Saturday, March 01, 2008

A Few Thoughts on the Tanker Deal

The KC-30, which will serve as the Air Force's next-generation tanker (Northrop-Grumman photo)

Aviation circles and Wall Street are still abuzz over the Air Force's decision to award a $40-billion contract for new aerial tankers to a Northrop-Grumman/Airbus consortium. Announcement of that choice represented a major blow to rival Boeing, which had supplied most of the service's aerial refuelers for the past 50 years.

Defense and business analysts are rightly hailing Friday's announcement as a major win for Northrop-Grumman and its European partner EADS, the military division of Airbus. Not only did the U.S.-European team secure a deal for 179 new tankers, they also positioned their firm to capture billions in follow-on contracts.

Both the USAF and U.S. Navy operate a variety of surveillance, command-and-control and intelligence collection platforms built on the venerable Boeing 707 design--the same airframe used in the older KC-135s that will be replaced by the new tanker. As the older C2, surveillance and spy aircraft reach the end of their service life, those missions could easily be transferred to the same Northrop-Grumman/EADS platform, based on the Airbus A330.

Justifying its decision, the Air Force noted that the European jet beat the Boeing design (a variant of the 767 jetliner) in four of five categories, including fuel offload--the most important consideration for any aerial tanker--cargo capacity, troop hauling, and aeromedical evacuation.

But those arguments are something of a red herring; aerial tankers--as their name implies--are designed primarily to refuel other aircraft in flight. Their abilities as cargo haulers, troop haulers and air ambulances pale in comparison to platforms like the C-17, which were specifically designed for that mission.

Moreover, tankers like the KC-135, KC-10 and the KC-45 (the Air Force designation for the new refueler) need special equipment to load or unload cargo, and they can't accommodate oversized equipment. We're also reminded that virtually all troops heading to a war zone now travel on charter jets, so the "troop carrier" role is a relatively minor consideration, to boot.

Still, the Northrop-Grumman/EADS tanker offers a clear advantage in the tanker mission and that alone was enough to justify the Air Force's decision. Boeing and its Congressional backers are clearly upset, but in hindsight, it seems clear that the aviation giant made critical errors in pitching the KC-767 as the next-generation tanker.

First, as posters on this (and other) forums have observed, the Boeing's decision to offer the 767 seems based, in part, on corporate desires to sustain production of that airframe. Without an Air Force tanker order, Boeing was looking at a short-term end for 767 production. Building more airframes for the Air Force would allow the company to keep the assembly line open for years to come, and generate more orders in the process.

At a "per unit" cost of $25-30 million less than the A330, Boeing believed the 767's pricetag would provide a strong selling point, as would its smaller "footprint" and the ready availability's of spare parts, based on the large number of airframes already in service.

Oddly enough, Boeing elected not to offer a tanker version of its hot-selling 777 wide-body jetliner, or innovative 787 "Dreamliner." The 787 was still in development when the Air Force asked for bids on a new tanker, so it wasn't a realistic contender for the contract.

As for the 777, Boeing has never fully explained its rationale for excluding that airframe. However, production of a military 777 would strain the company's production capabilities, and possibly slow deliveries to commercial customers. Still, a tanker variant of the "Triple-7" would have more than matched the A330's off-load and transport capabilities, and the wide-body is surprisingly fuel efficient, one reason it has become a favorite of long-haul airlines.

But Boeing's biggest blunder was, arguably, it's initial plan to lease 767 tankers to the Air Force. First approved in 2003, the deal was later abrogated when it was learned that the aircraft manufacturer had offered jobs to the service's senior civilian contracting official and two members of her family. The contracting official, Darlene Druyun, later served a 9-month prison sentence and two Boeing executives were convicted as well.

Not only did the tanker lease result in a huge fine, it also made Boeing "radioactive" in terms of future, big-ticket contracts. With an already-tight procurement budget, the Air Force did not want a rehash of the tanker lease controversy. And, with Northrop-Grumman offering more capability (at a slightly higher price), the service found it easy to justify the KC-30, heading off potential criticism that would come with a new Boeing deal.

Obviously, Boeing still rakes in billions of defense contracting dollars each year. But there is no question that the company's ability to win new Pentagon deals has been impacted by the ill-fated tanker lease. When Boeing received an Air Force contract for new search-and-rescue helicopters in 2006, competitors immediately cried foul, and the deal was re-opened for bidding.

At last report, a final decision on the helicopter program (better known as CSAR-X) has been delayed until later this year. A few months ago, most industry insiders still believed that Boeing would still win the contract. In the wake of last week's tanker announcement, some analysts now believe that Sikorsky or another U.S.-European team--led by Lockheed-Martin--may wind up with the contract. That would represent another body blow for Boeing, already reeling from the tanker decision and production woes with the Dreamliner.

So far, no one's erecting billboards around the Boeing plants in Seattle, St. Louis or Wichita, asking "The Last Person Out of (City's Name), to "Please Turn Out the Lights." Those were the signs that appeared in Everett, Washington in the late 1960s, before the 747 jetliner arrived and literally secured Boeing's future. Almost 40 years later, the aircraft manufacturer is a much more diversified--and financially secure--company. But it's also clear that Boeing's military division is facing tough times ahead, and many of the company's problems are clearly self-inflicted.


mannaka said...

