Air Force’s Shifting Rules Helped Boeing
The original article is here.
When a European company offered a larger tanker than Boeing for a lower price in 2008, the Air Force grabbed what seemed like a bargain.
But aviation analysts say Boeing won a rematch this week because the
government’s preference had shifted to a plane with fewer bells and
whistles but one that could be much cheaper to operate in the next few
decades.
The changes in the bidding rules for one of the Pentagon’s richest
contracts were relatively subtle, making the $35 billion award to
Boeing on Thursday a surprise for the company’s executives.
In the end, the proposed size of the aerial fueling plane offered by Boeing’s rival, the European Aeronautic Defense and Space Company, or EADS, seemed to work against it. And Boeing may have won, several analysts said, because its jet could save billions of dollars more in flying costs than any discounts EADS might have offered on its sticker price.
Perhaps the most decisive advantage occurred through a change advocated by one of Boeing’s biggest supporters, Representative Norm Dicks, Democrat of Washington. Mr. Dicks said that after the earlier bidding collapsed, he persuaded the Pentagon to alter a crucial rule to better reflect the long-term cost of the planes.
Under the change, the Air Force agreed to project the cost of the fuel used to power the tankers over a 40-year period, rather than 25 years. Air Force officials have said that the lengthier projections made sense, given that many of its tankers have already been operating for 50 years.
Mr. Dicks promoted the change publicly before the latest bidding started, and EADS officials said on Friday that they knew about it. But they say it was one of several rule changes that could help explain how Boeing, America’s top aerospace firm, reversed its prospects on the bid after faltering so badly in 2008.
EADS, bidding with Northrop Grumman, won the earlier contest only to have government auditors block the award after Boeing filed a formal protest. The auditors found that the Air Force had been too subjective in evaluating the bids and had given EADS too much credit for some of the extra features of its plane.
The successful protest rattled the Pentagon. It had already been embarrassed after an effort to lease tankers from Boeing in 2001 collapsed in a corruption scandal, and it was wary of the intense advertising and lobbying campaigns that both sides had mounted.
So top Pentagon and Air Force officials sought to make the evaluation more objective this time, creating a mathematical formula that weighed the bid prices, how well each of the planes met war-fighting needs and the 40-year operational cost estimates.
EADS executives said on Friday that they had no reason to question the Air Force’s selection. Louis Gallois, the chief executive of EADS, told reporters that he was “disappointed” and “perplexed” by the decision. But he said EADS would not consider its next steps until the Air Force briefed the company on Monday about the award.
EADS has 10 days after that to protest if it decides that the Air Force deviated from the bidding rules. The company, which planned to build an assembly plant in Alabama if it had won, has strong support from lawmakers in the gulf states counting on the jobs to help the region recover from Hurricane Katrina.
EADS supporters say that the size of its plane, about 25 percent bigger than Boeing’s, had impressed Air Force officials in 2008. The plane could carry up to two dozen pallets of cargo along with the fuel needed to transfer to bombers and fighters in flight.
But since then, the Air Force revised its needs, saying it already had more cargo planes than required.The Air Force also penalized Boeing more substantially than EADS in 2008 for not being as far along in developing its tanker. This time, the Pentagon insisted on a fixed-price contract and did not deduct any points from either bidder for possible production delays.
Representative Dicks acknowledged in an interview that his push to weigh the operating costs over 40 years rather than 25 “may have made a big difference,” and independent analysts agreed.
The Air Force plans to buy 179 tankers, and it has assumed that fuel prices will rise by an average of 2.5 percent annually over those decades.Boeing’s supporters had said earlier this week that Boeing thought that rate should be higher, and they contended that parts of the Air Force’s formula seemed to favor EADS.
But Edmund S. Greenslet, publisher of the Airline Monitor, an industry newsletter, said commercial models similar to the EADS tanker burned about 1,900 gallons of fuel per hour, while Boeing’s plane used less than 1,500 gallons. With fuel costs rising, that difference could have offset any advantages for the EADS plane, he said.
Both the EADS and Boeing planes could carry more fuel than any of the aging tankers in use today. Analysts also said the Air Force would have had to make greater operational changes if it had bought the EADS plane.Boeing held a celebration Friday at its plant in Everett, Wash., where it made production changes last year to cut costs. As she left the rally, Senator Maria Cantwell, Democrat of Washington, said in a telephone interview that Boeing had “used sweat equity to get down to brass tacks” and lower its bid.
Hundreds of Boeing workers attended the rally, cheering that the contract would save many of their jobs and add thousands more. A job at Boeing, once seen as a ticket to a comfortable life, has become dicier as competition has intensified in the aerospace industry.
Boeing’s tanker is based on its 767 passenger jet, and the company had planned to end production of that plane if it had not won the tanker contract. The passenger version of the 767 will be replaced by Boeing’s new 787 Dreamliner.
Mr. Greenslet noted that the long delays in the 787 program had prompted Boeing to keep the 767 line open longer than planned. And if the new plane had not been delayed, Boeing might not have been in as good a position to bid for the tanker work, he said.
Boeing officials had also feared that EADS, which is partly owned by European governments, could rely on subsidies to undercut Boeing’s price or to absorb losses if it won the contract with a low bid.
