Tanker Wars II

While most observers weren’t surprised when Boeing initiated its PR campaign to underpin its protest, what was surprising was the intensity of the rhetoric which was directly targeted at the USAF and its program decision makers, as if there was more to lose than just a 179 aircraft order. Full page ads in Washington DC’s and other national newspapers were common, and both teams erected huge billboards in and around the Crystal City area of Washington DC near the Pentagon as the PR campaign escalated.

STRONG RHETORIC So why would Boeing go so hard and so vocally against the decision, claiming it has been unfairly treated by the USAF and that the selection process was manipulated to favour the KC-30, and potentially jeopardise its long standing relationship with the USAF? The 179 aircraft to be ordered for KC-45, although not an insignificant number, should be taken in context against the 1044 and 1417 commercial orders the company received in 2006 and 2007 respectively, and the more than 450 airliners it will deliver in 2008 alone.

Most think the Northrop Grumman/ EADS plan to build the KC-45 in the US is a major factor in Boeing’s strategy.

Along with the KC‑45, EADS North America has said it would switch production of the similar A330-200F freighter, for which there are currently 77 orders, to its new Mobile, Alabama, facility.

Despite being primarily built in the more expensive ‘Euro zone’, all of Airbus’s commercial aircraft are sold in US dollars, and lower margins are often necessary to secure orders against competing Boeing products.

Therefore, Airbus has recently stated its desire to move as much component and assembly work for its aircraft production as possible out of the Euro zone in order to offset the weaker US dollar, and has only increased this focus in the wake of its Power8 restructure in the past 12 months.

Analysts state that for every 10 cents the US dollar weakens against the Euro, Airbus loses about US$1bn (A$1. 05bn) in revenue on its sales. To this end, many analysts predict the entire A330 line, for which there is currently a backlog of more than 300 aircraft and continuing strong demand, may also be moved across the Atlantic as A350 development ramps up early next decade, while others see potential for future product lines such as Airbus’s A320 single-aisle successor to also be built in Boeing’s backyard.

Other theories include Boeing’s aggressive stand being linked to a desire to appease its unions in the lead up to triennial labour negotiations later this year; that the winner will have the inside running for follow-on tanker orders of similar numbers of aircraft due in the 20-teens and 2020s; and the company’s need to shore up what is essentially a dwindling military airframe product line.

With C-17 production winding down, no new orders for the F/A-18E/F Super Hornet or F-22 (on which Boeing is a subcontractor), and rival Northrop Grumman seemingly having one foot in the door for the USAF’s next ‘2018 Bomber’ program and winning the US Navy’s UCAS-D and BAMS competitions, Boeing’s P-8A Poseidon currently looks being like its only military offering post 2013. Boeing noted in an April interview with Leeham’s Scott Hamilton that it was “focusing on the process” and that it was aware it had a “relationship to maintain. ” “There are different audiences (for the campaign),” the company’s tanker program spokesman said. “One is definitely Boeing’s people . . . and the suppliers.

Then there is the broader audience . . . it’s not Washington-specific. ”

Kc-x Becomes Kc-45

During the bid process, the USAF announced the winning tanker would be called the KC-45A in service.

Boeing used the interim period between its derailed 2003 bid and the KC-45 competition to re-jig its bid.

The KC-767AT (Advanced Tanker) is essentially a hybrid 767 comprising the 767-200’s fuselage, the -300’s wing, and the -400’s cockpit and heavier gauge landing gear, as well as an entirely new boom.

EADS had also not been idle, bringing in Northrop Grumman as its US based prime contractor, choosing Mobile as its manufacturing site, and significantly maturing its KC-30 design through development successes on its A310 testbed and on the Australian KC-30B program, while taking orders from the UK and UAE. Indeed, the KC-30’s boom design (on an A310 testbed) successfully passed fuel for the first time the day before the decision was announced.

Still, most observers expected Boeing’s ‘apple pie’ KC-767AT to prevail, as it has greater (although not significantly so) US content, and because Boeing was the incumbent having supplied more than 700 KC-135s and 60 KC-10s (through McDonnell Douglas) since 1955. So it was quite a surprise when the USAF announced the Northrop Grumman/ EADS KC-30 as its preferred bidder for the KC-45 on February 29.

Representatives with Boeing facilities in their electorates were quick to condemn the USAF’s decision, with those from the states of Kansas (Wichita) and Washington (Seattle) the most vocal.

The main thrust of their arguments was that, despite its bid team being led by Northrop Grumman and that the aircraft were to be built in the southern US state of Alabama, the KC-30 was a “European airplane” and that “thousands of US jobs” would be displaced. Even then aspiring Democratic presidential nominees Hillary Clinton and Barack Obama joined in the chorus, both calling for the competition to be rebid or for funding for the project to be blocked in Congress, as well as criticising Republican nominee John McCain for the role he played in helping to get Boeing’s win in 2003 overturned.

