European aerospace EADS is set to announce Friday it will not appeal a US Air Force decision to award a major tanker contract to US rival Boeing , a person close to the matter told AFP Thursday.
"Apparently, there will not be an appeal from EADS," the person said, adding that the company's would announce its decision Friday.
A spokesman for EADS North America told AFP Thursday that "we haven't made a decision yet."
After a lengthy, controversy-marred contest, the Air Force awarded the $30-plus billion contract for up to 179 aerial refueling tankers to Boeing on February 24, saying that "Boeing was a clear winner."
The EADS North America team was debriefed Monday by the Air Force on the decision.
The European Aeronautic Defence and Space Company, parent of France-based Airbus has the right to protest the decision with the Government Accountability Office, the watchdog arm of Congress.
Technically, EADS has 10 days from the award of the contract to lodge any protest.
Gravity always wins!
I saw another news item yesterday that implied that EADS would not protest the award because they did not want to "hurt" relations with the Pentagon. First, if they see something wrong in the debrief of the competition, they should protest. Second, they should not fear a negative reaction from the Pentagon. Having said that, I would hope that they don't protest for the sake of protesting. But I want to be fair and repeat that if EADS sees something that is not right when they received their debrief on the award, then they have every right to protest. I also must admit, I am very curious as to the specifics of the bids each company made.
Loren Thompson of the Lexington Institute has written an analysis for Forbes Magazine re why EADS won't protest - they can't win since they lost on cost factors - their technical proposals was acceptable (just like Boeing's), but their costs were unaffordable. To keep them in the procurement, the USAF made some real concessions to the requirements so they would be acceptable (bent over backwards to help EADS). The bottom line - EADS lost on cost - too expensive, too much fuel, too much infrastructure costs, etc. The article is found at: http://www.lexingtoninstitute.org/eads-pricing-mis-step-enabled-boeing-to-win-tanker-contest?a=1&c=1171
Image via Flickr
After ten years of seeking a replacement for hundreds of Eisenhower-era tankers, the Air Force may have finally found a workable solution last week. On Thursday, Pentagon leaders surprised both teams competing for the prize — a program initially worth $35 billion that eventually could grow to $100 billion — by declaring Boeing’s proposal was the “clear winner.” The losing team, led by Airbus parent EADS, was stunned. Not only had it won an earlier competition to supply the new tanker, but some Boeing executives expected the European company to win this time too. So why did Boeing prevail in an outcome that government officials say wasn’t even close?
In this case, the bottom line really was the bottom line. Boeing offered a very low price to build and own its plane, while over-confidence and maybe funding constraints led EADS to bid less aggressively. Since the two rival tankers had already satisfied 372 mandatory performance requirements, price determined the outcome and Boeing emerged victorious. In other words, Boeing won because EADS made a mistake — it failed to tap the European government subsidies that have allowed it to develop every commercial transport it currently offers to a sufficient degree so it could overcome the pricing advantage Boeing had from offering a much smaller plane. Smaller planes cost less to manufacture and to fly, but that has not stopped EADS subsidiary Airbus from beating Boeing on price in scores of commercial competitions. In the tanker contest, though, EADS either bid too optimistically or failed to leverage subsidies for some other reason, so it was out of the money.
Before I elaborate on how Boeing won, I need to dispose of one inconvenient truth. A big part of the reason why many people thought EADS would win the tanker competition was because I said it would, over and over again in the national media, in the months leading up to the award. Within minutes after the Boeing victory was disclosed, Politico put up a story on its web-site stating that expectations of a Boeing loss were driven mainly by my pronouncements on the matter. And the biggest newspaper in Alabama editorialized on Sunday that the Boeing win was “unbelievable” in part because “one of the nation’s leading defense analysts” — me — predicted EADS would prevail. Obviously, I was completely wrong. So why would you take seriously my explanation of how the opposite of what I predicted happened?
The reason I’m still halfway credible on the subject is because I said all along that the Boeing plane was the more cost-effective solution to the Air Force’s tanker needs. I simply assumed EADS would leverage the same subsidies that allowed it to aggressively market its commercial product line to also win the tanker competition. It wouldn’t have been hard, because the Air Force methodology for comparing the EADS and Boeing planes actually understated the cost of owning the much bigger European tanker over a 40-year service life. Many people within Boeing assumed the same thing, which is why they were worried in the final stages of the tanker contest despite the fact they were offering a more economical solution to Air Force needs. But EADS didn’t tap subsidies to the degree Boeing or I expected, so Boeing won in the kind of competitive climax that defense industry insiders call a “price shootout.”
Boeing executives sensed during the preparation of final offers that EADS had become overly optimistic, in much the same way that Boeing itself had grown too confident in the earlier round of competition. They now think that EADS lost partly because of its own hubris. They’re probably right, but I suspect something more is going on because concessionary pricing has been the centerpiece of the EADS tanker strategy since it first got into the competition in 2006. I’ll come back to the question of why EADS didn’t fully leverage its pricing power at the end of this essay, after I explain why it is so clear that cost was the reason Boeing won and EADS lost. But it’s important first to demonstrate that Boeing won on the merits, because any protest EADS mounts to try to overturn the outcome is unlikely to prevail, and we don’t need conspiracy theories floating around for the next 40 years about why “the better tanker lost.”
