GAO review of tanker deal unlikely to produce truce

Associated Press ^ | June 10, 2008 | Joelle Tessler

[Paul Ross]

GAO review of tanker deal unlikely to produce truce

Both sides have ways to fight on

By JOELLE TESSLER, THE ASSOCIATED PRESS

WASHINGTON -- Northrop Grumman Corp. and the European Aeronautic Defense and Space Co. beat out The Boeing Co. to win a $35 billion order from the Air Force three months ago.

Yet the contract to build 179 aerial refueling tankers is hardly a done deal.

The surprise selection of a team that includes EADS -- the parent company of The Boeing Co.'s rival Airbus -- has ignited a backlash among unions representing Boeing workers, lawmakers from Washington, Kansas and other states with Boeing plants and "Buy American" proponents in Congress.

They have pinned their hopes on the Government Accountability Office, which will rule on Boeing's protest of the massive military contract by June 19. Although the Air Force is not bound by the GAO review, the decision will shape the tug of war on Capitol Hill and potentially determine which company walks away with the high-stakes award.

A ruling that finds problems with the Air Force selection would give critical ammunition to Boeing's congressional supporters as they try to block funding for the contract or force a new tanker competition. And that could position Boeing to capture part or all of the deal.

But a GAO ruling that upholds the award would leave Boeing backers with little justification to overturn the order. To be sure, the Boeing side wouldn't just abandon the fight, yet it would be an uphill effort.

"The outcome here is so unsettled that nobody knows where this will end up," said Loren Thompson, a defense industry consultant at the Lexington Institute in Virginia.

Further complicating matters is last week's ouster of the two top Air Force officials over mistaken nuclear shipments, leaving the service ill-equipped to answer difficult questions it may soon face about the contract, Thompson said.

The Air Force is under intense pressure to prove that it ran a fair competition after a procurement scandal in 2003 sent a top Air Force acquisition official to prison for conflict of interest and led to the collapse of an earlier tanker contract with Boeing.

The current contract is the first of three Air Force deals worth as much as $100 billion to replace its entire fleet of nearly 600 aerial refueling tankers over the next 30 years. With so much at stake, both sides have poured money into lobbying, advertising, media campaigns and blogs, though neither will say how much it has spent.

Northrop's message is clear: Its tanker will create American jobs. Northrop estimates the contract will support four new factories and 48,000 jobs with 230 U.S. suppliers, including more than 1,500 new positions in Mobile, Ala., where the tanker would be assembled.

A Boeing tanker would support 44,000 new and existing jobs at Boeing and more than 300 U.S. suppliers, the company says. Boeing would perform much of the work in Everett and Wichita, Kan.

On Capitol Hill, supporters have echoed Boeing's claim that the Air Force biased the tanker competition to favor the larger plane offered by Northrop and EADS even though it had originally asked for a medium-sized aircraft. Boeing's backers also maintain the Northrop/EADS team had an unfair advantage since the U.S. Trade Representative has filed a complaint with the World Trade Organization charging the European Union with providing illegal subsidies to Airbus.

The EU has filed a similar complaint with the WTO, accusing the U.S. government and several states of providing unfair support to Boeing.

Lawmakers are holding off moving on any major tanker-related legislation until after the GAO ruling. Still, a massive fiscal year 2009 defense policy bill passed by the House does include a provision requiring the Air Force to review the effect of subsidies on the tanker competition if the WTO rules against the EU.

The bill also would prohibit the Pentagon from awarding future contracts to companies that benefit from illegal subsidies and require it to consider the effect of contracts on U.S. jobs.

"It is crucial to our industrial base to keep the fruits of this contract in America," said Duncan Hunter, R-Calif., ranking member of the House Armed Services Committee, which produced the bill.

The real action, however, will come after the GAO decision.

If the GAO rules in favor of Boeing, the company's supporters in Congress will use the decision "as a club" to politicize the matter, predicts Teal Group analyst Richard Aboulafia. Aboulafia believes Congress could even push the Air Force to split the tanker order between Boeing and EADS/Northrop if it can force a new competition.

Yet even if the GAO upholds the existing award, the tanker controversy won't disappear. Although the White House opposes the measures in the House bill, Boeing's backers insist Congress needs to examine the role of subsidies and American jobs in defense contracts.

