the stock market is off base on this one.
The orders, especially for the 787, are a great asset for ILFC and will be an important part of any sale of the company. Furthermore, even if ILFC were to cancel, other lessors and airlines will snap up these positions, resulting in no net loss in orders for Boeing.
What now for the tanker?
In today’s column we discuss the tanker, how much the IAM strike is costing Boeing every day and how long the strike may last.
Out of all the twists and turns in the seven year old effort to replace aging Boeing KC-135 aerial tankers, no one we spoke with predicted that the Department of Defense last week would dump the entire competition in the trash can. What happens next and what are the ramifications for Northrop, EADS, Boeing and the Air Force?
A full re-start by the Air Force/DOD on the competition will probably take anywhere from two-four years before a new contract is awarded. There would have to be a full reassessment by the Joint Requirement Oversight Council (JROC) and the Request for Information (RFI) process; the Defense Acquisition Board reviews and approval of the Request for Proposal; determination of the Source Selection Authority; and the actual evaluation process. Plus any additional appeals of the decision.
Could the new Administration, whether it is McCain or Obama, simply pick up more or less where the Bush Administration left off? We suppose that in theory it could but in practice it’s unlikely. Boeing has been very clear that it views any changed to the specifications for a larger airplane as requiring a compete re-start, and having won its political point and getting DOD Secretary Robert Gates to cancel the Northrop Grumman award, Boeing and its supporters are hardly likely to support anything absent a full do-over.
In the meantime, in what is a reversal of rhetoric by Boeing and DOD, both now take the position that the aging KC-135 tankers are good enough to last while the competition is re-run. Throughout the competition both originally took the position that there was great urgency to proceed with the tanker replacement program because the KC-135s were essentially ready to fall out of the sky. (A separate government-funded study took a different view, arguing there was plenty of life left in the airplanes.) After Boeing protested the Northrop award, Boeing’s spin shifted to “what’s the hurry? There’s plenty of life left in the KC-135s.” Boeing ought to know; it also has the maintenance contract on the KC-135 fleet.
Be that as it may, who are the winners and losers in the decision by Secretary Gates to punt this to the next Administration? Here’s our take:
Winners
- Boeing, its lobbying efforts, its Congressional supporters and Boeing’s labor unions. Boeing’s incredibly effective lobbying campaign certainly won the battle. But will it cost Boeing in the coming war? See Potential Losers.
- Boeing, also because it gets a third shot at the tanker contract in what will be Round 4 of the process (including the abortive re-bid that was just ash-canned).
- Boeing, because plans by Airbus to build the A330-200F in US-dollar based Alabama are put on hold. This will keep pressure on Airbus for the Euro-dollar exchange rate and complicates Airbus’ decisions over production for the A350.
- Washington State and Kansas. The KC-767, or if Boeing elects to offer a KC-777 and should it be selected, will be built in Washington and modified in Kansas. Gates’ decision keeps them in the game.
- The Taxpayers, if you believe Boeing’s assertions that Northrop’s KC-30 is too big, too costly, and will (essentially) bankrupt the USAF in 40-year life-cycle operating costs. (OK, Boeing didn’t actually make the bankruptcy claim but you get the drift.) Read more
Week 2, IAM-Boeing strike
As the Boeing strike enters Week 2, we continue our “media watch” for continuing coverage.
September 14:
Seattle Post-Intelligencer: BCA President Scott Carson hopes talks will resume in a “couple of weeks” and a settlement will come shortly thereafter. The P-I’s James Wallace also has a Q&A with Carson.
Reuters: Boeing’s CEO gambles on strike.
September 13:
Forbes: Analyst predicts additional 3-6 mo 787 delay before the strike. The headline of the story is about the strike lowering demand for titanium. Yeah, fine. What caught our eye is the additional delay in the program. Boeing CFO James Bell told a Morgan Stanley conference the program delay should be one day-for-one day. Which means either others are looking for a long strike (we only hear 4-6 weeks and Bell would be happy with only a month) or there are deeper issues in the 787 program.
Business Week: This magazine predicts a two month strike.
Seattle Post-Intelligencer: Obama rips McCain on outsourcing.
Seattle Post-Intelligencer: Boeing’s Carson confident of settlement.
Marketwatch: IAM strike may be hurting themselves. This is a good analysis with a good illutration of where parts of the 787 are built.
Aviation Week: This is a good summary of the stand-off between IAM and Boeing.
