Wednesday, September 29, 2010

Tanker Wars Update - Long Overdue

It’s has been awhile since I have said anything about the Air Force Tanker Competition or KC-X as it is known. Well, not that anything is going on right now but here is a quick and dirty summary of activity on this huge contract that I have been holding onto.

First, the proposals are in and the Air Force is busy studying and evaluating them. They received two, one from Boeing pitching their Next Gen Tanker (a modified KC-767 based on the version they are building for Italy and Japan) and another from EADS/Airbus.

The EADS offering is a KC-45 the A330-304 MRTT aircraft that they are selling to Australia and Germany. In fact, the German Air Force (the Luftwaffe) just recently took delivery of their first MRTT aircraft.

There was a proposal submission that was not accepted that has created some news. A California based company; US Aerospace Inc. threw in with the Russian aircraft manufacturer Antonov to propose an all new built aircraft tentatively named the AN-112-KC. This aircraft was going to be built to US Air Forces specifications, even though the USAF did not publish any, they wanted to buy something off the shelf, in the Ukraine and then flown to the U.S. for finally assembly. Story here and here if you wish to learn more, there is not much out there.

The US Aerospace Inc./Antonov proposal was 5 minutes late. It seems that the “courier” that was carrying the proposal to the Contracts desk at Wright-Patterson Air Force Base got lost after getting through the Main Gate delivering the proposal after the Bid Closing time. They have filed a protest with the GAO. (Story here.) Now I have been there dropping off a Bid Proposal for contracts of several thousand dollars, nothing like a $30 Billion aircraft manufacturing contract. I think I would have camped out in an RV right out in front of the Contracts Office. Shame on them. They feel so strongly in their position that they have submitted a second Protest, just to be sure they get heard. (That story here.) If they had shown this kind of attention to the original bidding process they would not have required all the legal activity now that only slows things down. The GAO is scheduled to rule on the Protests in early November however they have made a ruling on some of the claims made by US Aerospace Inc. Specifically, the GAO has dismissed the “bad faith or intentional agency misconduct” charges that US Aerospace made. Their claim was that the Gate Guard intentionally gave them bad directions from the main gate to the Bid submittal desk in the Contracts building. (Story here.) Can things get any more funny?

Boeing KC-X News:

Boeing is bidding the KC-767 that they had bid previously, but it appears they are changing the cockpit design but details are scarce. The rumor is that some format of the all new and state of the are cockpit that is being put into the new 787 Dreamliner will be put into the NextGen Tanker. The question really is how much of it will go into the KC-767, all or a portion thereof. (Story here.) This would be an interesting blend considering the need to install a fair amount of Military equipment that the civilian market does not worry about, like UHF radios, TACAN’s, PAR ILS systems and of course secure encryptions for the voice and data communications. They are answering most of these issues on the Navy’s P-8 aircraft which is a military configured 737 that will see service as an ASW aircraft (replacing the P-3). Time will tell.

Here is a story about how Boeing is out talking up having their ability to reduce it’s currently Bid price on the Tanker package if the USAF puts out a “Best and Final Offer” to the two bidders. They have left themselves some room to move their offer lower putting pressure on EADS/Airbus. Since the EADS/Airbus is a much larger aircraft, and presumably much more expensive to build the pressure is in forcing the issue to lower pricing. So the Boeing PR machine is out talking this up in hopes of getting the USAF to issue a BAFO.

EADS/Airbus responded that they have room in their bid to trim some of their pricing too. (Story here.) But right away Congressman and Senators sensitive to the Boeing bid complained that EADS/Airbus would be “dumping” their aircraft in order to gain the contract. This is the policy of bidding at a price well below of what it costs to build. EADS/Airbus has responded by stating they will not build the USAF tanker under the actual cost that it takes to produce (that story here) saying that they have a lot of cost capacity because of them building these aircraft for other countries.

Sometimes a manufacturer will do that in order to win the contract and then they nickel and dime the government for cost increases. This is known in these parts as the Lockheed Business Model and I refer you to the F-22 and F-35 programs for how well that works, which it does but surely leaves a bad taste. Especially if you are the taxpayer!