And they may use the Pentagon spending bill to make their case. Boeing has several key allies on the appropriations subcommittees that write that legislation: Todd Tiahrt, R-Kan., and Norman Dicks, D-Wash., in the House, and Patty Murray, D-Wash., in the Senate.

But Northrop Grumman and EADS also have some powerful supporters in their corner. Alabama Republican Richard Shelby is a member of the Senate Appropriations subcommittee on defense, and he stresses that the Northrop/EADS tanker "is going to be built by Americans."

Shelby added, however, that the debate over American jobs is focused on the wrong issue. "What we want is the best plane for the war fighter," he said.

[Paul Ross]

Then Shelby should hang his head in shame. The EADS plane is not the best plane for the "war fighter".

It is the more-expensive to buy, more expensive to run, the least helpful for US defense infrastructure, least capable of going into harms way (Flunking five of eight survivability criteria. FLUNKING OUTRIGHT.) And significanly less capable in going into forward air deployments due to weight and runway length requirements.

[Yo-Yo]

Northrop's message is clear: Its tanker will create American jobs. Northrop estimates the contract will support four new factories and 48,000 jobs with 230 U.S. suppliers, including more than 1,500 new positions in Mobile, Ala., where the tanker would be assembled.

A Boeing tanker would support 44,000 new and existing jobs at Boeing and more than 300 U.S. suppliers, the company says. Boeing would perform much of the work in Everett and Wichita, Kan.

Latest figures from the Economic Policy Insitute estimate that the NG/EADS tanker will generate 14,000 jobs and the KC-767AT will generate 28,000.

[straps]

Boeing is years behind in everything they are presently building plus they no longer build the antique 767. They have yet to deliver the first 767 modified tanker to Japan or Italy Hmm Please do not forget an additional thing the 767 can only refuel 1 aircraft at a time the Northrop does 3 at a time.....
In addition did not the President and a certain vp end in jail trying this crap before. We don’t reward crooks do we?

[DuncanWaring]

Boeing delivered two tankers to Japan earlier this year.

The proposed KC-767 has three hose-drogue mechanisms; I am certain it can refuel two aircraft simultaneously, I believe it can refuel three simultaneously, depending on size.

[JRios1968]

ping

[RayChuang88]

I think people also forget that the A330-200F freighter could be assembled there, too. And there’s a huge market for this freighter: with many Asian and African countries cracking down on the use of ex-Soviet era Antonov and Ilyushin transport planes, many countries need modern air freight transport, and the A330-200F fills that need quite well.

[Mr Rogers]

If the EADS plane is so bad, why did the USAF pick it?

Remember - Boeing is the one with a history of bribes...

[phantomworker]

If you want on or off this aerospace ping list, please contact Paleo Conservative or phantomworker by Freep mail.

[Paleo Conservative]

Please do not forget an additional thing the 767 can only refuel 1 aircraft at a time the Northrop does 3 at a time.....

Wrong, it has hose and drogue pods on the wings for refueling Navy planes and NATO fighters, so it too can refuel 3 planes simultaneously. The Northrop KC-30/KC-45 has an advangtage in that it uses the wing from the A340 that was designed to carry 4 engines. The hose and drogue system attaches where the #1 and #4 engines would attach on an A340. It already has all the structural reinforcements necessary to support the weight of an engine at that point, so it needed minimal modifications in order to support the refueling attachemnt there. The 767 required much more modifications, because the wing was not originally designed to support a heavy weight hanging from the wing other than the engines.

[DesScorp]

I have two issues here:

One, the EADS plane will still be largely fabricated in Europe, jut assembled here. Boeing's entry will mostly be built, parts and all, in the US. When it comes to weapons, we should buy American unless the American product just can't do the job.

Second, the Air Force was pretty much dishonest in this competition. Boeing entered the 767 because USAF asked for a 707 medium airlifter replacement. Boeing thought they were giving the Air Force what they asked for. So it was disengenous when USAF picked the Airbus on the basis of it being more capable as it's a larger widebody aircraft. It's like competing for small truck sale, and then the Ford Ranger loses to a Chevy Suburban because "it had more room and a bigger engine". Well of course it did. It's a bigger truck. But the sale was supposedly for a small truck, and so Ford is screwed in this case. Essentially, USAF changed their criteria for success without telling Boeing. Boeing had said that had they been told that a larger aircraft would be picked, they'd have gladly offered a 777 based tanker. But USAF specifically told Boeing that they wanted a medium airliner replacement. That alone should be grounds for an order to re-do the competition.