But Guy M. Hicks, a spokesman for EADS’s North American unit, said that while the company’s bid was low, it had still projected a profit. He also said that EADS might have had a more realistic sense of the costs than Boeing, since it is building more tankers for other countries.
When a European company offered a larger tanker than Boeing for a lower price in 2008, the Air Force grabbed what seemed like a bargain.
In the end, the proposed size of the aerial fueling plane offered by Boeing’s rival, the European Aeronautic Defense and Space Company, or EADS, seemed to work against it. And Boeing may have won, several analysts said, because its jet could save billions of dollars more in flying costs than any discounts EADS might have offered on its sticker price.
Perhaps the most decisive advantage occurred through a change advocated by one of Boeing’s biggest supporters, Representative Norm Dicks, Democrat of Washington. Mr. Dicks said that after the earlier bidding collapsed, he persuaded the Pentagon to alter a crucial rule to better reflect the long-term cost of the planes.
Under the change, the Air Force agreed to project the cost of the fuel used to power the tankers over a 40-year period, rather than 25 years. Air Force officials have said that the lengthier projections made sense, given that many of its tankers have already been operating for 50 years.
Mr. Dicks promoted the change publicly before the latest bidding started, and EADS officials said on Friday that they knew about it. But they say it was one of several rule changes that could help explain how Boeing, America’s top aerospace firm, reversed its prospects on the bid after faltering so badly in 2008.
EADS, bidding with Northrop Grumman, won the earlier contest only to have government auditors block the award after Boeing filed a formal protest. The auditors found that the Air Force had been too subjective in evaluating the bids and had given EADS too much credit for some of the extra features of its plane.
The successful protest rattled the Pentagon. It had already been embarrassed after an effort to lease tankers from Boeing in 2001 collapsed in a corruption scandal, and it was wary of the intense advertising and lobbying campaigns that both sides had mounted.
So top Pentagon and Air Force officials sought to make the evaluation more objective this time, creating a mathematical formula that weighed the bid prices, how well each of the planes met war-fighting needs and the 40-year operational cost estimates.
EADS executives said on Friday that they had no reason to question the Air Force’s selection. Louis Gallois, the chief executive of EADS, told reporters that he was “disappointed” and “perplexed” by the decision. But he said EADS would not consider its next steps until the Air Force briefed the company on Monday about the award.
EADS has 10 days after that to protest if it decides that the Air Force deviated from the bidding rules. The company, which planned to build an assembly plant in Alabama if it had won, has strong support from lawmakers in the gulf states counting on the jobs to help the region recover from Hurricane Katrina.
EADS supporters say that the size of its plane, about 25 percent bigger than Boeing’s, had impressed Air Force officials in 2008. The plane could carry up to two dozen pallets of cargo along with the fuel needed to transfer to bombers and fighters in flight.
But since then, the Air Force revised its needs, saying it already had more cargo planes than required.The Air Force also penalized Boeing more substantially than EADS in 2008 for not being as far along in developing its tanker. This time, the Pentagon insisted on a fixed-price contract and did not deduct any points from either bidder for possible production delays.
Representative Dicks acknowledged in an interview that his push to weigh the operating costs over 40 years rather than 25 “may have made a big difference,” and independent analysts agreed.
The Air Force plans to buy 179 tankers, and it has assumed that fuel prices will rise by an average of 2.5 percent annually over those decades.Boeing’s supporters had said earlier this week that Boeing thought that rate should be higher, and they contended that parts of the Air Force’s formula seemed to favor EADS.
But Edmund S. Greenslet, publisher of the Airline Monitor, an industry newsletter, said commercial models similar to the EADS tanker burned about 1,900 gallons of fuel per hour, while Boeing’s plane used less than 1,500 gallons. With fuel costs rising, that difference could have offset any advantages for the EADS plane, he said.
Both the EADS and Boeing planes could carry more fuel than any of the aging tankers in use today. Analysts also said the Air Force would have had to make greater operational changes if it had bought the EADS plane.Boeing held a celebration Friday at its plant in Everett, Wash., where it made production changes last year to cut costs. As she left the rally, Senator Maria Cantwell, Democrat of Washington, said in a telephone interview that Boeing had “used sweat equity to get down to brass tacks” and lower its bid.
Hundreds of Boeing workers attended the rally, cheering that the contract would save many of their jobs and add thousands more. A job at Boeing, once seen as a ticket to a comfortable life, has become dicier as competition has intensified in the aerospace industry.
Boeing’s tanker is based on its 767 passenger jet, and the company had planned to end production of that plane if it had not won the tanker contract. The passenger version of the 767 will be replaced by Boeing’s new 787 Dreamliner.
Mr. Greenslet noted that the long delays in the 787 program had prompted Boeing to keep the 767 line open longer than planned. And if the new plane had not been delayed, Boeing might not have been in as good a position to bid for the tanker work, he said.
Boeing officials had also feared that EADS, which is partly owned by European governments, could rely on subsidies to undercut Boeing’s price or to absorb losses if it won the contract with a low bid.
But Guy M. Hicks, a spokesman for EADS’s North American unit, said that while the company’s bid was low, it had still projected a profit. He also said that EADS might have had a more realistic sense of the costs than Boeing, since it is building more tankers for other countries.
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