Boeing speaks to Morgan Stanley
The Boeing Chief Financial Officer spoke to the Morgan Stanley conference September 10. James Bell is the presenter. Highlights as the presentation proceeds:
(Unless there are quotation marks indicating a direct quote, Bell’s comments are paraphrased as we took notes in real time during the presentation.)
- Bell reiterates Boeing’s best offer to the IAM.
- He is concerned about the cancellation of the tanker competition but Boeing needs time to prepare proper bid.
- Outsourcing is major concern with the IAM strike. “We are in sort of a cooling off period,” he said. “We’ve always had language in the contract that gives them the opportunity to bid for work. We need to make sure we have process in place” to outsource work, support our marketing efforts. A lot of the backlog we have for orders is supported by the ability to share the work in other countries.
- Backlog remains solid because traffic remains essentially strong. “We are really feeling comfortable” due to diversity in backlog around the world. “We have looked at it, we’ve seen it,” and have not had more than normal kind of deferrals and cancellations. “That doesn’t mean we’re not concerned about it, or looking at it,” but right now 80% of our backlog is ExIm financable.” Only 3% of our backlog has been financed by Boeing.
- Question: What are the sticking points, are you at an impasse. Bell: We are not at a complete impasse. They want all the work done there, which isn’t practical, and we want flexibility and we’ll come in between. But that’s not the only issue we’re apart on. We are going to retain our ability to be competitive.
- How long for the strike before delivery of 787 slips to 2010? Bell: doesn’t give a timeline. (Later says one-for-one for every day there is a strike.)
- Delay on the 787: Bell says we are not overly concerned about growth in costs vs escalation costs in contracts, but will have to negotiate with customers on payments that might cover the costs. Productivity efficiencies will be important to keep costs down. Initial deliveries (undefined) will be at zero profit (doesn’t quantify what a loss per plane might be).
- We have a pretty good model for 1,000 planes about what the pricing ought to be and we have a pretty good idea what the costs will be for costs and we’re getting a pretty good idea what the penalties will be, and [all-in] I’m not going to tell you what that will be. There is significant profit to accommodate all the costs.
- My basic understanding on tanker is that the DOD has canceled the contract and there will be a new RFP issued. We may offer the same airplane or something new depending on what the requirements are.
- Right now there is a one-for-one (day-for-day) slip on the 787 and all other programs due to the strike.
- Boeing’s IDS defense division is avoiding bidding on fixed price contracts going forward.
- We have been preparing for the possibility that we will have to help our (US) domestic customers (for financing) but the reality is we haven’t had to. There is enough liquidity in the market. Customers are able to get better deals out of the market than Boeing’s backstop financing.
- The A350-1000 challenge to the 777: We will respond when we know what it is. A350 looks good on paper and we have the resources to invest the R&D necessary to respond [with a refresh or a new airplane]. We’re not going to jump out in front of it until it gets finalized.
- 737 replacement: We’re looking at the end of the next decade, and the key is to have technology to get improvements. Composites don’t scale down as well as they scale up. It could be a small twin-aisle. Engine technology needed. I don’t think the CSeries will change dynamics that materially, engine technology could, but issue is reliability. We’re all excited by the Geared Turbo Fan but question is whether it will have reliability to give advances required for a new airplane.
- DOD has actually canceled this procurement and this means an entirely new RFP. This is an important distinction from merely postponing the competition from the Bush Administration to the next Administration.
- Bell predicts the strike will last at least a month.
Tanker canceled (update 9/12)
Update, Sept. 12:
Reuters: EADS threatens no-bid in Round 4. Here we go again. First Northrop threatened a no-bid. Then Boeing. Now EADS. Or not. Now Reuters reports that EADS denies the first story.
Chicago Tribune: Obama slams McCain for ties to EADS, tanker controversy. It was bound to happen: the tanker is now fully caught up in presidential politics.
Mobile Press-Register: McCain ‘just doesn’t get it,’ claims Obama.
DOD Buzz: Direct sale of KC-30 to USAF pondered. Military.com’s blog reports some Northrop supports are trying to figure a way to offer to sell 20 KC-30s to the Air Force on a “commercial deal” that would by-pass the ordinary procurement process. Separately, we learned from two sources that US cargo airline Atlas Air considered a plan to buy the winning tanker and provide fueling services to the USAF.
