Boeing Continues to Announce Sub-Contractors for KC-46A

As the KC-46A aerial tanker program moves forward headed up by Boeing (BA) they continue to announce the different sub-contractors and parts suppliers. The latest is that BAE Systems (BAE:LSE), the British defense giant, will be providing touch panels to operate some of the systems on the aircraft.

The panels are derivatives of the current ones they manufacture for Boeing’s 737 airliner indicating that Boeing will follow its plan of utilizing components from its different aircraft to support the 767 based tanker. The cockpit is planned to be a version of that used in the new 787 Dreamliner expected to enter service in the next few months.

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Boeing Issues Contracts for Cargo Nets

Boeing (BA) issued a contract to AmSafe Industries Inc. to manufacture the internal cargo nets for the KC-46A tanker aircraft. The contract has a value of about $45 million.

The barrier net system will be used to restrain and contain cargo inside the aircraft. One of the secondary missions of the modified 767 tanker being built by Boeing is to carry cargo and these nets are key to ensuring a safe flight.

AmSafe is one of the world’s leading manufacturer of these type of systems. They also build safety curtains as part of this to prevent any fire and smoke from the cargo area entering the cockpit and crew areas.

The KC-46A program is continuing a pace with the first aircraft expected to be flown in 2015. Ultimately the Air Force could buy over 170 of the aircraft from this contract.

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Air Force Continues Commitment to KC-46A

At a recent conference the Air Force Secretary, Mr. Michael Donley, discussed the key programs for the Air Force’s future. Facing a declining budget situation the Air Force as all of the services may be forced to choose which investments have a higher priorities then others. Not surprisingly the keys for the Air Force will be the F-35, Unmanned Aerial Vehicles (UAV), space and the KC-46A tanker.

The KC-46A currently being developed by Boeing (BA) will go into service later this decade to replace the aging KC-135 fleet. In terms of total cost it is one of the largest current defense programs. If the Air Force follows through with the first 170 odd aircraft the cost will be about $35 billion. There are plans to buy another 300 or more.

If there are as significant reductions to the defense budget as being discussed then the KC-46A like so many other programs may see quantities cut. This could be either the total procured or the annual buys. It could also see it being maintained at the expense of other investment programs such as new UAV or space programs.

Tankers are a key force multiplier for the United States. Declining amounts of strike assets increase the reliance on the tanker fleet. The need for the KC-46A is well established and it is a program now that the commitment to Boeing has been made that the U.S. really cannot afford to reduce. Whether this holds true remains to be seen.

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Boeing and DoD Release Latest Estimate for KC-46A First Phase Contract

The Hill is reporting that Boeing (BA) currently estimates the first phase of the KC-46A contract at about $5.2 billion or 6% above the $4.9 billion ceiling price. All of that increase if that is what it turns out to be will be paid for by Boeing. The cost share of the difference between $3.9 billion target price and the $4.9 billion ceiling will be split between the Government and Boeing.

There was some consternation when the reports of Boeing’s efforts costing a great deal more then the $3.6 billion price at which the contract was awarded. This led to charges that Boeing “bought in” the contract by bidding deliberately low so that competitor EADS North America, part of European aerospace giant, EADS (EADS:P), could not win.

As the contract goes forward the total cost will change depending on what challenges the program faces and if it needs more time and investment to develop the variant of the Boeing 767 airliner. It may end up being less then $5.2 billion or even more as the program evolves.

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Department of Defense Not Really That Concerned with Boeing’s Costs for Tanker

At a recent public event the Undersecretary of Defense for Acquisition, Logistics & Technology, Ashton Carter, was asked about the projected cost increases for the KC-46A development. His response was that he, and OSD, are not really that worked up about the fact that Boeing (BA) may exceed the projected ceiling price of the contract.

In his eyes the U.S.’s liability is based on the $4.9 billion price. Boeing’s bid of $3.6 was a conscious business decision on their part. Some members of Congress, led by Senator John McCain (R-AZ), have raised concerns about the increase and the fact that the cost share structure of the contract obligates the U.S. to pay 60% of the first billion in increases.

There is also the idea that this situation would encourage contractors to submit low estimates for development contracts, or buy-in, with the goal of making up the difference in their production or by having the U.S. pay some of the overruns. McCain and the Senate Armed Services Committee (SASC) are also investigating the large cost increases in F-35 production that are requiring the U.S. to pay over $700 million as part of their cost share.