EADS/Airbus News:

Besides the above story on EADS/Airbus not spiking their pricing on their Tanker offering is this bit of unusual news. The UK’s Parliaments’ Public Accounts Committee criticized the UK’s Ministry of Defense for signing a $16 Billion dollar deal to lease Airbus A330 tankers from a consortium that was formed to specifically sell and lease A330 tankers to European military organizations. Ouch, that’s got to hurt. (Story here.) The deal was for 14 of the Airbus tankers over a 10 year period but the committee complained that the deal was not good for the UK because the aircraft will not have the protective equipment necessary for taking any aircraft into a war zone (you know like Afghanistan). Now you make that aircraft huge like an Airbus A330 and you got yourself a nice fat target so I would guess they are going to need a lot of extra’s on that bad boy and none of this is factored into the $16 billion cost. Oh well, live and learn. I once leased a car a long time ago and that was the last time I’ll do that. Must really hurt when you lease an aircraft!!

And if the above is was unwelcome news there is more for EADS/Airbus to contemplate. The WTO has ruled that both companies have received what they are calling “illegal” subsides. In the case of EADS/Airbus the subsides came in the form of “Launch Aid” which is money given to Airbus from the various sponsoring governments in the EU that prop up Airbus. Launch aid is money given to Airbus when they overrun the development of their aircraft which apparently happens on every aircraft they have built. The running total is a whopping $200 Billion dollars. (Story here.)

Meanwhile, the WTO ruled Boeing has been receiving “preferential” treatment by the U.S. Government which they translate into a prohibited “subsidies” to the tune of $24 billion dollars. (That story here.) The WTO claim is that contracts with the U.S. Government and even the tax breaks given to the many Boeing Plants around the country by both local and State governments has translated into “aid”. Maybe so.

But there is in my mind several critical differences between the two which I don’t think the EU leaning WTO understands, first of these is the issue of Launch Aid. When Boeing runs out of money when trying to bring a new aircraft to market they go back to their investors and raise the cash they need privately. In Europe, Airbus runs out of money they go back to the sponsoring governments and request however much they think they need and that is what they get. This is a big difference and continues even with their latest aircraft the A400M (which is a military cargo aircraft) and the new XWB-A350 commercial airliner (which is to compete against the Boeing 787). So they don’t feel the pain like Boeing does since Airbus has no “skin in the game” so to speak, Boeing wagers stocks in the company and their own profitability. Not so Airbus.

Another difference is that any defense work Boeing wins in this country is done in a robust competitive market. That is not true in Europe where a lot of competitions are open only to European companies or if an American company is bidding they must have some kind of European company participation (called an offset). I am working a job that has a contract with a European Government and there is a 40% offset requirement meaning, my company has to spend 40% of the total value of the contract with companies in Europe. We don’t require that here in America, in fact the only “Buy America” provision passed by congress is for Fasteners (screws, nuts, bolts and rivets) and Electrical connectors. Oh, and by the way, Allies of the U.S. are exempt from this requirement so only U.S. manufactures such as Boeing have to buy American made fasteners and connectors while Airbus can populate their aircraft with parts made in China. Nothing like shooting ourselves in the foot but that’s what we get with our Congress.

There is a movement afoot to force the USAF to take into consideration the WTO rulings on the EADS/Airbus offering (that story here) but my guess is that this will be challenged and further delay the awarding of this contract. All the while the USAF racks up huge costs in flying this very old aircraft. In 2002 the cost of maintenance per flight hour was $11,000 per hour on this aircraft and with a 6.2% increase per year for that you can only imagine what it costs today to fly and operate this aircraft. So any delay in replacing this aircraft is a huge cost to the USAF. (Numbers come from this report.)

It’s time for the US to adopt a Buy American provision that covers something like this even if it means there is only one bidder. It is time for the FTC to stop these big defense companies from buy each other out, which is why we are down to the one company that builds large fuselage sized aircraft in this country from 4 or 5 we had back 20 years ago.

Anyway, folks, that it for this version of the Tanker Wars update. A little long but there is a lot here.

BT: Jimmy T sends.


Anonymous said...

For clarification - the MRTTs EADS/Airbus sold to Germany were A-310 used aircraft that were modified into hose only (no boom) tankers. EADS has not yet delivered any A-330 tankers. Boeing has delivered four KC-767s to Japan who is actively using them.

JimmyT said...

Anonymous, thanks for the clairfiction seems like Airbus is touting the wrong horn!! Thanks again and don't be a stranger!!

BT: Jimmy T sends.