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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Navy LCS Strategy Raises Idea of Split KC-X Buy Again

In the past some analysts and members of Congress floated the idea of using both Boeing (BA) and EADS (EADS:P) as sources for new tankers. This split buy would negate contract protests and also more rapidly replace the aging KC-135 aircraft. The U.S. Air Force had always pushed back saying that the logistical costs of having two very different aircraft would be too expensive. Neither Boeing or EADS really supported the idea publicly either.

One of the leading proponents was Democratic Congressman John Murtha of Pennsylvania who died in the last year. The idea seemed to go away when the Air Force released its latest RFP and Boeing and EADS submitted their proposals.

Now the U.S. Navy’s decision to use two sources for their new small combatant the Littoral Combat Ship (LCS) is raising the issue again.

The original plan was to use two different designs and contractors to make this ship due to the large amount planned to be built. Two years ago because of cost and schedule problems the Navy changed its plan to one where several batches of ships would be awarded in separate contracts. But after receiving the proposals for the first batch the prices from the two bidders were so good the Navy has asked to go back to the dual source plan again.

There are some differences as the Navy planned for multiple providers even with the new acquisition strategy. The KC-X was always going to be one. The LCS despite two radically different hull designs meet the same basic requirements for speed, seakeeping, range and weapon layout. The Airbus 330 and Boeing 767 designs are quite different in fuel loads, range, runway and support requirements so the Air Force would still have two large, dissimilar logistic tails.

Even if Congress or others want the Air Force to copy the Navy in this case it really doesn’t make sense to do so. The original strategy should be stuck too and carried out.

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Boeing Can’t Be Seen As Taking Advantage Of Being Sole Bidder

Now, that Boeing is the only bidder on the KC-X, the Seattle Times notes that Boeing now has to make sure that it is not seen as taking advantage of being the sole bidder:

Northrop Grumman walked away from the $40 billion Air Force refueling-tanker competition Monday, drawing a widely criticized and nearly decadelong procurement process close to an outright Boeing victory.

With the likely prospect of air tankers rolling out of Everett until around 2027 at least, the outcome could secure as many as 2,000 direct jobs in Everett and an additional 6,000 statewide at suppliers and others, according to previous Boeing estimates.

Yet Northrop’s withdrawal leaves Boeing with a pricing dilemma as it prepares a final bid. The Pentagon, embarrassed by the lack of competition, now will be under extra scrutiny over what it pays for its tankers.

On one hand, because the contract is a fixed price — meaning the winner must swallow the loss if program costs escalate beyond the price it bids — Boeing typically would be expected to aim high, especially with no competition.

At the same time, Boeing will want to avoid the appearance that it is taking advantage of Northrop’s withdrawal to jack up the price.

“This competition was supposed to be a model for future procurement,” said Issaquah-based aviation analyst Scott Hamilton of “It’s clear the Department of Defense fell short again in running a procurement process that works.”

The contract is to supply the Air Force with 179 tankers used to refuel fighter, transport and bomber aircraft en route to their targets.

Northrop had teamed with EADS, parent of European planemaker Airbus, to offer a tanker based on the Airbus A330.

In 2008, the Defense Department cited a rough contract value of $35 billion, or about $196 million per airplane, plus an extra $5 billion in operational support and other costs.

Certainly, the rivalry in the previous round of the tanker competition between the Boeing 767 and the A330 drastically reduced the cost to the taxpayer.

Read the entire article at the Seattle Times.

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Presumed Bidders Meet With Air Force

It has been reported that last week Boeing (BA), Northrop Grumman (NOC) and EADS (EADS.P) had a series of meetings with the Air Force to discuss the draft KC-X RFP and the final one. After these meetings EADS and Northrop made clear that their threat not to submit a bid without changes to the RFP language was not an idle negotiation ploy as some have said. The companies believe that the current RFP is biased towards the smaller, cheaper Boeing 767 rather then the larger Airbus 330.

The discussions also indicate that the final RFP will come out before the end of January. Without two bidders it will be hard for the Air Force to proceed so they need a proposal from Northrop and EADS. At the same time they must have an RFP that will hopefully be protest proof and get the needed capability quickly.

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Northrop Congressional Supporters Continue Harsh Words

Last week Northrop Grumman (NOC) and its partner EADS (EADS.P) wrote a letter to the Defense Department stating that they are not interested in bidding on the KC-X contract if the current RFP language stands. Their argument is that it is currently biased towards a smaller aircraft which means that it is set up to give Boeing the contract. In their eyes there is no reason to go through the motion of bidding just not to win.

This of course caused all sorts of critics to rise up and claim that Northrop was trying to force the Government to bias the RFP and contract towards Northrop. Basically this is an attempt to blackmail the Government. The problem the Air Force has faced is that they need to write a RFP that gets them the best value bid meeting all of its requirements and is done in such a way that no protest occurs. This is proving difficult to do. The two aircraft, KC-767 or A330, are dissimilar enough that the requirements have to be carefully chosen. At the same time there is a great deal of pressure in Congress to support American companies and products. This is the state that the U.S. has gotten itself into by allowing only one major source of aircraft of this size to remain — Boeing (BA).

Now Northrop’s supporters in Congress are striking back. In a recent editorial the Congressman for Mobile, AL where EADS will assemble the aircraft, Jo Bonner (R-AL), writes that it is unfair to tar Northrop. In his eyes the Government is going out of their way to award a sole source contract to Boeing. This violates the spirit if not the law on contracting. He writes “And the reason Northrop Grumman, and its partner EADS, was not playing a game of chicken is because the draft RFP, released by the Air Force in September, has been all but written to guarantee the pre-selection of the smaller, older and much less capable Boeing 767”.

That is the crux of the problem. The Government lost the last attempt to award the contract competitively. Their attempt to let a sole source lease to Boeing before that was overturned by Congress. This next round doesn’t look good either. There is a crying need for this capability and it lags because of politics, industrial policy and poor management.

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Analysis Stresses Increased Cost To Air Force Of A330 Due To Size

This analysis at The Gehrson-Lehamn Group stresses that the Northrop Grumman/EADS A330 based tanker proposal will be more expensive then the Boeing 767 one due to the larger size of the aircraft and the requirements for investments in infrastructure to support it. The conclusion is that the 767 aircraft is currently closer in size to the existing KC-135 fleet and the existing Air Force bases, runways and facilities will support it with little or no modifications.

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