The Air Force’s aerial refueling fleet is unique in the world. Without it, U.S. and allied aircraft would have great difficulty sustaining operations in places like Iraq and Afghanistan. But by the beginning of the new century, the Boeing 707-type tankers that provided 90 percent of the aircraft in the refueling fleet had reached nearly 40 years of age, so Air Force officials began what they thought would be a routine effort to convert an existing commercial transport into a replacement tanker. A decade later, no new tankers had been built. An abortive effort to lease tankers from Boeing was killed by Congress, and then a competition to select a new tanker from between rival Boeing and Airbus offerings was overturned by the Government Accountability Office. By the time the Obama Administration was handed the responsibility for finding a new plane the aging tankers in the fleet were approaching half a century of age, and the new team at the Pentagon decided it had to come up with an acquisition strategy that was impervious to further delays.
Its solution was to craft a selection process in which there was virtually no subjectivity that might be challenged by the loser. Rather than weighing the performance features of Boeing and Airbus offerings, the Air Force developed a list of 372 mandatory performance requirements that each team must meet before they could submit a final bid. What this meant in practical terms was that unless one of the teams was disqualified, the key discriminator in the competition would be price. But price was defined to cover more than just the cost of producing the planes. It also reflected the cost of ownership over a 40-year lifetime, including fuel expenditures, construction outlays, and the relative efficiency with which each tanker could accomplish refueling missions. Those life-cycle costs were to prove pivotal in Boeing’s eventual victory.
The tanker competition that began in late 2009 was a “come as you are” competition in the sense that the Air Force did not want to pay for the cost of developing a new tanker from scratch. So Boeing and EADS had to pick an airliner from their existing commercial product lineups and adapt it to the refueling mission. The mandatory performance requirements demanded that it be able to offload at least as much fuel as the 707-type planes in the existing tanker fleet while having a main flight deck available for cargo, passengers and other payloads. Boeing had long since settled on its twin-engine widebody 767 airliner as the best available airframe, since other planes in its line-up were either too small for necessary payloads or too expensive to operate. The 787 Dreamliner was not seriously considered because production capacity was committed to commercial customers far into the future. EADS selected as its offering a modified version of the much bigger Airbus A330, which weighed 28 percent more than the Boeing entry and burned correspondingly more fuel — in fact, over a ton more fuel per flight hour when fully loaded.
On its face, the A330 did not look like much of a bargain for the Air Force because it cost much more to build and operate than the plane it was replacing or the Boeing alternative. However, in the first, abortive round of competition with Boeing’s tanker, EADS and then-partner Northrop Grumman had convinced Air Force evaluators that by doing refueling missions differently they could benefit from buying the bigger plane. That made a certain amount of sense since bigger planes typically are more efficient per pound of payload delivered. The problem, though, was that existing, smaller tankers typically returned from refueling missions with a lot of fuel still on board, so buying a much bigger successor required the Air Force to completely change its approach to aerial refueling. That became all too apparent when the Air Force tried to apply its scenario-based warfighting model to the rival tankers and discovered that the EADS plane couldn’t accomplish some wartime missions due to basing constraints. Under pressure from Congress to keep the Northrop-EADS team in the competition, the Air Force made changes to its model that enabled the bigger plane to execute all the missions.
Northrop Grumman decided to withdraw from the tanker battle when it saw the Obama Administration’s proposed terms for the second round of competition, so EADS elected to go it alone. Despite complaints from Boeing, the Air Force continued using the same modified warfighting model to evaluate the two tanker proposals — which was one reason why EADS thought its bigger plane had a shot at winning. But once the rival tankers met mandatory performance requirements the revised acquisition strategy was all about price, and there EADS faced a big challenge. First of all, the A330 typically sells for about $40 million more than Boeing’s 767, which is a huge difference in cost when multiplied by the 179 planes the Air Force was seeking to acquire in the competition. EADS would need to tap billions of dollars in subsidies to price competitively with the manufacturing costs of the smaller Boeing plane. And then there were the post-production costs — the much higher fuel burn of the A330 over a 40-year service life, and the need to modify hangars and runways to accommodate a bigger plane. The only way Airbus could defray those costs for the Air Force was to offer an even lower up-front pricetag.
Boeing wasn’t happy with the way the Air Force calculated the higher fuel costs of the A330, since evaluators used a price escalator for the next several decades that was only about a third of the actual growth rate in fuel costs since 1970. The company felt the government was undercutting the cost-effectiveness of their offering in the real world, especially given the refusal of policymakers to even consider adjusting the EADS price to reflect use of illegal subsidies as long as subsidy cases were still pending before the World Trade Organization. So Boeing entered the final stages of the tanker competition pessimistic about its prospects. However, one message the company heard loud and clear was that if it was to have any chance of prevailing it had to price very aggressively, and that it did — so much so that its board refused to go any lower for fear of losing money on the contract. When the Pentagon announced that Boeing had won last Thursday company officials were pleasantly surprised, but they knew the government had gotten quite a bargain.
Of course, Boeing got something big too: the continuation of it 50-year tanker franchise with the U.S. Air Force, and a deal that would preclude its main rival in the airliner business from setting up commercial operations in Boeing’s home market. But in the aftermath of Boeing’s convincing win, the question still arises as to why EADS didn’t bid more aggressively when it knew price would be decisive in determining the outcome. Was it really just hubris, or was something else going on? Perhaps people like myself over-estimated how much latitude EADS had in tapping government subsidies, given the huge funding infusions it had already received to fix the A380 jumbo-jet, continue the A400M military transport, and develop a rival for the Boeing Dreamliner. Or perhaps the company’s willingness to leverage subsidies in a politically charged competition had been muted by the WTO finding of massive impropriety in its past use of subsidies to steal commercial market share.
We’ll have to wait a while to learn why EADS failed to price its tanker competitively. The one thing we know for sure is that the real-world costs of the rival tankers weren’t even close, because EADS lost even though evaluators gave the company big breaks in calculating the cost of owning its plane. In other words, the Boeing tanker won on merit, and no protest of the outcome by EADS is going to change that fact.