February 1, 2007  


Why Boeing will win the aerial refueler contest

The Northrop Grumman/EADS partnership continues to advance its proposed KC-30 replacement for the aging Boeing KC-135 aerial tanker, winning an important point with the U.S. Air Force and the advocacy of Sen. John McCain. But coming on the heels of this important victory is an apparent setback that is even more damaging, one that means the Air Force specifications will be almost tailor-made for rival Boeing.

The victory came when the Air Force eliminated the requirement from the draft request for proposal (RFP) that asked submitters to assess the potential outcome of an international trade dispute between the European Union and the U.S. over state subsidies provided to Airbus and Boeing.

The setback came when the Air Force indicated that specifications will be revised to focus on tanker, not transport, capabilities. This favors the Boeing offering.

Northrop’s KC-30 is based on the Airbus A330-300 passenger airliner. Boeing’s KC-767 or KC-777 are based on the passenger 767-200ER and 777-200. The EU and U.S. accuse Boeing and Airbus of receiving billions of dollars in “illegal” subsidies in violation of trade rules dating to 1992. The Air Force originally included language that required submitters to predict the outcome of the trade dispute, penalties that might be imposed and the cost of any penalties on the tanker proposals — all impossible tasks on an issue that has yet to be adjudicated.

Enter McCain. He virtually single-handedly killed Boeing’s 2001 KC-767 tanker lease deal because of illegal activities in the procurement process that sent Boeing’s chief financial officer and the Air Force procurement officer to jail and forced the resignation of Boeing’s CEO Phil Condit. The scandal, plus an unrelated one involving Boeing impropriety, cost Boeing more than $600 million in government fines.

When the Air Force included the World Trade Organization (WTO) language, McCain went into high gear again, challenging the Defense Department for including the language in an apparent attempt to derail the Northrop bid, because it is based on the Airbus airplane. In a series of exchanges over three months, McCain won the day: The Air Force in December changed the language to say that any penalties resulting from the WTO action could not be passed on to the Air Force.

McCain likely had help with lobbying from Northrop’s allies, including Alabama Sen. Richard Shelby and other members of the Alabama congressional delegation; the KC-30 will be assembled in Mobile, Ala., if Northrop wins the contract.

The stakes are higher than high. The initial order is expected to be for as many as 179 tankers, to be delivered at the rate of a 12 to 15 a year. Follow-on programs, the KC-Y and KC-Z, will replace another 300-plus KC-135s and 59 wide-body KC-10s.

Boeing has been the principal supplier of tankers since World War II. Accordingly, Boeing and others feel it’s their birthright to provide the next generation of tankers. Politics also rallies ’round the flag in a buy-American, anti-Airbus frenzy, exacerbated by French opposition to the war in Iraq. (It didn’t help that France turned out to be correct in its assessment of the American invasion.)

The buy-American sentiment resulted in legislation being adopted in the U.S. House (but rejected in the Senate) that would have prohibited the Air Force from buying an Airbus-based airplane as long as the trade dispute was before the WTO.

The Washington state delegation naturally rallied around Boeing. The company’s commercial airplanes are built in the Seattle suburbs and the KC-767 or KC-777 will be built there. Rep. Norman Dicks and senior Sen. Patty Murray, both Washington state Democrats, have been particularly vocal for Boeing; Murray has made the “illegal” subsidies to Airbus a signature political issue.

With the Democrats taking control of Congress, these two move into powerful leadership positions. Murray is now the fourth-ranking Democrat in the Senate and moves to a senior position on the Senate Appropriations Committee, which will have to approve expenditures for the tanker program.

Dicks similarly moves up in importance in the House, where he is one of the most senior members of Congress.

“Democrats are now in the driver’s seat,” Murray wrote in a statement for this report. “We will set the agenda in the Senate, help draft the bills and have more members on the committees. As a senior member of the Senate and a member of the Democratic leadership, I’ll have an opportunity to make sure the priorities of the Senate match the priorities of the constituents I represent.

“I think the change in control of Congress allows Democrats to have a real say in the tanker replacement program and other defense policy issues,” Murray stated. “It will allow me, Norm Dicks and others to have a louder voice and make it clear to the Air Force that it needs to move forward with the tankers our men and women in the military need.