[DesScorp]

"If the EADS plane is so bad, why did the USAF pick it?"

You're missing the point. The plane isn't bad. That was never the claim. The complaint was that A)we're outsourcing American defense weaponry abroad, and B)that USAF changed the game at the end. Remember, USAF asked for a medium airliner replacement for the 707 based KC-135, NOT the larger widebody KC-10. The 767 is a medium airliner, the Airbus is a large widebody.

"Remember - Boeing is the one with a history of bribes..."

You don't think European subsidies to Airbus is a kind of bribe?

[DesScorp]

“Please do not forget an additional thing the 767 can only refuel 1 aircraft at a time the Northrop does 3 at a time.....”

That’s simply not true. Both aircraft have three refueling lines; one flying boom in the tail, and a traditional probe-and-drogue system under each wing. You can only have one flying boom in any tanker because it takes a human to operate and aim it onboard the tanker aircraft it self. The flying boom guy is the one that sits in the tanker’s tail. You don’t need operators for probe-and-drogue. The pilots birds getting the fuel are responsible for hooking up to the drogue.

[True Republican Patriot]

Airbusst Ping!

[DuncanWaring]

The flying boom guy...

A minor correction - the "flying boom guy" on a KC-767 sits up front and runs the boom via a TV screen ... they no longer "lay on their belly and pass gas".

[Yo-Yo]

That’s simply not true. Both aircraft have three refueling lines; one flying boom in the tail, and a traditional probe-and-drogue system under each wing.

Both aircraft also have a third hose-and-drogue system in the centerline position, ala the KC-10. This third hose-and-drogue position can flow fuel at a higher rate than the two wing mounted positions can.

Therefore, both aircraft can refuel three probe equipped aircraft at the same time, or one recepticle equipped aircraft at a time.

I do not believe (but am willing to be proven wrong) that they can refuel two hose-and-drogue plus one recepticle aircraft at the same time, due to safety considerations during boom operation.

A.A.? You know different about that last?

[Oztrich Boy]

Essentially, USAF changed their criteria for success without telling Boeing. Boeing had said that had they been told that a larger aircraft would be picked, they'd have gladly offered a 777 based tanker.

Boeing says a lot of things, not many completely true.

Back c.2000 the Airforce had an ORD for a future tanker, which it released to both Boeing and EADS.

Boeing took that ORD and "persuaded" the US Air Force to cut the 26 specification on the wish-list down to the 7 the Boeing could meet. This was done specifically cur out the competition (The A330MRTT could meet 20 criteria on the wish list). This gave Boeing the gift lease from Ms. Druyun.

All this was known back in 2004

Third, the DoD-OIG and the NDU also concluded that the operational requirements document (ORD) for tankers was not tailored, as it should have been, to the requirements of the warfighter, but rather to closely correlate to the Boeing KC-767A. The DoD-OIG found that senior Air Force staff directed that the ORD closely correlate to the Boeing KC-767A that was being developed for a foreign government, in anticipation of the authorizing legislation. This is particularly troubling where, according to an internal Boeing document regarding the ORD, Boeing planned to ``establish clearly defined requirements in ORD for the USAF Tanker configuration that results in an affordable solution that meets the USAF mission needs and will prevent an AOA from being conducted.

When the Airforce released the new KC-X RFP in January 2007. Boeing assumed the fix was still in and it could put forward the KC-767 (which needed the orders) and not the KC-777 (which didn't)

Northop-Gruamman raised objection the the ORD had been tailored to the KC-767 at the request of Boeing (which it had). Knowing their hand was firmly in the cookie jar (by proxy) DoD agree to judge the contenders to the old pre Boeing ORD. Inevitability the KC-30 was so far ahead on the merits that political considerations couldn't get the "US supplier" the contract.

The only way Northop-Grumman played hardball was holding off their objection until it was to late for Boeing to think about switching horses to an alternative (which it didn't want to do anyway, as the whole Boeing idea was to get Uncle Sugar to pay for the development of the 767-200LRF - which had no commercial orders)

[Paul Ross]

Remember - Boeing is the one with a history of bribes...

