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A $40 Billion Tanker Battle
Source: Business Week
Publication date: 2008-02-26
It's a classic dogfight. On one side, cruising at a good clip, flies Boeing (BA), the U.S.'s second-largest defense contractor with some $66 billion in total sales. Ready to attack is $32 billion Northrop Grumman (NOC), the No. 3 contractor. It has allied itself with European Aeronautic Defence & Space (EADS), Boeing's archrival in commercial and military aircraft. At stake is a $40 billion contract to supply the U.S. Air Force with 179 new refueling tankers.
With the nation's Bush-era defense buildup in its waning years, the contract could be one of the last major aircraft acquisitions for some time. The Pentagon's Defense Acquisition Board met on the afternoon of Feb. 25 and was predicted to pick a winner as early as Feb. 26. A spokesperson for the Air Force said the branch had no further information or comment.
In many ways the contract is Boeing's to lose. The company is already the largest provider of refueling tankers. The Air Force owns 502 Boeing KC-135 Stratotankers, workhorse aircraft that carry 202,000 pounds of jet fuel to supply thousands of Air Force, Navy, and Marine planes in midair. The tankers have played a key role in the conflicts in Afghanistan and Iraq, where access to foreign bases and airspace has been a major hurdle. The average age of the current fleet is some 45 years, however, and Boeing and others have argued it is need of an update.
McCain Has Questioned the Program The history of the contract has been a long and tortuous one. The Government Accountability Office first suggested modernizing the tanker fleet in 1996. The Pentagon awarded Boeing a $23 billion contract to lease 100 new tankers in 2002, but the acquisition proved controversial. Current Presidential candidate John McCain [R-Ariz.], sitting on the Senate Armed Service Committee, criticized the deal as expensive and a departure from regular procurement procedure. The Office of Management & Budget also challenged the cost of the lease. The Air Force had argued that a lease program would help it to obtain the planes faster.
Congressional hearings were held. In 2004, former Air Force lead negotiator Darleen Druyan and former Boeing Chief Financial Officer Michael Sears pled guilty to secretly negotiating a job for Druyan with Boeing while she was simultaneously overseeing the tanker award. In the wake of that investigation, the Defense Dept.'s Inspector General also cited Air Force Secretary James Roche for improperly recommending the brother of a colleague for a job at Northrop, Roche's former employer. He resigned. The controversy also helped shoot down the career of Boeing Chief Executive Philip Condit.
In December, 2007, McCain raised concerns that the Air Force was not adequately preparing to keep the KC-135s in service for as long as possible. "Given that taxpayers have made a significant investment in the KC-135 fleet, the Air Force should not be permitted to precipitously retire them simply because it wants to buy as many new tanker aircraft as possible," he said.
Dueling Aircraft Both companies have been lobbying hard to win the new contract. Los Angeles-based Northrop, which is briefing analysts in New York on Feb. 26 about its 2008 outlook, would clearly like to report that it's taking the lead in a new aircraft acquisition after years of serving mainly as co-pilot in Lockheed Martin- (LMT) and Boeing-led projects.
Northrop's plane, the KC-30, is a derivative of the successful Airbus A330 commercial airline. Its military tanker versions are already in use by allies such as Britain, Australia, and Saudi Arabia. The Northrop tanker will carry 250,000 pounds of fuel, 25% more than Boeing's plane. Partner EADS, the parent of Airbus, has invested heavily in new manufacturing facilities in Mobile, Ala., part of an overall effort to ensure more than half of the tanker's components are American-made.
Boeing has argued that its offering -- a modified version of the company's 737 airliner -- is more practical. Boeing says its plane is 24% more fuel-efficient than its rival, a potential savings of $14 billion in fuel over the 40-year life of the aircraft. Boeing has already built more than 2,000 737s, half of them commercial use, half as military cargo aircraft. The company has begun supplying the new tankers to the Italian and Japanese military.
With its 156-foot wingspan, Boeing's plane is a good deal smaller than the 197-foot Northrop plane. That means it can land in more airfields, says Paul Nesbit, a defense industry analyst with JSA Research. The Pentagon would thus likely be able to afford more of them. "The A330 is a considerably larger and more expensive aircraft," he notes. "The Air Force would have to revamp its whole system of logistics to fly them."
The Made-in-America Advantage The Boeing aircraft would be manufactured at the company's massive plant in Everett, Wash., and flown to Wichita, Kan., where customized military parts such as the fueling boom would be added. It will have an overall U.S. parts content of 85%, according to Boeing spokesman Bill Barksdale, compared to about half for the Northrop tanker. "No matter how much our competitor wants to push back on that, it's definitely the American tanker," Barksdale says.
Defense industry analysts pick Boeing as the likely winner. Although the Pentagon has been awarding more contracts to foreign suppliers -- the new version of the President's Marine One helicopter, for example, is to be made by an Italian/British supplier -- John Pike, director of Pentagon watchdog GlobalSecurity.org, says it would be unusual for a contract of this size to have such a significant overseas component. "I'm just not able to believe American tax dollars are going to flow into Airbus on such large scale," Pike says.
One thing is almost certain, however: Whichever company loses will likely challenge the award. That will further delay an already long-delayed project.
