A Few Thoughts on the Tanker Deal

Aviation circles and Wall Street are still abuzz over the Air Force’s decision to award a $40-billion contract for new aerial tankers to a Northrop-Grumman/Airbus consortium. Announcement of that choice represented a major blow to rival Boeing, which had supplied most of the service’s aerial refuelers for the past 50 years.

Defense and business analysts are rightly hailing Friday’s announcement as a major win for Northrop-Grumman and its European partner EADS, the military division of Airbus. Not only did the U.S.-European team secure a deal for 179 new tankers, they also positioned their firm to capture billions in follow-on contracts.

Both the USAF and U.S. Navy operate a variety of surveillance, command-and-control and intelligence collection platforms built on the venerable Boeing 707 design–the same airframe used in the older KC-135s that will be replaced by the new tanker. As the older C2, surveillance and spy aircraft reach the end of their service life, those missions could easily be transferred to the same Northrop-Grumman/EADS platform, based on the Airbus A330.

Justifying its decision, the Air Force noted that the European jet beat the Boeing design (a variant of the 767 jetliner) in four of five categories, including fuel offload–the most important consideration for any aerial tanker–cargo capacity, troop hauling, and aeromedical evacuation.

But those arguments are something of a red herring; aerial tankers–as their name implies–are designed primarily to refuel other aircraft in flight. Their abilities as cargo haulers, troop haulers and air ambulances pale in comparison to platforms like the C-17, which were specifically designed for that mission.

Moreover, tankers like the KC-135, KC-10 and the KC-45 (the Air Force designation for the new refueler) need special equipment to load or unload cargo, and they can’t accommodate oversized equipment. We’re also reminded that virtually all troops heading to a war zone now travel on charter jets, so the “troop carrier” role is a relatively minor consideration, to boot.

Still, the Northrop-Grumman/EADS tanker offers a clear advantage in the tanker mission and that alone was enough to justify the Air Force’s decision. Boeing and its Congressional backers are clearly upset, but in hindsight, it seems clear that the aviation giant made critical errors in pitching the KC-767 as the next-generation tanker.

First, as posters on this (and other) forums have observed, the Boeing’s decision to offer the 767 seems based, in part, on corporate desires to sustain production of that airframe. Without an Air Force tanker order, Boeing was looking at a short-term end for 767 production. Building more airframes for the Air Force would allow the company to keep the assembly line open for years to come, and generate more orders in the process.

At a “per unit” cost of $25-30 million less than the A330, Boeing believed the 767’s pricetag would provide a strong selling point, as would its smaller “footprint” and the ready availability’s of spare parts, based on the large number of airframes already in service.

Oddly enough, Boeing elected not to offer a tanker version of its hot-selling 777 wide-body jetliner, or innovative 787 “Dreamliner.” The 787 was still in development when the Air Force asked for bids on a new tanker, so it wasn’t a realistic contender for the contract.

As for the 777, Boeing has never fully explained its rationale for excluding that airframe. However, production of a military 777 would strain the company’s production capabilities, and possibly slow deliveries to commercial customers. Still, a tanker variant of the “Triple-7” would have more than matched the A330’s off-load and transport capabilities, and the wide-body is surprisingly fuel efficient, one reason it has become a favorite of long-haul airlines.

But Boeing’s biggest blunder was, arguably, it’s initial plan to lease 767 tankers to the Air Force. First approved in 2003, the deal was later abrogated when it was learned that the aircraft manufacturer had offered jobs to the service’s senior civilian contracting official and two members of her family. The contracting official, Darlene Druyun, later served a 9-month prison sentence and two Boeing executives were convicted as well.

Not only did the tanker lease result in a huge fine, it also made Boeing “radioactive” in terms of future, big-ticket contracts. With an already-tight procurement budget, the Air Force did not want a rehash of the tanker lease controversy. And, with Northrop-Grumman offering more capability (at a slightly higher price), the service found it easy to justify the KC-30, heading off potential criticism that would come with a new Boeing deal.

Obviously, Boeing still rakes in billions of defense contracting dollars each year. But there is no question that the company’s ability to win new Pentagon deals has been impacted by the ill-fated tanker lease. When Boeing received an Air Force contract for new search-and-rescue helicopters in 2006, competitors immediately cried foul, and the deal was re-opened for bidding.

At last report, a final decision on the helicopter program (better known as CSAR-X) has been delayed until later this year. A few months ago, most industry insiders still believed that Boeing would still win the contract. In the wake of last week’s tanker announcement, some analysts now believe that Sikorsky or another U.S.-European team–led by Lockheed-Martin–may wind up with the contract. That would represent another body blow for Boeing, already reeling from the tanker decision and production woes with the Dreamliner.

So far, no one’s erecting billboards around the Boeing plants in Seattle, St. Louis or Wichita, asking “The Last Person Out of (City’s Name), to “Please Turn Out the Lights.” Those were the signs that appeared in Everett, Washington in the late 1960s, before the 747 jetliner arrived and literally secured Boeing’s future. Almost 40 years later, the aircraft manufacturer is a much more diversified–and financially secure–company. But it’s also clear that Boeing’s military division is facing tough times ahead, and many of the company’s problems are clearly self-inflicted.