Defence, security and diplomacy

Clausewitz

America's air-tanker order

Home-team advantage pays off for Boeing

Feb 25th 2011, 12:58 by M.J.S.

SO THE rumours that EADS had managed to gain an edge over its rival, Boeing, on price in the long and bitter contest to supply the United States Air Force with a new generation of aerial re-fuelling tankers turned out to be wide of the mark. On February 24th the secretary for the air force, Michael Donley, announced that the home team had after all beaten the European defence firm that also owns Airbus to win a $35 billion contract to replace the 1950s-era Boeings (pictured above) that currently do the job.

It should not have come as a surprise, because this was a competition decided more by politics than the capabilities of the two aircraft on offer. In 2008 EADS and its then-partner in America, Northrop Grumman, pulled off a shock victory when its KC-45 triumphed over Boeing’s 767-based alternative. The air force had preferred the bigger plane based on the much more modern Airbus A330 mainly because of its ability to shift more fuel and other payloads. It was also in many ways a less risky option because the aircraft actually existed (see picture, below) and had been picked by other air forces, while Boeing’s offering, even now, will not make its first flight until 2015. There was also little difference in the number of American jobs that either plane would secure: about 50,000.

But amid howls of rage on its behalf from (mainly) Democratic members of Congress, Boeing refused to take defeat lying down and exercised its right to protest at the award, coming up with 110 complaints about a bidding process that had been unusually fair and transparent (in part because of a scandal six years earlier when Boeing had first bid but had been disqualified on grounds of criminal collusion with an air-force official). The Government Accountability Office, a congressional watchdog, upheld seven of them. With a presidential election looming, the Pentagon decided to kick the can down the road.

In September 2009 the air force duly issued a new draft Request for Proposals (RFP) that, by making price the main criterion for selection, effectively undermined the case for the KC-45. A Northrop executive condemned it as a “lowest-common-denominator approach designed to favour a less capable, smaller aircraft by turning the contest into a cost shoot-out”. Unless the RFP changed Northrop, he said, would pull out of the bidding, which it duly did in March last year. At the time, I wrote a piece with the provocative headline of “The best plane loses”. It attracted a huge number of venomously furious e-mails, accusing The Economist of bias, ignorance and probably being in the pay of EADS. Quite a few of the correspondents had direct connections with Boeing.

As it happened, EADS was not ready to throw in the towel and it tried hard to find another American partner to help it carry on the fight. But one of the firm’s most senior executives told me that fears of possible political retribution had meant that no big defence company was willing to raise its head above the parapet. Even so, EADS soldiered on, partly because it still believed that the combination of its plane’s superiority and much lower procurement risk might still prevail, partly because it calculated that the campaign would help to establish its credentials as a serious competitor in America whatever the outcome.

In the end, Northrop’s concerns proved fully justified. Boeing’s offer came in more than 1% lower than that of EADS, which meant that the air force could bypass a set of 96 non-mandatory requirements that could have tipped the balance the other way. Another factor in the Boeing plane’s favour was its lower fuel burn—a direct consequence of the KC-45’s 25% higher maximum take-off weight. EADS may still find grounds to protest and says it is studying the air force’s reasons for its decision closely. Whether it would be wise to do so is another matter. As for Boeing, its persistence and political clout has paid off, but it will be under pressure now to execute flawlessly, something it has struggled to do in recent years.

Read on: Boeing launches the latest incarnation of the 747

Louis Gallois heals EADS's wounds (Dec 2010)

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1-20 of 78
hedgefundguy wrote:
Feb 25th 2011 1:18 GMT

Nearly 200 of them, that's almost 4 per state.

Will we have more flying gas stations than bombers?

It's a good thing our foreign friends lend us money so we can protect them. That means thier businesses and consumers don't have to pay for thier defense and we defend the seas they use to sell us things via more credit.

Ever hear of the term "competitive advantage".

Regards

willstewart wrote:
Feb 25th 2011 1:21 GMT

Will the perception that Boeing needs to cheat to win damage its performance elsewhere?

LaContra wrote:
Feb 25th 2011 1:39 GMT

A case of if at first you are found guilty of criminal collusion, try, try, try again...?

Alex, we'll take "Imaginary Planes with Patriotic Patter" for 400.

Alex Trebek:
A company that lobbied its considerable weight on Capitol Hill into a contract to sell a plane that does not yet exist, on a budget and at a price which cannot be maintained, and within a timeframe that cannot be met, to an air-force which wanted the competitors product.... and all the while continuing to gorge itself on government subsidies which negate the supposed cost-savings.

Answer:
What is Boeing?

Alex Trebek:
That is Correct!

Spectacularj1 wrote:
Feb 25th 2011 4:07 GMT

The EADS plane was better, if size if the only determining factor, however, it is not. The Boeing plane won because it met all the criteria and was cheaper - the magnitude by which one surpassed the criteria was irrelevant here why:

The USAF asked for a Medium Sized tanker. Boeing offered a medium sized tanker, while EADS offered a Large tanker that was more expensive.