This sentiment shows that you have swallowed the Kool Aid, and don't know which end is up anymore. You omit the comparative loathesomeness of EADs.

Allow me to point out the real difference here. The US guys went to jail. EADs guys never do:

Ethical Turbulence? A Short History of EADS and Ethics

EADS is the European Union's aerospace darling: the company is funded with illegal subsidies, permitted to bribe foreign officials in order to secure contracts, sell arms to rogue countries, pursue espionage of U.S. technologies, and engage in widespread insider trading, all while sheltered within a heavily protectionist European defense market.

According to a 2001 European Parliament report, Airbus agents were offering bribes to a Saudi official to secure a lion's share for Airbus in modernizing Saudi Arabian Airlines. fleet. (The Economist, "Airbus's Secret Past", 6/12/03)

Illegal Subsidies. Since 1969, EADS has benefited from tens of billions of dollars of European government subsidies the U.S. Trade Representative has determined violate the Subsidies Agreement of the WTO, including more than $5 billion devoted to the A330/340 airframe which EADS is using for the tanker. Tens of thousands of well-paying U.S. aeronautic jobs have been lost over the last ten years alone due to these subsidies.

According to a recent Moody's report, EADS A-1 long-term credit rating is well above the level it would be in the absence of government support.

With overwhelming bipartisan Congressional support, the U.S. Trade Representative has sued in the WTO to end the practice. The French and other EU companies have remained defiant.

Regarding the subsidies, former French Prime Minister Lionel Jospin declared, "We will give Airbus the means to win the battle against Boeing."

State Ownership. The European Aeronautic and Defense Systems is a consortium owned 30% by French interests (including the French government and Daimler Chrysler), 30% German Interests, 5% by Spanish interests. Foreign governments control significant shares of EADS stock: France (15%), Spain (5%), Russia (5%).

Russian Government Ownership of EADS
The Russian government (through a state- controlled bank) has purchased a 5% ownership in EADS and has publicly stated its interest in increasing ownership to 20% (Forbes, "Putin Hungry for EADS," February 21, 2007). Mr. Putin expressed desire for "Russia's capability to have a hand in EADS's corporate matters" (Flight International-FlightGlobal.com, Vladimir Putin outlining interest in Russian EADS cooperation including equity stake, September 19, 2006). The Russian government has expressed continued hostility to U.S. defense, space, and Mid-East policies.

Foreign Corrupt Practices Act-Related Issues . Until France ratified an OECD convention to outlaw bribery, the French government permitted French companies tax deductions for giving bribes.

Continuing Bribery Allegations

In 2007, 7 years after ratifying the OECD convention, EADS Eurofighter lobbyist Erhard Steiniger paid 87,000 euros to the wife of Austrian Air Force Major General Erich Wolf, a member of the commission which selected the Eurofighter in a $2.7 billion contract.

Since signing the OECD treaty, EADS/Airbus has become embroiled in bribery scandals in several countries, including India, Kuwait, Canada, Belgium, Switzerland, and Syria (The Economist, "Airbus' Secret Past", June 12, 2003). EADS/Airbus was so brazen as to complain about the OECD rules after they had been implicated (The Guardian, "Bribery rules too tough for Rolls, Airbus and BAE", November 17, 2004).

Close Relationship with Iran

With limited exceptions, U.S. companies are prohibited legally from trading with Iran. Yet EADS attended the Iran Air Show in 2005 and hawked military aircraft, according to Lisa Myers, then a member of the NBC News investigative unit. When asked about their presence at the Air Show, an EADS spokesman said, As a European company, we're not supposed to take into account embargoes from the U.S.

Exclusionary Procurement. The EU has a long-standing track record of exclusionary and discriminatory practices against US defense companies.

This year, the French government again registered its opposition in the EU to opening up EU defense markets for U.S. contractors.

In 2004, France excluded Boeing from a competition for military air refueling tankers by including a provision in its Request for Tender (the equivalent of U.S. RFP) stating, Aircraft need to be designed and built in Europe. Since the French government owns 15% of EADS, it's not surprising that they'd institute this protectionist provision.

Insider Trading

EADS co-CEO Noel Forgeard was one of scores of executives (85% of EADS top 800 executives) accused of dumping stock after learning of major problems delaying A380 production. EADS stock subsequently plummeted 26% on June 13, 2006.

