October 1, 2009  

Industry Pulse: Tanker food fight

Defense Secretary Robert Gates said he didn’t want to see a repeat of the corporate food fights that prevailed in the 2006 KC-X tanker competition. For a man who is serving his sixth president, this was incredibly optimistic or naïve.

The 1978 movie “Animal House” is renowned for its food fight scene. Thirty-one years later, its spirit is alive and well.

The draft request for proposals (RFP) for the third round of the Air Force’s KC-X aerial tanker competition hadn’t even been issued when congressional supporters of Boeing began their bleating that Northrop Grumman’s Airbus-based KC-30 should be penalized by the Air Force.

The trigger was the Sept. 4 interim report issued by the World Trade Organization’s three-judge panel that Airbus had benefited from launch aid and other financial benefits that violate WTO rules. This set of findings was five years in the making, begun when the U.S. government renounced the 1992 General Agreement on Tariffs and Trade (GATT) agreements that lay the foundation for government support for Airbus and Boeing.

Within a week of the draft RFP being issued, Northrop complained that the competition was unfair because Boeing received Northrop’s cost data in the 2006 contract debrief while Northrop did not receive Boeing’s cost information. With the new draft RFP placing top emphasis on cost, Northrop believes Boeing has the upper hand, even though the Defense Department specifically said it reviewed Northrop’s concerns and didn’t find them applicable to this new competition and its parameters.

The current round of food fights is really a continuation of those that began in 2004, when the U.S. renounced the GATT agreement under which Airbus was permitted direct government launch aid for its airliners, up to 33 percent of the research and development cost. Boeing was permitted indirect benefit via the Defense Department and NASA.

Over the course of the intervening years, both sides accused the other of abusing the process. After the U.S. renounced the GATT agreement and filed a complaint with the WTO, the European Union (EU) responded in kind about six months later. The WTO is expected to issue its findings in an interim report in the first half of next year and it is widely expected that the organization will also find Boeing improperly benefited from tax breaks and indirect government support. Both reports are subject to reviews, comments by the parties, the issuance and adoption of a final report and the likelihood of appeals that will drag out the process to 2011-13.

These uncertainties didn’t stop Boeing’s supporters, notably Sen. Patty Murray, D-Wash.; Sen. Sam Brownback, R-Kan.; and Reps. Norm Dicks, D-Wash., and Todd Tiahrt, R-Kan., from demanding that the Air Force include recognition of the WTO Airbus finding to prevent “rewarding” Airbus for its “illegal activity.” Rep. Jay Inslee, D-Wash., whose district include the Everett, Wash., Boeing production site where the KC-767 or KC-777 would be built, placed the illegal subsidy on the KC-30-based A330/A340 program at $5 billion. The inference is that the Air Force should add $5 billion to whatever price Northrop submits.

Boeing officials, in an interview in July with trade magazine Flight International, discussed this point and said they wouldn’t presume to suggest a “prescriptive” approach they think the Air Force should undertake. Interestingly, a spokesman for Dicks said the same thing after the interim report was issued.

Dicks’ chief of staff George Behan told me on Sept. 11, before the draft RFP was issued, that although Dicks believes the Air Force could and should decide to do a sole-source selection, it was obvious it wasn’t going to do so. Therefore, the Air Force should take note of the WTO interim ruling, despite the fact that a final ruling and resolution may be years away and that an interim report on the EU’s complaint against Boeing aid is pending.

“We think it would be entirely appropriate for DoD to do what it did in 2003 when DoD did sole-source,” Behan said. “[WTO] panel recommendations are never changed in substantive ways. We do not prefer a hold-harmless clause. We are not going to prescribe to DoD what to do, but it must in some way take [the WTO finding] into consideration. We won’t prescribe the remedy. There are many ways you can do it.”

Murray was even more adamant, if that’s possible, as were Tiahrt (a former Boeing employee) and Brownback.

The Air Force denied all suggestions that it consider the interim report, and quite properly so. “Interim” means only that, and although no party on either side expects any substantive change in the final report, it still may be appealed — and likely will be, certainly by the EU and possibly by the US, the latter over issues the WTO rejected.

No WTO findings

More to the point, the WTO has yet to issue findings on the EU’s complaint against Boeing aid. Can you imagine what would happen if the Air Force took note of the Airbus findings before the Boeing report was issued and awarded a contract to Boeing in part based on the WTO-Airbus findings? This would be a ready-made protest by Northrop Grumman to the Government Accountability Office (GAO) that would delay yet again a contract to replace the ancient KC-135s. At the very least, if the Air Force is going to take note of WTO findings, it has to take note of findings in both complaints.

