Washington Watch

Aug. 1, 2011

Boeing Lowballed the Tanker

It wasn’t just sour grapes when EADS North America Chairman Ralph D. Crosby Jr. claimed back in March that, on the KC-X contract, Boeing made an “extremely lowball offer in order to achieve their strategic objectives.” Both the Air Force and Boeing now acknowledge this is so.

Boeing “revealed” to the Air Force on April 25—two months after the contract award—that “it proposed a ceiling price for the [engineering and manufacturing development] contract that is less than its actual projected cost to execute,” an Air Force spokesman said in June.

In other words, Boeing bid less to develop and produce the initial models of the KC-46 than it will cost to do the work. Boeing broke no law or rule by bidding less than its estimated costs, the spokesman added.

“There is no legal barrier that prohibits an offeror from pursuing a below-cost proposal strategy,” he noted, saying Boeing adhered to federal acquisition regulations and “met all rules stipulated” in the request for proposal.

As a result of the low bid, there was “significant savings” to the government and American taxpayer, he said.

However, under the terms of the fixed-price incentive firm contract, Boeing must absorb any overruns beyond the $4.9 billion ceiling of the deal. That figure is the maximum financial liability to the government.

The Air Force now aims to “tightly control program execution to make certain Boeing delivers what it promised during source selection and to ensure the government maintains the competitively negotiated program cost, schedule, and performance baselines,” the USAF spokesman continued. This includes delivering 18 aircraft in the final production configuration by the end of 2017.

A Boeing spokesman said the company tendered an “aggressive but responsible” bid which will be good for the taxpayer and provides “value to Boeing shareholders.” When asked to elaborate, he explained, “We expect to make money on the KC-46 program.” Winning the program “opens additional opportunities, including potential US and international tanker sales and related services for decades to come.”

At the time of the award, industry officials suggested that Boeing was taking a longer-view approach to the KC-46 than just the initial batch of 179 aircraft. After the KC-X, the Air Force plans to have a KC-Y competition to replace the remainder of its already-50-year-old KC-135 tankers, and after that, a KC-Z contest to replace the KC-10 Extender. Winning the KC-X could give Boeing the inside track in those contests, although they are probably 10 and 20 years away, respectively.

Moreover, Air Force officials have in recent years suggested that the winner of KC-X could potentially be in a favored position to win work replacing other large aircraft such as the E-3 AWACS, E-8 JSTARS, and RC-135 Rivet Joint, all of which have significant commonality with the KC-135. The KC-46 could potentially be the vanguard of a new “family” of USAF heavy aircraft, patterned on the 707/C-135 model.

There was a commercial element to Boeing’s move as well. Industry officials pointed out that Boeing needed to win KC-X in order to block EADS—parent of Airbus—from gaining a production beachhead in the US. Had it won the KC-X, EADS planned to open a manufacturing capability on US soil to build its KC-45, based on the A330 airliner. Establishing such a production facility would have given Airbus an American manufacturing and service presence it currently does not enjoy.

MC-12 to The Army

The Air Force would have to give its brand-new fleet of MC-12W Liberty aircraft to the Army if a Senate Armed Services Committee plan becomes law.

Reporting on its markup of the 2012 defense authorization bill, the Senate said it was cutting nearly a half-billion dollars from the Army’s budget aimed at building an aircraft very like the MC-12W, and directed instead that the Secretary of Defense “develop and implement a plan for the orderly transfer of the Air Force C-12 Liberty intelligence, surveillance, and reconnaissance (ISR) aircraft to the Army.”

The House, in its version of the bill, also slashed the Army’s MC-12 clone, the Enhanced Medium Altitude Reconnaissance and Surveillance System, by $524 million, which was to buy 18 aircraft in Fiscal 2012. The Army had planned to slowly phase out its aging RC-12 Guardrail aircraft—which perform a similar function—replacing it with the EMARSS.

Defense Secretary Leon E. Panetta would have to submit the transfer plan by the end of Fiscal 2013. The report didn’t specify how long the Air Force would have to complete the transfer.

The MC-12W is one of the centerpieces of the Air Force’s efforts to fulfill former Defense Secretary Robert M. Gates’ insistence that the service do more to provide timely ISR products to ground troops. The service prided itself on bringing the MC-12 from concept to operations in record time, from a cold start in July 2008 to combat missions in Iraq in June 2009.

The aircraft is based on the Hawker Beechcraft King Air—the C-12 in military parlance—used by all the military services. The Air Force recently began bedding down the MC-12 at Beale AFB, Calif., which will host seven aircraft for training; the rest of the planned 37-aircraft fleet is expected to remain deployed overseas.

To help pay for the MC-12 and other ISR enhancements demanded by Gates, such as a large fleet of remotely piloted aircraft, the Air Force cut deeply into other accounts, e.g., retiring large numbers of fighter aircraft.

A spokeswoman for SASC Chairman Sen. Carl Levin (D-Mich.) said the move was prompted by the airland subcommittee staff, which convinced that panel that the role played by the MC-12 is “an enduring mission of the Army.”