Interestingly, both Boeing and Northrop Grumman appeared to submit wildly optimistic estimates of the amount of jobs that would be created by their respective bids. While Boeing claimed its KC-767 would create 44,000 jobs, during the protest process Northrop Grumman revised up its estimate from some 25,000 in its original bid to 48,300 direct and indirect jobs. These estimates, with a relatively modest annual production rate of between 12 and 18 KC-45s planned, make an interesting comparison to Boeing’s own Long Beach C-17 production line which, with an annual production rate of about 36 aircraft, reportedly supports a total workforce of 22,000.

Gao Report

The GAO identified seven areas in which it says the USAF’s selection process in awarding the KC-45 contract to Northrop Grumman/EADS was flawed.

In its findings submission, the GAO claimed: • The USAF went against its own evaluation criteria and didn’t give Boeing credit for satisfying a number of “nonmandatory requirements. ”• The USAF gave Northrop Grumman’s bid extra credit for exceeding the minimum fuel offload threshold, despite saying in the tender documents that no extra credit would be given.

• The USAF was unable to disprove Boeing’s claim that the service didn’t have the ability to assess the KC-30’s ability to refuel all the USAF’s likely fixed wing receiver aircraft, including the CV-22 Osprey.

• That the USAF told Boeing that the KC-767 fully satisfied a particular requirement, but later changed that opinion prior to the closing of the bid process without informing Boeing.

• That Northrop Grumman had refused to provide two years of maintenance support in its bid, something which it says the USAF “unreasonably” attributed to an administrative oversight.

• That, despite claiming in its post contract award briefs that Northrop Grumman had submitted the lowest life cycle costs, the USAF later admitted that it had miscalculated these costs and had in fact found that Boeing had submitted the lowest estimated life cycle costs.

• That, despite being unable to prove through its own modelling, the USAF raised the estimated non-recurring engineering costs for Boeing’s bid because Boeing failed to explain how they had arrived at their estimate.

Perhaps what is most interesting is that in not one of these seven appeal items nor anywhere else in its report did the GAO conclude or even suggest that the KC-767 was in any way more capable than the KC-30.

“This decision should not be read to reflect a view as to the merits of the firms’ respective aircraft,” the full report reads. “Judgments about which offeror will most successfully meet governmental needs are largely reserved for the procuring agencies, subject only to such statutory and regulatory requirements as full and open competition and fairness to potential offerors. ” “We find… a number of errors in the Air Force’s conduct of this procurement, including the failure to evaluate proposals in accordance with the RFP criteria and requirements and to conduct discussions in a fair and equal manner.

But for these errors, we believe that Boeing would have had a substantial chance of being selected for award.

Accordingly, we sustain Boeing’s protest of the Air Force’s award of a contract to Northrop Grumman for the aerial refuelling tankers. ” “We recommend that the Air Force reopen discussions with the offerors, obtain revised proposals, re-evaluate the revised proposals, and make a new source selection decision, consistent with this decision. ” But the GAO also denied some elements of Boeing’s protest. “We also denied a number of Boeing’s challenges to the award to Northrop Grumman, because we found that the record did not provide us with a basis to conclude that the agency had violated the legal requirements with respect to those challenges. ”

Where To Now?

The USAF is now in a difficult position.

The GAO’s findings show its selection processes in a poor light at a time when the service is struggling to replace rapidly ageing equipment right across its order of battle amidst an unprecedented leadership crisis that saw its two leaders (and key defenders of the KC-30 contract award), Secretary Michael Wynne and Chief of Staff General Michael Moseley, forced to resign in mid June.

“The reason we are very disappointed (with the ruling) I think is the intensity of effort that went into having a very open and a very transparent” competition, Wynne said in a farewell speech on June 20.

The service had 10 days after the June 18 GAO decision in which to appeal that decision, but chose not to do so. It now has until August 15 in which to respond to the GAO’s findings, and inform it of its intentions. Currently, the USAF will likely re-bid the competition for a third time, as has been recommended by the GAO, with a resulting further delay of at least another 12 months.

If the competition is re-bid, Boeing may even choose to offer a derivative of its larger 777 or even its technologically advanced 787 to go up against the KC-30 if it perceives the USAF really wants a larger aircraft.

Alternatively, the USAF may choose to ignore the GAO’s recommendations and proceed with the contract award to Northrop Grumman/EADS, although it would then likely face a drawn out battle against vocal supporters of Boeing in the US House of Representatives.

In the meantime, the USAF’s 450 remaining KC-135s, the youngest of which was delivered in 1966 and the average age of which is 47 years, aren’t getting any younger.

“Any significant delay only punishes the men and women who are forced to fly an ageing fleet,” Northrop Grumman’s KC-45 program manager, Paul Meyer, said on June 20.

And early next decade the USAF is due to commence the tender processes for the KC-Y program to replace those 300+ KC-135s which were re-engined in the 1980s and 1990s, while the KC-Z program will follow in the early 2020s to replace the KC-10s.