At a "per unit" cost of $25-30 million less than the A330, Boeing believed the 767's pricetag would provide a strong selling point, as would its smaller "footprint" and the ready availability's of spare parts, based on the large number of airframes already in service.

That sentence speaks volumes, and it clearly describes why I don't believe this is over yet. There are several interrelated "transformations" occurring simultaneously in the AF & DoD right now that are relevant to this issue, a few of which revolve around the words "joint" & "efficient." On the joint side, DoD wants to operate more like one cohesive unit rather than four separate services. As a result, they’re constantly trying to turn their weapons systems purple, and standardize (simplify) the maintenance & logistics functions between services. Programs like the Joint Strike Fighter are good examples of this from a headline perspective, but it goes a lot deeper than that. DoD wants things like its depot functions, spares, AGE, etc to be as interchangeable as possible to make joint operations more seamless. If we suddenly jump from Boeing airframes in our tanker fleet (and eventually other MDSs as is so aptly pointed out) to Airbus designs, we’ll be forced to significantly increase the complexity of our support functions. Rather than creating more simplicity and interchangeability, we’ll be creating more complexity and incompatibility. This also conflicts with the efficiency objective, because adding what will essentially be a whole new asset to our inventory, rather than more or less updating what we already have, is going to cost a lot more money. The media focus has been primarily on the unit cost of the airframes (which also favors Boeing), but what about things like the cost of training our mechanics who are experienced with Boeing systems to work on an Airbus.

My gut tells me that the AF doesn’t intend for this decision to stand, but it felt compelled to make it for a number of reasons (mostly political). I might be completely off base on this, but my prediction is that Congress will push to have this overturned and the AF will eventually end up with Boeing tankers. Whether they’re based on the 767 (which I doubt) or the 787, will depend on how long the process takes. Knowing Congress, Dreamliners have the upper hand in my book.

Ken Prescott said...

If we suddenly jump from Boeing airframes in our tanker fleet (and eventually other MDSs as is so aptly pointed out) to Airbus designs, we’ll be forced to significantly increase the complexity of our support functions.

We will have the same exact problem in jumping from the 707 to the 767 airframe--they aren't even close in commonality. This really isn't a tenable argument.

mannaka said...

I'm not talking about the hardware so much as I am the culture (i.e., processes, procedures, workflow, etc.). Regardless of who ends up winning, the technology will be completely different than what the AF has now. In fact, if things drag out long enough for a 787 (with its extensive use of composites) to make it into the mix, the technology will be even further removed. However, it would be a hell of a lot easier to transition your fleet to a new generation of equipment with the same vendor than it would to change your technology AND its supplier. There’s a lot more to a weapons system than just its nuts and bolts.

owr084 said...

"Those were the signs that appeared in Everett, Washington in the late 1960s, before the 747 jetliner arrived and literally secured Boeing's future."

You are way off on that one. First, the signs appeared in Seattle, not Everett. Second, it was in 1971, not the late 60s. Finally, it was due to the overall aviation recession which affected Boeing particularly hard. The cancellation of the SST didn't help either and was the start of 60,000 lay-offs. Guess you just had to live there at the time...

Doug said...

Murtha Blasts McCain Over Tanker Contract

Fox News Channel
Air Force Secretary Defends Tanker Contract Award to European Manufacturer
Seeking Alpha
In Defense of Northrup-Grumman's USAF Contract Win
Reid calls for congressional hearings on tanker deal
The Earth Times Online Newspaper
Boeing demands Air Force brief on tanker contract
House panel calls hearing on tanker deal

Unknown said...

One reason why it's important to keep the tanker's production in America is that the technical expertise stays in America. If we allow that expertise to slip away to France then if there is a situation where we need to build our own tanker (when they refuse to deliver tankers based on foreign policy decisions they disagree with we won't be able to. That does put our national security in jeopardy and quite frankly, is a huge mistake on the Air Force's part.

MB said...

This was the wrong decision for many reasons including those made in earlier comments. Here are two more: Despite that the Tanker is not very "sexy", it IS the lynch pin to everything the AF does today in mobility. It enables the Air Force to achieve the air superiority needed in the early moments of any ground campaign. We cannot get airlifters or fighters across oceans, into theater or into and out of the fight without Tankers. Because the EADS A330 is so much larger, it means that each one of them will be a higher value target, there will be far fewer of them and consequently, less flexibility with fewer tactical and strategic options. They also will have far less availability for planned new missions and roles such as Med Evac and C2/4. The AF has a fleet of around 500 KC-135 Tankers today and their utilization rate is high. We will not have the options in the future that we have even with today's 50 year old KC-135's. Secondly, there has been no consideration of the billions of military construction dollars that will be needed. The Air Force has no hangars large enough today at locations where the new Tanker could be based to house it. Once again, the taxpayer is in for a surprize when they get the bill for all the new airfield construction that will be needed. The KC-767 is also larger than the current KC-135 and will likewise require new MILCON dollars but nowhwhere near the scale needed for the EADS A330.
Lastly, after Congress fails to act and the contract to EADS goes forward placing control of this essential capability in the hands of a foreign entity, we will dicover too late as a nation how geo-politically complicated projecting US power becomes.