“American taxpayers should not reward a company that has spent decades hurting American workers, and we should not turn a critical military contract over to a foreign company that is unfairly supported and subsidized by foreign powers,” Murray wrote.

Too much airplane?

Many impartial observers believe the KC-30 is superior to the KC-767. The commercial A330, designed 10 years after the 767, effectively killed the commercial 767 based on economics, performance and capabilities. The KC-30 can carry more cargo, troops and fuel greater distances than the KC-767. However, being larger, it requires more ramp space and costs more than the KC-767. If only a tanker is defined in the RFP, the KC-30 is too much airplane.

Because the KC-767 is already in production, with first deliveries in 2007 to Japan and Italy, Boeing is focusing on this airplane. But it has offered a derivative of the 777 should the Air Force want it; draft specifications allow an airplane in the million-pound range (the 747 and A380), but nobody believes the Air Force really wants an aircraft this large. The 777 is better matched as a replacement for the KC-10, however.

By having the KC-767 and KC-777 bracketing the KC-30 in size and capability, Boeing has the advantage on the chessboard. But a checkmate may be forthcoming in the final RFP, which was expected in January. An updated draft RFP for the KC-X was issued in mid-December, and it stressed that the tanker was the No. 1 procurement priority.

“All three missions of the aircraft are vitally important,” said Lt. Gen. Donald Hoffman, military deputy in the Office of the Assistant Secretary of the Air Force for Acquisition, “but first and foremost, the KC-X is the next generation in aerial refueling.”

This appears to confirm a prediction by the Lexington Institute think tank that the award will turn on how much importance the Air Force will put on the transport side of the specifications. Reducing the importance clearly favors Boeing.

But the draft RFP also incorporates changes that include addressing the WTO litigation.

“The Air Force has revisited its position on the WTO issue concerning the tanker replacement program based upon discussions with the offerers,” said Kenneth Miller, assistant to the secretary of the Air Force for acquisition. “In the updated draft RFP, we’ve added a clause that makes certain costs associated with the WTO litigation unallowable expenses under the contract.”

Northrop believes the Air Force will be shortsighted by reducing the capabilities in the RFP. The service men and women in the field need transport and cargo lift today, Northrop said, and the KC-30 is the better airplane.

Boeing and others believe that getting more “booms” (a reference to the extendable boom at the tail of the tanker that transfers the fuel to other airplanes) is a more important near-term strategy. This favors the cheaper KC-767.

Even if the Air Force decides the KC-30 is the better airplane on its technical merits, the final decision won’t be made by the service branch — it will be made in Congress. Murray will do everything to see to that. It’s clear that whatever the outcome of the WTO litigation, and despite the fact that launch aid for the A330 will be repaid by the time the contract is awarded, Murray intends to keep the issue alive.

“Launch aid provides unfair advantages that distort the market, and those advantages remain even if launch aid is eventually repaid,” she wrote in her statement. “For more than a decade, launch aid and other subsides have enabled Airbus to weather downturns, develop products they couldn’t bring to market otherwise, and save millions in financing. Those years of benefits have given Airbus unfair advantages which continue to distort the marketplace, whether or not those subsidies are ever repaid.”

Nor does it matter to Murray that Northrop says that nearly 60 percent by value of the KC-30 will be made in the U.S.

“Airbus has zero credibility to claim that its products are made in America,” Murray said. “Airbus has a long history of making unsubstantiated claims about its impact on American workers and our economy. When I asked, the U.S. Commerce Department could not validate Airbus’s claims about how many American suppliers and workers it used. Airbus continues to make false claims, but the bottom line is clear. EADS has spent decades trying to take jobs away from American workers and has spent millions of dollars on a [public relations] effort to sell itself as an American company. I think people can see through Airbus’s deceptive spin.”

So as this competition finally gets down to brass tacks, it will be powerful and will lead Republicans like McCain and Shelby against the newly empowered Democrats like Murray and Dicks. The winner of the competition will be based more on politics than on technical considerations. Based on this, the winner almost certainly will be Boeing.


Scott Hamilton is president of Leeham Co., an aviation consulting firm. He publishes an online newsletter that focuses on Boeing and Airbus and has written extensively about the tanker competition.