"A clear winner," Deputy Defense Secretary Bill Lynne called Boeing at the contract award announcement. "An extremely low-ball offer" was how EADS North America Chairman Ralph Crosby characterized that winner's bid, in announcing that he could find no grounds on which to protest. For as Bloomberg Businessweek reported this weekend, Boeing's offer for the 179 aircraft of the US Air Force's KC-X program was $20.6 billion—fully two billion dollars less than Airbus's offer. Boeing's protest of the previous award may have "turned the tables, and the rules," as Chicago Magazine's Whet Moser put it, but whatever the difference in capabilities, or one's opinion of the RFP, two billion dollars is hard to ignore.
The rules that changed, that is, concerned a perceived handicapping of the additional cargo and fuel capacity of the KC-45, Airbus's offer of tanker-transport versions of the A330. As I have analyzed those arguments elsewhere (indeed, finding some merit in the argument for a bigger plane), I will attempt to conclude my years of on-again, off-again commentary on this deal on one final question. Was it worth it? That is, the USAF's twice fumbling the procurement process may have been egregiously bad public administration, but did it actually work to the USAF's advantage?
Answering that requires a simple calculation. In 2002, the USAF requested a price from Boeing (as well as Airbus, admittedly) for up to 100 KC-Xs. Boeing's initial offer for KC-767s, based on a low-rate of production for the Japanese and Italian Air Forces, was obscenely high: about $175 million each. Airbus howled, suggesting that the price should be 40 percent less, or about $105 million. Boeing wasn't amused by that number, but after some protracted negotiations with the USAF (in which the service was aided by some number-crunching by the Institute for Defense Analyses), the company agreed to a price of $131 million per plane. At that point, someone in the Pentagon decided to get clever, and dreamt up that lease deal, whereupon the whole deal started unravelling fast.
Today, though, with that low-ball bid, each airplane from Boeing will cost, with some allowances for future factor inflation, just $115 million each. That's not too far from the list price of the plain-vanilla passenger plane, without any refueling equipment. It's also a great deal less, adjusted for average US inflation over the past eight years, than that earlier bid—$105 million from 2002 is worth about $131 million today. So, the USAF dropped the ball, twice, and in the end, got the same tanker it wanted eight years ago, but for $16 million less—and without even factoring for inflation. In real terms, the figure is over $20 million. If Boeing has actually figured out how to build KC-767s (or KC-46s, as the USAF version will be called), then boo-yah to them. If they've not, and they're just spitballing, then woe to them instead. But that's a story for another installment.
For that matter, just the numbers are not even quite the whole story now. Since 2002, we've all been hearing the same narrative about the KC-135s: they were first bought when Eisenhower was president, they're about to start falling out the sky, and they're hideously expensive to fly. Actually, as the GAO concluded back in 2003, the last models (the KC-135Rs) cost then about $3.7 million annually to operate. That includes crews, fuel, spares, engineering services, depot repairs—the whole smash. Eight more years of flying old airplanes, for $16 million in savings? That actually makes sense as long as the cost difference between flying KC-135Rs and KC-46s wouldn't have exceeded $2 million per plane per year. That is, the KC-46 would have to be not much more than half as expensive to fly if the delay were to be called a bad deal financially.
Well, that's not quite it either—I might hold my comments under some guard until the last KC-135R lands on its final flight. The accident rate could conceivably still spike, leading us all to wring out hands about the tragedy of the delay. But barring that, this simple serial incompetence may have played out usefully. The wait may have saved the US government a billion dollars or so, and today, it needs every billion it can find. Indeed, Boeing's win today is rather reminiscent of Oshkosh's victory over BAE Systems in the 2009 FMTV competition. In both cases, the perceived underdog just underbid by about nine percent, and won the deal for a highly specifiable conveyance. As short as the government is, that sort of margin cannot be ignored.
There's a point of procurement policy herein that translates to plans for corporate strategy. For all the lamentations we hear about aging equipment, the breadth of the problem is uneven. The KC-135s have kept pumping fuel at altitude, as is their singular job. Adjusted for cost, that's pretty much the whole measure of their goodness. And at altitude and on long-runway landings, estimating their future operating costs, and figuring out how to keep them operating, is a knowable-know for the Air Force. Off-road trucks have a totally different and less knowable operating profile, and so the medium truck fleet recapitalization became a bigger priority for the Army. Where military suppliers sit with respect to investing in their OEM and MRO businesses depends to a great extent on how the inwardly shifting budget constraint will affect military plans for new versus refurbished kit. And if the old kit is soldiering along just fine, this might not be the time to stand by that rosy new kit sales forecast.
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