Leeham News and Analysis
There's more to real news than a news release.
Leeham News and Analysis
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Obama considers dual tanker buy
The US Air Force AIM online newsletter reported October 24 that presidential candidate Barack Obama is considering a dual tanker purchase. The article is here.
The same publication has another story quoting a retired general as saying delaying the tanker purchase is unwise.
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.
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
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:
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.
Tanker update, 9/3
DOD Buzz has this interesting report on the prospect of a split buy for the tanker competition.
AFP, the European news agency, reports DOD/USAF officials are worried another tanker protest will be filed, no matter who wins Round Three.
Reuters has this report on a USAF general urging quick action.
Update, 12:50 PM PDT, Sept. 4: In true military fashion, it’s hurry up and wait–the final RFP for the tanker has been delayed another week, according to this report in The Hill newspaper.
Update, 4:45 PM PDT, Sept. 5: DOD has tough decision on tanker
Back to the tanker
A few interesting stories today on the USAF tanker saga:
Business Week: Boeing’s tanker challenge.
Reuters: US arms buyer faults Boeing. This story quotes a Jacques Gansler of the University of Maryland who now sits on the Defense Science Board. If memory serves correctly, Northrop Grumman partially funded a study at the U of M Gansler oversaw on the tanker. No mention of this is in the story.
Note: Be sure and check out updates to posts below on the 787 and the best-and-final offer.
Update, August 31:
The Tacoma News Tribune has this long analysis on the tanker and whether Boeing should press on.
Predictable and disappointing
Northrop Grumman’s opposition to granting Boeing’s request for a six month response time instead of 45-60 days for the re-bid on the KC-X competition is predictable and disappointing.
Boeing also threatened to no-bid the contract if it doesn’t get its way on the request.
As readers know, we have always felt the KC-30 was the more capable airplane for the KC-X than the KC-767 offered by Boeing. We’ve sided with Northrop on any number of issues during the competition. But not this one, as we opined on August 22.
Northrop believes that Boeing is stalling on the bet that the Democrats will increase their majorities in the House and the Senate in the November election, and that this will increase Boeing’s sympathy in Congress. We have no doubt this is part of the Boeing calculus. So what? EADS decided to locate the KC-30 production facility in Republican Alabama at a time when the Republicans controlled Congress. That was hardly a coincidence. Politics have permeated this process from the start and while there is plenty of reason to stop now, that’s not going to happen.
Boeing, in its political gambit, is taking a risk that falls into the “be careful what you ask for category,” however. While it seems certain Democrats will increase their majority in Congress, it’s hardly a sure bet today that they will win the White House. Sen. John McCain is giving Barak Obama a run for his money and if McCain wins, this won’t be good news for Boeing.
We see no harm in giving Boeing the six months. We think both sides will produce a better bid, and that’s good for taxpayers.
Meantime, Steve Trimble at Flight International has an interesting take on his blog about how the re-bid can flip-flop some of the suppliers.
Update, 09:15 AM PDT Aug. 26: Innovation Analysis Group does a six minute podcoast with an Israeli reporter discussing Israel’s plan to update its aerial tanker fleet. The air force could use the KC-135/707 for another 20 years if necessary, but it really wants to buy the same aircraft used by the USAF.
Update, 2:30 PM PDT Aug. 26: So far, no final RFP has emerged from DOD; it was thought that it might be issued yesterday. We’re picking up rumblings that it may not come out this week.
Update, 350 PM PDT Aug. 26: Reuters now reports the final RFP may be issued next week.
Update, 12:00 PDT, Aug. 27: The St. Louis Post Dispatch has this piece looking at the strategic implications of the tanker competition.
6 more months makes sense
(Updated 0730 AM PDT with references to EADS North America COO John Young and the “KC-35.”)
Giving Boeing six more months to come up with a revised bid is a prudent and reasonable thing to do. Here’s why.
- Why not? It gives the appearance of fairness and the fact of fairness. Besides, at the EADS media day immediately preceding Farnborough, EADS North American COO John Young predicted the process would take to March anyway. What’s three more months after that?
- Boeing and Northrop will have to “sharpen their pencils,” as DOD procurement chief John Young (no relation to the EADS-NA John Young) put it, and come up with a better price, benefiting taxpayers.
- Northrop and Boeing may sharpen the technical characteristics of the airplanes, providing a better product for the Air Force. We think a KC-777 is a non-starter–it’s just too big for the KC-X (it’s better suited for the KC-Y or KC-Z, as our chart on our Corporate Website this week shows). The 767-400 is the only logical alternative Boeing has to offer for the KC-X competition, even if it still falls short compared with the KC-30 (also see the chart). But what if Northrop responds with a KC-30 powered by the fuel-sipping GEnx engine? This cuts the KC-30 fuel consumption by 15%, providing a better life-cycle cost and thus benefiting the taxpayer. Airbus already did the analysis of an A330-powered GEnx airplane when it first proposed Version 1 of the A350. The GEnx is now certified for the 787, so certifying it for the A330 should be of little concern. We’ll call a GEnx-powered KC-30 the “KC-35.”
- Northrop could propose a “KC-33,” a tanker based on the larger A330-300, though we don’t think that’s necessary.
- Boeing’s “KC-764” could be proposed with the GEnx, which would improve the performance of the 767-400 as well as the fuel economy. NA KOA (remember them?) proposed such an airframe-engine combination as part of its response to the Request for Information from the Air Force at the start of Round Two of the competition, and it had been in touch with Boeing to partner with Boeing on such a project, so there is already some research completed on this. (NA KOA really wanted to offer a tanker based on the 747-400, readers will recall, and filed a protest with the GAO when Boeing refused to go along. The GAO dismissed that protest and last month dismissed NA KOA’s request for reconsideration.)
- Adding six months to the process won’t make any difference in the operation of the KC-135 fleet.
Giving Boeing another six months will likely produce better pricing, perhaps a better plane and perhaps better life cycle costs. DOD should grant Boeing’s request.
Update, 2:00PM PDT: IAG has a new podcast with Boeing IDS spokesman Dan Beck on the Boeing request for six more months.