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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KC-X Soon? Protest Coming

At a recent press availability during the Air Force Association’s winter conference the Secretary of the Air Force indicated that the KC-X new aerial tanker contract will be awarded as early as this week. Earlier rumors had it being done in the next month or so.

Mr. Donley also made it clear that there is a potential for a protest of the award by either Boeing (BA) or EADS NA (EADS:P) if they don’t win and that the Air Force and the Defense Department are prepared to deal with it.

This is the third attempt to award this contract with the last contest won by Northrop Grumman (NOC) and EADS in 2008 overturned on Boeing’s protest. Due to the size, importance and the conflicts between the U.S. contractor and its supporters and the European aerospace giant this may continue to be an messy, extended affair.

For now everyone must wait until the decision is announced which could occur as early as tomorrow after 5:00 Eastern.

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Rockwell Collins Plans for KC-X Delay

Rockwell Collins (COL) had a good fourth quarter when they announced their most recent earnings. Overall revenue was up almost eight percent and profit twelve. Like most defense contractors though the company is planning for rougher times ahead as the U.S. defense budget declines.

Rockwell is part of Boeing’s (BA) team bidding for the KC-X new aerial tanker and the CEO, Clay Jones, said as part of the earnings release that they expect the contract award to be delayed.

Expectations were that it would be announced early next month but there have been consistent rumors and stories that this will be pushed off at least a few months as the Air Force evaluates EADS’ (EADS:P) and Boeing’s submissions.

The Air Force has been trying to buy a new tanker to replace the aging KC-135 aircraft now for most of this century. The current competition represents the third attempt and the second using competitive bids.

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SecDef Steps Up for EADS

The Secretary of Defense Robert Gates made clear that the Defense Department and the Air Force want some competition for the KC-X aerial tanker program. This is going to have to include EADS (EADS:P) against Boeing (BA) due to the requirements of the program. Gates stressed disappointment with those in Congress attempting to prevent U.S. companies working with EADS on their bid.

If there is going to be any competition for the third attempt to buy a replacement for the aging KC-135 aircraft it will have to include EADS. The only other potentially viable contender would be a Russian aircraft either based on the Ilyushin IL-78 Midas system or perhaps on the IL-96 wide body airliner. Having a Russian competitor would make the contest even more difficult then just one with EADS.

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Latest KC-X Article At BNET: Government

This is the latest post I wrote for BNET: Government entitled “KC-X Aerial Tanker Contract Starting To Become A Farce”.

It starts “The Air Force’s ten-year effort to purchase a new aerial tanker continues rapidly seems to be disintegrating. The third attempt at awarding a contract for what has now become one of the most critical needs for the Department of Defense has been roiled by international trade, politics and concerns about the whole approach.”

You may read the rest here.

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U.S. Air Force Continues To Invest In Older Tankers

The current U.S. fleet of aerial tankers consists of a few hundred Cold War era KC-135 aircraft and less then a hundred KC-10 built in the Eighties. The KC-135 is based on the Boeing (BA) 707 airliner but were built as tankers not converted from passenger aircraft. The KC-X program will replace most of the KC-135 if all 400 or more are purchased and built. The initial contract which the proposals are due on is for about 150 aircraft.

Because it will now be several years before the first KC-X flies and a substantial number are available the U.S. Air Force will need to continue to upgrade, maintain and overhaul the existing aircraft. The most modern variant of the KC-135 is the R model. Today ARINC Engineering Services was awarded a contract to upgrade several KC-135R models with new avionics. No value was given for the contract but it will provide modern, digital instruments for the older aircraft. Eventually all KC-135R will receive this upgrade.

Due to the fact that it has taken almost ten years to get to this, the third, attempt to award a contract for a new tanker the KC-135 and KC-10 fleets will fly for several more years beyond what was expected. The continued investment in modernizing these aircraft will help them meet the current set of mission requirements while waiting for the new tankers.

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Northrop And EADS Wait On Final RFP Release

The KC-X Tanker RFP is expected to be released in the next few weeks. Previously Notthrop and its partner EADS had threatened not to participate as they felt the draft RFP was biased in favor of Boeing. Now they are saying they will wait and see what is in the RFP when it is put out. It is in the best interest of the Air Force and the U.S. Government to receive multiple bids on the project.

Without competition the chance of this third attempt proceeding will be difficult. Sole sourcing the contract to either Boeing or the Northrop team will cause an outcry in Congress no matter what as both companies have their supporters. Not putting out a competitive RFP will only lead to protests and further delays in what has become a critical program to replace the aging KC-135 aircraft.

We are all going to have to wait to see what the Air Force puts out and how Northrop, EADS and Boeing respond to it.

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