It is worth noting that the EU’s complaint includes the Boeing 777 in particular as having benefited improperly from NASA and Defense Department research. Boeing may offer a tanker based on the 777 in addition to or instead of the Italian-based KC-767 that it is most widely expected to propose to Air Force.

But waiting for the Boeing report means delaying the procurement process for some indeterminate period. Although the EU filed its complaint six months after the U.S., and expectations are the interim report therefore should be issued about six months after the Airbus findings, the WTO hasn’t said when the EU findings will be issued.

Additionally, I’m going to guess that the Air Force took note, even if the Boeing supporters refuse to, of another provision in WTO rules: Article 23 prohibits a winning complainant from imposing penalties (or self-help, in the legalese) prior to the final resolution of a case. In other words, after all appeals, if any, are resolved.

If the Air Force penalized Northrop (Airbus) on the basis of the interim report, the EU would be free to impose penalties immediately on U.S. interests and regardless of the outcome of the Boeing complaint.

Boeing hasn’t commented on the interim report and now that the draft RFP is out, neither company is commenting at all beyond highly ambiguous statements that they are reviewing the RFP.

If only Boeing’s supporters would exercise similar restraint. Here’s why: During the 2006 competition — the one that was ultimately overturned by the GAO from Boeing’s protest of the award to Northrop — Boeing and Northrop each engaged in public relations, advertising and political campaigns that at best were unseemly and at worst were characterized by Gates as “corporate food fights.” Making matters worse, these efforts were clearly aimed at Congress (which appropriates the money). The Air Force makes a decision on the technical merits of the offerings and, assuming competition is run fairly, the outside food fights should have nothing to do with the selection.

The 2006 campaigning included focus on the Airbus launch aid, among other things, and was kicked off by Boeing. Procurement officials in the Pentagon and Air Force were said to be offended by the aggressive Boeing tactics.

It’s already clear Boeing’s fingerprints are all over the current congressional and media campaign. In the weeks running up to the Sept. 4 issuance of the interim report, members of Congress had the same talking points and media stories began appearing predicting a U.S. win, nearly all citing similar details. The recent press conference of a half-dozen lawmakers was staged in front of the Boeing KC-767 tanker simulator.

And Dicks’ office already has talking points lined up for the expected anti-Boeing findings by the WTO. “The difference is that complaint filed by U.S. government and the WTO is huge,” Behan said. “The primary charge the U.S. government made was the launch subsidy issue. Other subsidies were also included. The EU filed a counter-complaint focusing on infrastructure issues. Tax subsidies pale in comparisons to launch subsidies.”

Thin ice

Boeing and its supporters are treading on very thin ice. Meddling in this round of the KC-X procurement won’t win any friends in the Pentagon or the Air Force. The service and Gates’ office have structured the draft RFP very carefully to address the GAO findings in the Boeing protest and to ensure fairness and independent oversight during the evaluation process. Boeing and its supporters might win the battle over the tanker but the long-term damage to Boeing could be worse than losing the KC-X contract.

It is widely perceived that Boeing has very good connections on Capitol Hill but that Northrop has better connections in the Pentagon. Is this why Boeing is relying on its political connections to carry the water on this round? Or is there another reason?

Does Boeing have to fall back on its political connections because it believes it cannot win the competition on the merits? If indeed it believes its KC-767 is better than Northrop’s KC-30 (despite the long-running troubles with the Japanese and Italian tanker programs) or that its conceptual KC-777 is better than the KC-30, why is it necessary to rely on members of Congress to engage in this political food fight?

Boeing told me that it can’t control what the politicians do or say and there certainly is some truth to that. But Boeing can ask, and it is almost certain that the press conference in front of the KC-767 simulator had Boeing cooperation. If Boeing makes the case to its congressional supporters that their meddling might hurt more than help, I’d bet they would tone down their rhetoric. It’s not as if any of them have to play to their constituencies. All have safe seats, though Brownback wants to move from the Hill to the Kansas governor’s mansion and Tiahrt likely wants to move into Brownback’s Senate seat.

And what of Northrop’s cost complaint? The company drew some criticism, though not nearly as much as Boeing, in the 2006 competition for its tactics of threatening to not bid if the draft RFP criteria weren’t changed to give its larger airplane extra credit for its extra capabilities. Sen. John McCain, R-Ariz., went to bat for Northrop to ensure a “fair and open” competition and to exclude the WTO issue then. (A hold-harmless clause was inserted instead.)

At this writing Northrop hasn’t threatened to not bid in this competition, but regardless of the merits of this cost complaint, Northrop risks being seen as a whiner again.

If anyone thought that this competition would be more professional, think again. As long as politicians are involved, the refueling boom won’t be the only thing passing gas.

Scott Hamilton is an aviation consultant. He may be reached at www.leeham.net.