Source: Business Week
Publication date: 2008-02-26
It's a classic dogfight. On one side, cruising at a good clip, flies Boeing (BA), the U.S.'s second-largest defense contractor with some $66 billion in total sales. Ready to attack is $32 billion Northrop Grumman (NOC), the No. 3 contractor. It has allied itself with European Aeronautic Defence & Space (EADS), Boeing's archrival in commercial and military aircraft. At stake is a $40 billion contract to supply the U.S. Air Force with 179 new refueling tankers.
With the nation's Bush-era defense buildup in its waning years, the contract could be one of the last major aircraft acquisitions for some time. The Pentagon's Defense Acquisition Board met on the afternoon of Feb. 25 and was predicted to pick a winner as early as Feb. 26. A spokesperson for the Air Force said the branch had no further information or comment.
In many ways the contract is Boeing's to lose. The company is already the largest provider of refueling tankers. The Air Force owns 502 Boeing KC-135 Stratotankers, workhorse aircraft that carry 202,000 pounds of jet fuel to supply thousands of Air Force, Navy, and Marine planes in midair. The tankers have played a key role in the conflicts in Afghanistan and Iraq, where access to foreign bases and airspace has been a major hurdle. The average age of the current fleet is some 45 years, however, and Boeing and others have argued it is need of an update.
McCain Has Questioned the Program The history of the contract has been a long and tortuous one. The Government Accountability Office first suggested modernizing the tanker fleet in 1996. The Pentagon awarded Boeing a $23 billion contract to lease 100 new tankers in 2002, but the acquisition proved controversial. Current Presidential candidate John McCain [R-Ariz.], sitting on the Senate Armed Service Committee, criticized the deal as expensive and a departure from regular procurement procedure. The Office of Management & Budget also challenged the cost of the lease. The Air Force had argued that a lease program would help it to obtain the planes faster.
Congressional hearings were held. In 2004, former Air Force lead negotiator Darleen Druyan and former Boeing Chief Financial Officer Michael Sears pled guilty to secretly negotiating a job for Druyan with Boeing while she was simultaneously overseeing the tanker award. In the wake of that investigation, the Defense Dept.'s Inspector General also cited Air Force Secretary James Roche for improperly recommending the brother of a colleague for a job at Northrop, Roche's former employer. He resigned. The controversy also helped shoot down the career of Boeing Chief Executive Philip Condit.
In December, 2007, McCain raised concerns that the Air Force was not adequately preparing to keep the KC-135s in service for as long as possible. "Given that taxpayers have made a significant investment in the KC-135 fleet, the Air Force should not be permitted to precipitously retire them simply because it wants to buy as many new tanker aircraft as possible," he said.
Dueling Aircraft Both companies have been lobbying hard to win the new contract. Los Angeles-based Northrop, which is briefing analysts in New York on Feb. 26 about its 2008 outlook, would clearly like to report that it's taking the lead in a new aircraft acquisition after years of serving mainly as co-pilot in Lockheed Martin- (LMT) and Boeing-led projects.
Northrop's plane, the KC-30, is a derivative of the successful Airbus A330 commercial airline. Its military tanker versions are already in use by allies such as Britain, Australia, and Saudi Arabia. The Northrop tanker will carry 250,000 pounds of fuel, 25% more than Boeing's plane. Partner EADS, the parent of Airbus, has invested heavily in new manufacturing facilities in Mobile, Ala., part of an overall effort to ensure more than half of the tanker's components are American-made.
Boeing has argued that its offering -- a modified version of the company's 737 airliner -- is more practical. Boeing says its plane is 24% more fuel-efficient than its rival, a potential savings of $14 billion in fuel over the 40-year life of the aircraft. Boeing has already built more than 2,000 737s, half of them commercial use, half as military cargo aircraft. The company has begun supplying the new tankers to the Italian and Japanese military.
With its 156-foot wingspan, Boeing's plane is a good deal smaller than the 197-foot Northrop plane. That means it can land in more airfields, says Paul Nesbit, a defense industry analyst with JSA Research. The Pentagon would thus likely be able to afford more of them. "The A330 is a considerably larger and more expensive aircraft," he notes. "The Air Force would have to revamp its whole system of logistics to fly them."
The Made-in-America Advantage The Boeing aircraft would be manufactured at the company's massive plant in Everett, Wash., and flown to Wichita, Kan., where customized military parts such as the fueling boom would be added. It will have an overall U.S. parts content of 85%, according to Boeing spokesman Bill Barksdale, compared to about half for the Northrop tanker. "No matter how much our competitor wants to push back on that, it's definitely the American tanker," Barksdale says.
Defense industry analysts pick Boeing as the likely winner. Although the Pentagon has been awarding more contracts to foreign suppliers -- the new version of the President's Marine One helicopter, for example, is to be made by an Italian/British supplier -- John Pike, director of Pentagon watchdog GlobalSecurity.org, says it would be unusual for a contract of this size to have such a significant overseas component. "I'm just not able to believe American tax dollars are going to flow into Airbus on such large scale," Pike says.
One thing is almost certain, however: Whichever company loses will likely challenge the award. That will further delay an already long-delayed project.
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