In effect EADS thought that they could hijack this competition by offering something that the AF didn't ask for by beating Boeing on the grounds of size. That is patently unfair, if the USAF had wanted a large tanker they should have asked for one.

So what you chalk up to politics is in fact good faith contracting. The politicians had to remind the USAF that since they asked for a Medium Sized tanker, that they couldn't go against the Boeing jet as long as it met the criteria that the AF wanted - this left price as the determining factor.

Price is no small factor, frankly with the US budget it, both vendors should be happy there was such a competition at all.

PS - the fact that the current Boeing jets are still flying 50 years later should tell you who builds a "better" plane.

happyfish18 wrote:
Feb 25th 2011 4:16 GMT

Despite the careful camouflage, the whole tendering process certainly stinks of Protectionism, Arm-twisting and Pork barrelling by the politicians.

Embra wrote:
Feb 25th 2011 4:30 GMT

Obviously the US can waste its money in a manner of its choosing but I think they would avoid ill-feeling if they stopped pretending to believe in open competition for this sort of thing. No need to state it openly, just a quiet word to Airbus and the like not to bother and save the time of their tender staff. Same issue with the DTCT - over promising and under delivering can only hurt.

Michael Dunne wrote:
Feb 25th 2011 5:00 GMT

Isn't Airbus a product of dirigiste policies?

Otherwise, aerial refueling is pretty much old hat with the USAF - pretty much did it throughout the cold war - not sure why such a big stick over this (the corruption, the debates, the expense, etc.).

Should have been a straightforward project with some domestic manufacturers.

Jordan5941 wrote:
Feb 25th 2011 5:17 GMT

Although I'm not pleased that America (my country) seems to have slipped into provincial politics on the issue, I also wonder how much consideration was paid to the thought of keeping significant military production within the country. I would like to see Clausewitz's perspective on the issue if at all possible.

blue asgard wrote:
Feb 25th 2011 5:30 GMT

Well, Surprise! Surprise! The US Government favours its own military-industrial complex over any other consideration, e.g. military effectiveness. What's more EADS are being 'encouraged' not to contest the decision on penalty of being 'disadvantaged' in future bids. Since present experience suggests that the US military procurement is anything but a level playing field EADS can well conclude that it will be disadvantaged anyway in any future procurement competition. In fact it would be no loss to them to complain to the WTO, just as Boeing did about them over 'hidden subsidies' where it eventually turned out that Boeing received as much in the way of hidden subsidy from the US taxpayer as EADS had in the way of somewhat more transparent launch subsidies from the EU. Sauce for the goose is good enough for sauce for the gander.

Any country which fails to provide the best for its military is inviting defeat in the next war, or if not that one, the one after. The US has the most expensive military system in the World whose sheer cost defies any other nation to copy it, but to-day there are other counties who are rapidly approaching the US's spending power so could, themselves, beat the Americans at their own game. In time, of course. So antagonising your allies when you don't need to doesn't seem like the best option, especially if you have a look at what's coming down the pipeline.

The other point is that this is a democratic President soon to seek re-election. To have failed to reverse the Boeing/EADS KC decision would lose a lot of votes in the various regions Boeing has distributed its production lines to. So it's a political decision in the end. And so much for this 'principled' President who has proved that, when the chips are down he can be as unprincipled as the rest of them. He and his party are, of course gambling on the stupidity of the US electorate in failing to see that this outcome weakens the US's future defence posture for a wholly partisan decision.

Imagine what the US's military line of battle would look like if it was decided entirely by US partisan policies? When the Republicans were in they'd advocate shock-and-awe, when the democrats were in they'd advocate non-lethal weapons. Third World dictatorships would buy both to give them a two-tier approach to keeping their population on-side while the US's real enemies would consider it all hilarious. Oh yes! And don't forget to buy American, especially in a recession.

How long before the US military goes completely down the tubes?

LaContra wrote:
Feb 25th 2011 5:40 GMT

Spec..
"In effect EADS thought that they could hijack this competition by offering something that the AF didn't ask for by beating Boeing on the grounds of size. That is patently unfair, if the USAF had wanted a large tanker they should have asked for one."

Hmmm....I should imagine that's why EADS won the contract in the first instance...because they tended a contract on the wrong plane and USAF didn't want it.....But luckily the politicians then reminded the USAF that the niceties of contractual law were of paramount importance trumping any notion of the primacy of defence considerations and thus nixed the purchase of the better plane for the job, which was the USAF preferred choice....what a way to run a DoD eh?

Besides, the link you provided was to a 2007 KC-767A which will be 10 years old by the time delivery of the new Boeing tankers are expected...The new tankers will not be KC-767A's thus the model that won the contractual bid does not actually exist at this time.

Feb 25th 2011 5:47 GMT

Boeing can no longer procure a contract based on the merits of its product alone. Instead, it relies on political pressure and sad appeals to patriotism to strong-arm the decision of the US Government.

I'd like to point out that during this process, in the tunnels of the Washington Metro system, there were posters literally plastered throughout the Pentagon station emblazoned with an image of Boeing's plane and a banner that read, "America's Tanker."