Update, Sept. 11:
DOD Buzz: IAG does a 16 minute podcast with DOD Buzz, relating a conversation with US Rep. Norm Dicks (D-Boeing) about a possible split buy on the tanker (right at the top of the podcast); and the possibility that Northrop might offer a commercial deal to sell 20 KC-30s to the USAF (about 11:45 minutes).
Steve Trimble at Flight International has one of his as-usual insightful blog items.
Politico: Tanker delay may help McCain.
The Motley Fool takes a whimsical look at the tanker debacle.
Update, 7:00 PM Sept. 10:
Business Week reports that EADS is pondering a legal challenge to the DOD decision to cancel the competition.
CNN/Dow Jones: EADS howls over contract cancellation.
AFP (Europe): Politics charged in cancellation.
Seattle Times: Timeline in tanker saga.
September 9:
The Wall Street Journal reports the Department of Defense has canceled the competition for the KC-X tanker. The report:
The Pentagon cancels tanker competition, saying it’s impossible to pick a winner by January. The Department of Defense is expected to notify Congress and the companies today. Full article to follow.
Bloomberg now also reports cancellation. Here is an update with more information.
Wall Street Journal: Here is the full article, but paid subscription may be required.
This is another stunning twist in the tanker saga. More news to come.
DOD Buzz has this piece.
Our take: We agreed with Boeing that six months was reasonable to do the re-bid, but we don’t know why the analysis could not have transcended administrations. Although the top leadership at the Pentagon might change (even though there has been plenty of speculation that DOD Secretary could stay on, no matter whether McCain or Obama is elected), presumably the evaluators would not change–only the deciders. This development is not good news.
Update, 9:15 AM PDT: Boeing CFO James Bell told a Morgan Stanley conference that the DOD has canceled the procurement and an entirely new Request for Proposal process will begin. This is an important distinction from postponing the competition. See the last bullet point of our post of Bell’s presentation.
Update, 10:45 AM PDT: Here is the statement by Defense Secretary Robert Gates:
Airbus: jobs and cost cutting
Airbus has hit the news this week with a series of stories about jobs and cost-cutting.
September 9:
International Herald Tribune: No job cuts, just more US$ purchases.
Reuters: From Tunisia, with love.
Business Week: Airbus seeks new cost cuts.
Forbes: Airbus aided by strong dollar.
Flight International: Airbus to offer A330HGW to take advantage of 787 delays.
Week 1, Boeing-IAM strike
For the duration of the IAM strike against Boeing, we’ll divide updates into weeks (Week 1, Week 2, etc.). Any special, breaking news will be its own posting. The Weekly updates probably will consist of linking significant news stories but may also include any tidbits we pick up.
Update, September 10:
Washington Post: Outsourcing key to strike.
Seattle Times: Outsourcing key issue; economic issues not insurmountable.
Update, Tuesday, Sept. 9:
New York Times: Boeing strike dynamics changed.
Seattle Post-Intelligencer: 1986 strike averted with bluff.
Defense Industry Daily: DID has this lengthy story about the potential impact of the IAM strike on a variety of programs.
Associated Press: IAM strike fund good for six months.
Associated Press: Suppliers look for silver lining in strike.
Outsourcing is a key strike issue for the IAM. Marketwatch has this story reporting that an analyst thinks outsourcing will help Boeing recover from the strike within six to nine months if the strike is 60 days or less.
Fitch says Boeing’s ratings and cash flow can be affected by a long strike but Boeing will recover once the strike is over.
Update, Monday, Sept. 8:
Seattle Post-Intelligencer: Interview with the head of the IAM.
Business Week: Why isn’t Airbus on strike?
Update, Sunday, Sept. 7:
Wall Street Journal, Outsourcing crux of Boeing strike.
Wall Street Journal, Strike may cost $100m a day.
Seattle Post-Intelligencer, No sign of talks.
Reuters, Global Supply Chain for Boeing.
Tanker countdown-maybe
First it was mid-August, then late August and now it’s supposed to be this week. Pardon our skepticism if the US Department of Defense slips yet again on issuing the Final RFP for KC-X program.
We’ll update this column this week as necessary as we all wait for the tanker RFP.
Update, Tuesday, Sept. 9:
Update, 1:00 PM PDT: Defense News: Tanker statement may come Wednesday.
From earlier today:
Reuters: DOD brass to meet, make statement.
Flight International: Citing engine test problems, the A400M program looks for yet another delay.
Update, Sunday, Sept. 7:
Defense News: Italian KC-767 delivery slips to 2009, four years late.