The idea that the Defense Department would accept this kind of business model is interesting. One of the criticisms of defense acquisition is this very point. In the late Sixties when Lockheed, now Lockheed Martin (LMT), did the same with the C-5 transport, although perhaps not deliberately, it is considered one of the examples of acquisition abuse and the program was almost cancelled. Now Carter is saying that as long as it involves a Firm Fixed Price Contract it is an acceptable practice.

This is just the beginning of the situation and Boeing certainly has the ability to not charge more then the ceiling price as they work the KC-46A development. Their current estimate of about $5.2 billion may be conservative and costs for the first 18 aircraft could be under $4.9 billion.

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KC-46A Costs Reportedly Increase

A few weeks ago it was reported that Boeing (BA) had already informed the U.S. Air Force of at least a $300 million increase in the costs of the first phase of the KC-46A aerial tanker program. This led to Reuters asking the Air Force some follow up questions on the situation.

They are now reporting that the way the current contract is structured the Government and Boeing would share in the first $1 billion increase beyond the target price of $3.9 billion for the EMD contract which will also deliver 18 tankers. The original contract value was about $3.6 billion.

Once the price gets beyond $4.9 billion Boeing would be responsible for all costs. Up to that they would pay 40% and the government 60 or $600 million. The reports last month had Boeing predicting that they would spend at least $4.2 billion.

This was the third attempt by the Air Force to award the new tanker contract since 2001. An attempt to award a sole source lease to Boeing was derailed by fraudulent activity by Air Force acquisition chief Darleen Druyun and Boeing’s CFO. In 2008 EADS teamed with Northrop Grumman (NOC) won a contest that was overturned on protest by Boeing. This latest contract is the result of the new competition held due to Boeing’s successful protest. EADS was not able to match the price that Boeing offered which is now seemingly controversial due to the reported cost increases.

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Reports that KC-46 Contract Already Showing Cost Growth

Bloomberg is reporting that the U.S. Air Force has been briefing Congress in preparation for the FY12 budget that the KC-46 tanker contract with Boeing (BA) is already showing growth beyond the initial award price. The first part of the program is for development and testing as well as the delivery of the first 18 aircraft.

The value awarded was $4.9 billion but the indications are that it will be at least $300 million more. The way the contract is structured Boeing will have to cover that cost increase themselves. Boeing, though, seems confident that when all is complete the contract will be executed for close to the $3.9 billion and will not cost the company.

Boeing was awarded the contract in February for the new tanker program. The Air Force plans this as the first phase of a new program that could buy several hundred new tankers to replace the KC-135 and KC-10 fleet currently supporting operations. Boeing will ultimately build over 150 of the KC-46 tanker based on their commercial 767 airliner design. Boeing has also sold 767 based tankers to Italy and Japan with Italy just taking possession of their first aircraft.

The current estimate though of about a six percent cost increase is not a good sign for a program just starting which is going to be held to strict cost standards. One of the major reasons that Boeing won was their much lower price then their competition from Europen aerospace giant EADS (EADS:P) U.S. subsidiary, EADS North America. Their proposal based on the KC-30 tanker ordered by Australia and the U.A.E. was more expensive but was a larger aircraft that could carry more fuel. Further cost growth will only bring more scrutiny and criticism from Congress.

This was the third attempt by the Air Force to award the new tanker contract since 2001. An attempt to award a sole source lease to Boeing was derailed by fraudulent activity by Air Force acquisition chief Darleen Druyun and Boeing’s CFO. In 2008 EADS teamed with Northrop Grumman (NOC) won a contest that was overturned on protest by Boeing. This latest contract is the result of the new competition held due to Boeing’s successful protest.

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Boeing Releases Video of the Italian KC-767

Boeing (BA) has released a video on their Youtube channel of the Italian acceptance of the first two of their four KC-767A tankers.

The video may be found here.

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Recent Tanker News Link Round Up

The site has been quiet since the award of the KC-46A contract to Boeing (BA), but here are some links to articles about different aspects of the program and the companies involved in the contest:

Boeing is slowly releasing information about the KC-46A design.

World Trade Organization softens ruling against EADS (EADS:P). Boeing and U.S. still claim victory.

House puts strong cost controls on KC-46A with mandatory reporting requirements for Air Force.

First Australian KC-30 arrives at RAAF base for introduction into service.

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Aviation Week to Feature Indepth Article on KC-46A and Acquisition Process

Aviation Week is announcing that they have a feature article on Boeing’s (BA) new tanker and the process to acquire it. It features a interview with Shay Assad, Director of Defense Procurement, Acquisition Policy and Strategic Sourcing.

The article will be in the 11 April edition and on their website.

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