Calling all pigs, the slop is coming! Nestle down at the trough and feast.

scuba steve wrote:
Feb 25th 2011 5:48 GMT

"As for Boeing, its persistence and political clout has paid off, but it will be under pressure now to execute flawlessly, something it has struggled to do in recent years."

And EADS always executes its projects flawlessly. How's that A400M working out?

Honestly I'm not happy with how this competition worked itself out, but the EADS bias in this article is ridiculous. What about this bit from DefenseNews.com:

"EADS received a number of waivers for several "key performance parameters," including the ability to take off from 7,000-foot runways, fitting into existing hangars, and refueling all types of Air Force aircraft - it reportedly cannot pass fuel to Air Force V-22s."

It doesn't sound like EADS was offering the "best plane", just the biggest.

hobbes_us wrote:
Feb 25th 2011 6:01 GMT

while i'm not availed of the details of this latest decision, it seems like the pentagon actually tried to run as legitimate a competition as anyone could expect them to. that's not to say Boeing didn't enjoy a little bit of a home field advantage, but Airbus had its own political heavyweights in Congress too. even if it was a charade (although if it was, it was very, very well orchestrated), the resulting competition was fierce and resulted in the Pentagon getting a very good price.

and let's not forget that the home field advantage works both ways.... see the airbus A400 debacle- the Europeans didn't even pretend to give anyone other than Airbus a chance to build the plane, and furthermore refused to even let Airbus choose an American company to provide the engines. maybe the Europeans should learn something from the Pentagon's approach- even if you choose the home town favorite, competition is a good thing.

Spectacularj1 wrote:
Feb 25th 2011 6:04 GMT

LaContra - the airplane in the photograph is essentially the same. UNder your reasoning the KC-45 does not exist either because it is not identical to the Airbus A330 MRTT (KC-30). EADS won the contract in the second round because of size, despite the fact that it was NOT the airplane the AF requested.

As I already stated, the AF requested a medium sized tanker and then chose the EADS plane because it was a large tanker. Besides it's not necessarily about what the AF wants, it's about what it can afford - a line of thought that AF is not accustomed to using.

SutterCane wrote:
Feb 25th 2011 6:12 GMT

Hardly surprising: the US loves to talk about fairness and free trade when it wants access to other markets, but remains a closed market to foreign companies in many areas. These decisions always benefit those companies that are losing out on deals overseas and depend on government contracts to stay in business, but often end up boomeranging on those whom it’s supposed to help most. The inevitable cost and project overruns that will follow with a plane that is still in the design and test stage - as happens habitually nowadays - may make the US government regret their u-turn. I wouldn’t be surprised if out of frustration and desperation they end up ordering some of the tankers from EADS after all, not least to limit the damage to US companies competing for overseas tenders. This story still has a few twists and turns to offer, I’m convinced.

Spectacularj1 wrote:
Feb 25th 2011 6:14 GMT

BTW - I like how everyone has made the assumption that the only way Boeing could have won this was through back door dealing. Nevermind that Boeing has made quality air craft for decades, and offered, in this instance, an airplane that met the AF specifications and was cheaper.

This process was about as fair as possible, the same cannot be said for the first two iterations of this procurement process. Sounds like some hardcore sour grapes on the part of the Europeans.

Note to you - bigger does mean always mean better, and size was the only cognizable advantage that the EADS plane had.

SutterCane wrote:
Feb 25th 2011 6:28 GMT

As I said: http://www.ft.com/cms/s/0/f46f4b42-4073-11e0-9140-00144feabdc0.html#ixzz...

"the fierce competition with EADS could still come back to haunt the company. The KC-X programme is a fixed-price development contract which means that Boeing will be largely responsible for any cost overruns. Doug Harned, a defence analyst “the winner of this competition could well be the loser from a direct financial perspective ...”

LaContra wrote:
Feb 25th 2011 6:40 GMT

Spec.
"I like how everyone has made the assumption that the only way Boeing could have won this was through back door dealing"

Well a recent WTO ruling against Boeing regarding illegal subsidies and the 2003 contract cancellation due to criminal collusion on the contract bid which resulted in the resignation of CEP Condit and CFO Sears might have something to do with that assumption.

So Boeing has a verifiable track record of such behaviour.

LaContra wrote:
Feb 25th 2011 6:48 GMT

Spec..

...and when EADS won the bid it did so with a larger plane which met more of the USAF specifications AND had the cheapest per unit cost AND the cheapest predicted operational cost per unit.

Not until Boeing got yet another chance to bid, when the spec was changed yet again, and the mid sized designation made inviolable did they finally undercut the EADS price and win the contract.

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About Clausewitz

In this blog, our correspondents provide reporting and analysis on the subjects of defence, security and diplomacy, covering weapons and warfare, spooks and cyber-attacks, diplomats and dead-drops. The blog is named after Carl von Clausewitz, the Prussian soldier and military theorist whose classic work, "On War", is still widely studied today.

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