Tanker Verdict Surprised Analysts

Feb. 25, 2011
In the aftermath of Boeing's big contract win, questions remain.

What a long, strange trip it's been.

Yesterday's announcement that the Defense Department picked Boeing to update the Air Force's fleet of aerial-refueling tankers was the latest twist in a decade-long drama. And true to the nature of a riveting drama, it surprised analysts such as Scott Hamilton of Issaquah, Wash.-based Leeham Co. LLC, who had expected EADS NV to prevail in the contract competition.

Although EADS had conceded that Boeing's contract proposal favored Boeing in some respects -- such as military construction, or "MILCON," costs -- EADS asserted that its proposal offered a lower cost of delivery per gallon of fuel delivered, which Hamilton believed "would offset that."

He also saw the odds tilting toward EADS because the Netherlands-based aerospace giant, the parent company of Airbus SAS, offered a tanker based on Airbus's A330 commercial jet, and the tanker already was in production.

"Whereas Boeing only had a conceptual airplane, and with that higher risk factors in development," Hamilton said. "I though that all would've [factored] into the pricing of the airplane."

Boeing will build a variant of its 767 commercial jet, which the Chicago-based company describes as "a wide-body, multi-mission aircraft updated with the latest and most advanced technology and capable of meeting or exceeding the Air Force's needs for transport of fuel, cargo, passengers and patients."

"It includes state-of-the-art systems to meet the demanding mission requirements of the future, including a digital flight deck featuring Boeing 787 Dreamliner electronic displays and a flight-control design philosophy that places aircrews in command rather than allowing computer software to limit combat maneuverability," Boeing said in a news release yesterday.

In yesterday's announcement, the Air Force awarded a $3.5 billion "engineering and manufacturing development contract" to Boeing for the first 18 tankers, which are due by 2017. Essentially it's a down payment on the overall contract, which is valued at more than $30 billion.

Most of the assembly and production of Boeing's new KC-46A tanker will take place in Everett, Wash., with some finishing work taking place in Wichita, Kan. Hamilton, based in a suburb of Seattle, called the reaction in the region to yesterday's announcement "orgasmic."

That said, Hamilton wonders about the pressure that the tanker project will put on Boeing's already-thin engineering and development resources, especially with the pressing need to get its 787 and 747-8 programs off the ground this year, as well as other projects on the horizon.

"They've got to decide what to do about replacing the 737; they're going to make that decision this year. And they eventually are going to have to decide, probably within the next 12 to 18 months, what they're going to do about enhancing or replacing the 777," Hamilton told IndustryWeek.com. "So there's going to be a lot of demand on their engineering resources over the next couple of years. And Boeing already has a shortage of engineers."

'Devil is in the Details'

Beyond that, Hamilton, and no doubt other analysts, have a myriad of questions about the details of the contract and the two proposals.

"I'll be really interested to see what the pricing did in fact come out to be," Hamilton said. "I'll be really interested to see what the delta was on the increases in MILCON and lifecycle cost, because obviously both airplanes are more costly than the KC-135.

" ... And finally I'll be really interested to see what kind of airplane Boeing truly offered, because unlike in 2008, when they were very open about a lot of the details, they were pretty secretive about just what this airplane was."

The Defense Department was tight-lipped about the details of the contract decision as well, pointing out that both companies "met all the mandatory [bid] requirements" but Boeing's bid was greater than 1% lower than EADS's bid.

"They didn't say what the difference was. We have to wait for that information to come out," Hamilton said. "But one can only assume that Boeing not only had a lower price for the airplane itself but that the MILCON and lifecycle costs were substantially lower."

Perhaps the $64,000 question, though, is whether EADS will formally challenge the Pentagon's decision, as Boeing did in 2008. Hamilton is doubtful, noting that EADS "throughout the process has praised it as a fair and open competition."

"With EADS praising the process throughout, I'd be hard-pressed to find where they would have grounds for a protest," Hamilton said. "But the devil is in the details, obviously."

See Also

Boeing: Tanker Decision Will Support 50,000 U.S. Jobs

Merkel 'Regrets' U.S. Tanker Decision

And the Winner Is ... Boeing

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