She said the SASC believes “that these aircraft could best be operated and supported in the long term within the Army force structure,” and the transfer would prevent the Army from buying a duplicative capability in the form of the EMARSS.

The potential move of the MC-12 to the Army isn’t a new idea; Pentagon leaders proposed it in 2009 as part of a broader swap that would give the Air Force the whole of the C-27 Spartan light cargo aircraft fleet, which at that time was to be operated by both services. As it turned out, the Air Force got the Spartans and retained the MC-12, purportedly on the strength of its combat performance.

Flying over ground forces on patrol and in convoys, or circling above buildings and battles, the MC-12 crew gives troops on the ground instant intelligence about their surroundings, threats, and what resides over the next hill or around the next corner. This is provided by sensors that can intercept enemy communication and video that can be shared with the ground troops.

The Air Force crews consist of two pilots, a sensor operator, and a cryptologist who analyzes intelligence. The airmen communicate directly with ground forces, who have been effusive in their praise.

The Senate’s proposed MC-12 transfer plays out against the backdrop of a longer-term feud between USAF and the Army over how best to manage battlefield ISR. The Air Force has long sought executive agency for RPAs in a bid for efficiency and to deconflict the drones with manned aircraft. The efficiency would come from making RPAs available across the theater, as the theater commander directs.

The Army sees RPAs as tools tethered to individual units, and at the disposal of those unit commanders only; they would be idle when the unit wasn’t deployed. The Army’s plan for the EMARSS likewise would apportion the aircraft to ground commanders and not the joint force air component commander.

F-35 Targeted

Unhappy with cost overages and schedule delays on the F-35 program, Congress either attempted or passed a number of efforts to modify the program this spring, in hopes of imposing fiscal discipline on the fighter.

Sen. John McCain (R-Ariz.), ranking member of the Senate Armed Services Committee, attempted to add language to the armed services authorization bill that would compel the Pentagon to terminate the project by the end of 2012 if prime contractor Lockheed Martin fails to get costs down to within 10 percent of the target price. The measure failed in committee, but by the narrowest of margins—a 13 to 13 tie—suggesting SASC patience with the F-35 is razor thin.

McCain pledged to reintroduce the measure on the Senate floor.

In F-35 hearings this spring, McCain urged Pentagon acquisition leaders to develop “alternatives” for the program, insisting that contractors perform better if there is a real threat of losing the work to someone else. Pentagon acquisition chief Ashton B. Carter replied in testimony that the Pentagon sees no viable alternative to the F-35.

However, the F-35 did not escape without some restrictions. The SASC directed the Pentagon to make the next negotiated production contract—Lot 5—a fixed-price arrangement, which would compel Lockheed to eat any overruns on the project.

However, the panel allowed that if the government demands changes to the F-35 design—a likely outcome of flight-test discoveries or the need to add additional capability—then the additional cost “should be borne by the government,” the SASC said in its authorization bill report.

After promoting the fact that Lot 4 prices were lower than the Pentagon’s expectations—and making much of the fact that Lot 4 was of a fixed-price type two years earlier than expected—company officials have been less willing to predict a price reduction in Lot 5. Industry officials said that if Lot 5 must follow the SASC directive, it becomes a riskier proposition and demands a “risk premium” in the price. That, and the fact that the line will be switching from mostly F-35Bs to F-35As and Cs, could increase costs, industry officials said.

McCain, in a statement he attached to the SASC bill, expressed his worry that the directive the SASC adopted would indeed “result in the contractor simply insisting on a much higher fixed price, or require that a ‘risk premium’ be baked into the fee structure of the next lot’s contract.”

SASC Chairman Levin said he didn’t vote for McCain’s measure because it could be viewed as changing F-35 contracts after the fact, but did say he was studying ways to keep pressure on Lockheed to meet cost targets on lots already negotiated.

Lockheed F-35 Vice President Tom Burbage told reporters at the Paris Air Show that, although Lot 4 is only about 10 percent complete, company projections show Lockheed will earn a profit on the deal. The projection was the result of a periodic “estimate to complete” the contract.

Former Defense Secretary Robert M. Gates, interviewed by Bloomberg news just before leaving his Pentagon post in June, said he saw little chance that the F-35 will be terminated.

“There is no question in my mind we have to have the airplane if we are looking out 10, 20, 30 years,” he said. However, with costs going up, he thought it possible that the eventual size of the F-35 fleet—still pegged at around 2,400 aircraft for the Air Force, Navy, and Marine Corps together—could be reduced by budgetary pressures.

“Potentially,” he said, Congress could seek savings by reducing “the size of the buy.” However, such a tactic would mean “the price per airplane is going to go up.”

Prior to his departure, Gates put the F-35B version on a two-year “probation,” since the short takeoff and vertical landing variant had been the bad actor in delaying completion of development and flight testing. However, industry and Marine Corps sources have said the F-35B’s problems are well-understood and fixes are already being implemented.

The Pentagon is undertaking an internal analysis of what the F-35 “should cost,” and Carter said his office is working with Lockheed to reduce overhead costs and eliminate non-value-added processes to reduce prices on the fighter.