Leeham News and Analysis
There's more to real news than a news release.
Leeham News and Analysis
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Loren Thompson’s report of Boeing protest
Lexington Institute’s Loren Thompson provides a report of why Boeing protested the tanker award to Northrop.
Until we get through with our travels, this will have to suffice for our readers. We plan a full report Tuesday on our Corporate Website with our bi-weekly update.
Northrop doubles KC-45 jobs forecast
Our first reaction to this piece of news from the St. Louis Business Journal was, What the hell?
“Northrop Grumman Corp. has nearly doubled its estimate of the number of jobs its KC-45A tanker contract will support, using a different projection formula, the company said Monday.
“Using more recent data from suppliers and the Labor Department’s formula to project aerospace jobs at the state and local level, Northrop said the KC-45A program will employ about 48,000 direct and indirect jobs nationwide, the company said Monday.
“Its previous estimate of 25,000 direct and indirect jobs in the United States was based on the U.S. Department of Commerce jobs projection formula for the aerospace industry. The supplier base includes 230 companies in 49 states, according to a release.”
After all the dissing by Northrop of the Boeing forecast that its airplane would produce 44,000 jobs (and we had trouble believing this figure, too), now Northrop one-ups Boeing?!?
We’re traveling but we’re going to follow this up when we get back.
First thoughts on Boeing protest
There’s not much to say at this juncture; Boeing says the tanker process was flawed; the Air Force and Northrop say it wasn’t. Boeing’s statements over the last couple of days generally outline its grievances, so we won’t repeat them here.
One thing we can say: the Democratic response, and that of some labor leaders, blaming Sen. John McCain for this is, we think, out of place (and we’re no supporter of McCain in his presidential bid–on the GOP side we actually liked Ron Paul). McCain stopped the 2001 tanker award because he found evidence the Air Force and Boeing acted illegally. Two Boeing executives went to jail over this deal, and Phil Condit resigned as CEO. Political posturing against McCain over this is unfair.
Second thoughts:
We’ve previously gone on record as thinking the best solution for the Air Force all along was a split buy between Boeing and Northrop. In many ways, the two airplanes can accomplish different missions. We still think so. The Congress should double any allocation to double the production rate (which makes more sense in any case). Building just 12-18 tankers a year over 10-15 years to replace airplanes that are 45 years old is too skimpy. Boeing didn’t like the idea of a split buy before. But we still think this is the best solution for the war fighter.
Buzz about Boeing protest
Washington and a major aviation conference is a-buzz with expectations that Boeing will file a protest over the USAF tanker award to Northrop Grumman, perhaps as early as today.
Boeing was debriefed Friday and over the weekend and today issued statements that appear to lay the groundwork for a protest. Boeing said the competition was much closer than had been represented in the press and that it had questions about the Air Force process. Northrop Grumman was debriefed today and issued a statement as well, supporting the press reports that its KC-30 was superior to the KC-767.
Stay tuned.
Boeing’s Golden Opportunity
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)
787-8
787-9
787-10 (status unclear)
777F
747-8F
747-8I
[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.
Weekend 787 update
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 PR on the Tanker Debrief
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.
Great analysis of impact of tanker loss
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.
More bad news for Boeing
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.
Update 12:50p:
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.
Update 3:06p:
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.