Insider Trading Grounds For Debatment

All major U.S. defense contractors would expect that insider trading on this scale would likely lead to a ban on government contracts.

[Paul Ross]

Please do not forget an additional thing the 767 can only refuel 1 aircraft at a time the Northrop does 3 at a time.....

False. It can deploy three refueling lines simultaneously as well.

We don’t reward crooks do we?

Apparently we just did...giving the deal to EADs...the most crooked and dangerously anti-American corporate enterprise extant. Consistently espionaging and stealing our aerotech, and then proliferating that stolen tech in weapons to be used against us.

Thanks for helping "defend" us, EADs.

[pissant]

Not to mention McCain’s chums/donors who are EAD’s lobbyists. Of course, that did not influence McCain’s decision to force the AF to rewrite the RFQ to give EAD’s the advantage on this tanker deal.

[Paul Ross]

If the EADS plane is so bad, why did the USAF pick it?

I have been mulling that over since it is pretty blatantly bad for anyone with a critical understanding of the issues.

There is one explanation which has been ventured by a blogger that is quite intriguing...

Did Bush and McCain give the $100 billion tanker project to Airbus?

Blogging Stocks, Posted Apr 24th 2008 9:09AM by Peter Cohan

Filed under: Products and services, Boeing Co (BA), Politics, Northrop Grumman (NOC)

Despite excellent earnings from Boeing Co. (NYSE: BA) yesterday, a bit of a shadow still hangs over the company. That's because in February the Air Force awarded a $100 billion contract for in-flight refueling craft -- known as tankers -- to EADS's Airbus and Northrop Grumman (NYSE: NOC). Boeing is currently challenging this award. But an interview I did for my book on Boeing suggests that Boeing will not win this contract because George W. Bush and John McCain want to award the contract to Bush's new friends: France's Nicolas Sarkozy and Germany's Angela Merkel.

I got this theory from a veteran Wall Street analyst who covers the aircraft industry. He suggested that Boeing lost the Tanker bid because John McCain -- who is ranking member on the Senate Armed Services Committee -- had the Air Force change the specifications for the tanker bid so Airbus and Northrop would be able to field a competitive bid. My source noted that the one problem with the change was that the Air Force did not inform Boeing about it.

After the bid was awarded to Airbus, it became clear that the original specifications had changed from a small, 767-sized craft to a medium-sized 777 one. During the review process, my source contends that Boeing asked the Air Force if the 767-sized craft was what it wanted. Boeing also told the Air Force that it would be happy to bid with a different model if the Air Force wanted. But the Air Force told Boeing that it still wanted the 767-sized craft.

My source also pointed out -- as I posted last month -- that McCain's top finance staff members for his presidential run were lobbyists for Airbus. But my source mentioned that Airbus paid them hundreds of thousands of dollars a year. He also suggested that President Bush got involved in the decision. My source thinks that Bush awarded the contract to Airbus because he wanted to curry favor with Sarkozy and Merkel -- both countries are part of Airbus.

My source believes that the Air Force will not split this contract between two vendors and that Boeing will not win its appeal of the award. He said that the impact of the lost contract is not likely to be significant over the next five years. The tanker would have added "only" $1 billion a year for the next five years and then $2.5 billion to $3 billion in the early 2010s.

But here's the good news. He thinks that Boeing will deliver the 787 Dreamliner in the fourth quarter of 2009 and that starting then it will begin to show annual earnings per share growth of 25% to 30%. This is a big step up in growth which he attributes to Boeing's $346 billion backlog. And without the 787 delays, which he thinks will cost Boeing $3 billion in penalty payments, Boeing's 2009 earnings guidance would have been 20% higher.

Since Boeing trades at a relatively low P/E of 15.6, this analyst thinks the stock is a bargain. Even Bush and McCain can't keep a good company down.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He is writing a book about Boeing and has no financial interest in the securities mentioned.

__________________________________

COMMENT:
This is about the only thing that makes any sense to me to explain this insanity. And it conveys a dis-spiriting sense of corruption and corrupt-thinking in the White House ...that our "friends" should have pork-barrel to justify their friendship with the U.S.

What a sorry state if our CIC really thinks this way.