Perhaps inauspiciously given the Joint Strike Fighter’s poor record of meeting price and schedule goals, Boeing opted to depict its future KC-46A tanker with an F-35. (Boeing imagery)
Posted on 02/25/2011 5:40:05 AM PST by sukhoi-30mki
The US Air Force’s Tanker Gamble
(Source: defense-aerospace.com; published Feb. 25, 2011)
By Giovanni de Briganti
PARIS --- When all is said and done, the Pentagon’s Feb. 24 decision to award the $30 billion KC-X tanker contract to Boeing is a huge gamble for both the company and the department.
Despite all the evidence to the contrary, the Pentagon is gambling that Boeing will be able to develop and deliver a new, highly complex tanker design in less than six years, when it needed nine years to deliver the far simpler KC-767A to the Italian air force.
However, the Pentagon has hedged its bet: its award to Boeing is a “fixed-price incentive firm” contract, not a far laxer “cost-plus” contract as it used to award. This shifts all financial risk to Boeing, and means the company will no doubt have to pay financial penalties if it fails to perform, in addition to foregoing incentive payments.
But, despite this hedge, the Pentagon could find itself with a large shortfall in air-refueling capability if Boeing fails to deliver, and it would have no obvious recourse except to deal with EADS at whatever price the company then demanded.
Boeing, for its part, is gambling that it can develop a new aircraft combining the airframe of the 767 airliner with the digital flight deck of the still uncertified 787 Dreamliner; “new flight controls with a new design philosophy;” and an all-new, digital refueling boom that it has yet to design. And, once developed, Boeing will have to manufacture and deliver the first 18 production aircraft just six years from now.
Boeing says the new refueling boom will have “an expanded refueling envelope, increased fuel offload rate and fly-by-wire control system,” but intriguingly says in a Feb. 24 statement that it will use “a low-risk approach to manufacturing,” but offers no further explanation.
So, given the company’s past performance on the KC-767A, this is quite a gamble, and one which Boeing has no way of hedging: if it fails to meet its contractual obligations, it will have to pay substantial financial penalties out of its profits or its capital.
As the contract’s terms will not be made public, no-one knows exactly how big a financial risk Boeing is taking, and neither will Boeing’s shareholders, who still don’t know how much the company had to pay in compensation to the Japan Air-Self-Defense Force and to the Italian air force for the very late deliveries of the KC-767A.
(In fact, no one would even know Boeing delivered the first KC-767 to Italy on Jan. 27 if it hadn’t been announced by the Italian air force, as Boeing apparently decided it was not worth mentioning – or best not to draw attention to the KC-767 delays just as the US Air Force was finalizing its own tanker decision.)
In the circumstances, Boeing’s may well be a Pyrrhic victory, especially as the company must have cut its profit margin to the bone to have undercut EADS’ price by over 1 percent. All the more so, in fact, that Boeing still has to pay for the development of the KC-46A.
A little arithmetic can illustrate the scope of the financial risk Boeing took to win the program, and just how fragile are the KC-46 program’s economics.
Italy is paying $993.6 million in 2002 dollars for its four KC-767s, or about $1,093 million in today’s dollars, equivalent to $273 million per aircraft. Assuming the US Air Force pays about the same price for the first 18 KC-46As, the total works out to $4.9 billion in production costs alone.
Yet, as announced Feb. 24, the KC-46A contract covering “Engineering and Manufacturing Development” as well as the first 18 aircraft is worth “over $3.5 billion.”
The clear implication is that Boeing cut its KC-767 price by about 25% to stay within the $3.5 billion contract envelope, and that it is paying for all of the remaining KC-46A development work with its own money because there is nothing left from the $3.5 billion.
By comparison, the Feb. 2008 tanker contract won by Northrop and EADS was worth $1.5 billion and covered the first four aircraft, with a $10.6 billion option for another 64; this implies a unit price of $165.6 million, much lower than the KC-46A price implied by yesterday’s announcement.
Admittedly, this is a very rough, “back of an envelope” guesstimate, but it is clear Boeing will lose a lot of money on this initial contract, which is a fixed-price deal with no comebacks.
And this is assuming nothing goes wrong with the KC-46A’s development -- a fairly big assumption given Boeing’s recent development record. If this assumption proves wrong, the company’s very survival would be at stake.
EADS, although understandably frustrated that it has now lost a contract it had won so decisively in 2008, needs only to sit back and wait until it can bid on the two other tanker replacement contracts, KC-Y and KC-Z, at a time in the future when Boeing’s performance on the KC-X will be a matter of record.
Finally, it is worth noting that, despite all the hysterical rhetoric to the contrary, the issue of subsidies did not even come up, given the margin of Boeing’s victory. The more extravagant claims by some pundits that “illegal” government subsidies would allow EADS to underbid Boeing and to win unfairly were shown to be just the ill-informed, partisan rants they were.
-ends-
Perhaps inauspiciously given the Joint Strike Fighter’s poor record of meeting price and schedule goals, Boeing opted to depict its future KC-46A tanker with an F-35. (Boeing imagery)
EADs never had a chance. The White House and hence, the DOD are a “union-owned” shop.
EADS aircraft tend to break apart. Given Boeing’s track record how can they go too far wrong?
Nonsense. This competition was a 372 mandatory pass/fail requirement to qualify, followed by a lowest price wins.
Only if the two bids were within 1% of each other would 93 non-mandatory requirements have been used to select the winner. EADS clearly would have won those.
The simple fact is that Boeing underbid EADS by more than 1%. After EADS is debriefed on the selection process will we know if they will protest. Their only grounds for a potential protest would be over what modifications to their offered price were made to compensate for fuel use over 40 years and military contstruction costs.
Lastly, from what I've heard, this contract to Boeing is $1 billion higher than the 2008 KC-45A contract. So it cost the taxpayer $1 billion to overturn that decision.
from a selfish point of view I would have preferred the planes to be built in the Mobile AL area and thereby benefit this part of the country. sigh...
If they provided a better aircraft, mostly built in the US with US engines, parts, electronics, for a lower price, with the saving say going to buy a hundred MRAP so GI’s and Marines can survive IED.....then yes.
As opposed to US Communists...yes.
There is a huge misconception about Boeing employees and I see it all over this thread. We are not all Union members. The people that touch the parts in the plant, yes – but behind them are a whole lot of Boeing people who are salaried and not represented by a Union. And there are 800 suppliers in more than 40 states who benefit from this contract, many of them non- union shops. So this deal will provide jobs for Union and Non union employees alike. So lay off the “Unions got the deal” rhetoric, because it is not true, and as a Boeing employee I find it sickening that the lie just keeps going post after post.
I’ve read some imbecilic comments on the Tanker deal. You calling a well respected U.S. company (my company)communist tops them all.
But, hey, if you are enjoying your victimhood, go for it!
Watching the unions’ behavior in Madison and elsewhere and the corruption in Chicago and the White Hut, I’ll pass on the do-over, Alex for 200.
Oh Lord, you are a load of laughs. “Enjoying my victimhood?”
No, but I am enjoying my 76 grand I make each year on my non-union Boeing salary. You think we are all Union employees?
Come on, think a bit.
What do you think the thing is made of, pig iron? Airbus fuel weighs more?
They are nearly the same size, weight, dimensions and performance.
Just 6 years to move that whole avionics suite? Ouch. That will be tight. I would say that they are ‘betting the company’ on this one but I have a bad feeling Washington will think they are ‘too big to fail’.
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