Implications for the company from the US Air Force acquisitions scandal could go deeper than mere embarrassment

For Boeing, a period of acute embarrassment over a senior executive's role in a major US Air Force acquisition scandal is rapidly shifting to a stage of real financial risk.

In recent days, a prosecutor's comments may have exposed Boeing's management to severe penalties, government auditors have moved to break Boeing's grip on tainted contract awards, and the faltering 767 production line has sustained another major blow from a key US Air Force customer.

And this may be only the beginning. The Defense Science Board (DSB), General Accounting Office, Inspector General (IG) and Senate Armed Services Committee are each probing different aspects of the scandal, triggered by a rogue senior USAF acquisition official illegally recruited by ex-Boeing chief financial officer Michael Sears while the aborted deal to lease 100 KC-767 tankers was still being negotiated.

Meanwhile, the jail sentences handed to former USAF procurement official Darleen Druyun in November and Sears on 18 February are not likely to complete the criminal element of the probe. The federal prosecutor, in court documents, has criticised Boeing's "entire" senior management for knowing about Sears' talks with Druyun, but failing to "confront the obvious legal and ethical issues presented by these employment negotiations... Boeing executives appear to have accepted the negotiations as business as usual."

The prosecutor's remarks may open the door to further criminal action against Boeing executives, as well as weaken the firm's defence against a move by the Pentagon to impose financial penalties on the company later this year.

On a second front, several contracts tainted by Druyun's confession of favourable treatment at Boeing risk being overturned or scaled back. In a potentially precedent-setting action, a GAO draft decision issued on 18 February upholds a protest by Lockheed Martin over award of the $2.7 billion Small Diameter Bomb (SDB) programme to Boeing.

The GAO found Druyun bolstered Boeing's bid in the competition by postponing a requirement for attacking moving targets. Lockheed was ready to meet this requirement in the baseline SDB design using the cellular-datalink based PNAV guidance system.

Druyun deferred the moving target requirement to a follow-on Phase 2 award planned in 2006. USAF officials have now agreed with a GAO recommendation to recompete the $1.4 billion Phase 2 award, giving Lockheed's PNAV technology another chance.

Future GAO decisions, however, may cause greater disruptions. On another tainted Boeing contract - the C-130 Avionics Modernisation Programme - the GAO is urging USAF to recompete the installation phase of the programme and to conduct an analysis on recompeting the entire contract.

Meanwhile, the Pentagon has referred a total of 15 contracts suspected of being inappropriately manipulated to the IG's office for possible criminal review based on Druyun's interventions. Several contractors have been included, potentially widening the scandal to the industry as a whole.

The DSB review and Senate hearings are intended to examine the revolving door between government and industry - an issue that goes beyond Boeing's discredited tanker programme. The GAO report on the SDB protest, for example, found new concerns "regarding the handling of post-employment restrictions with respect to a senior air force official, who is currently employed at Lockheed Martin".

The fate of the 767 production line is another worsening situation, with USAF E-10A programme officials backing off from a firm commitment to buy six 767-400ERs beyond the one aircraft already on contract for delivery in 2006.

"That 767-400ER is the testbed," says Col Joseph Smyth, E-10A programme manager. "Given questions surrounding the longevity of the line, we're going to spend a few years looking at alternatives."

If the E-10A schedule holds, the USAF would be in a position to commit to a long-term platform in 2008, allowing the service to align procurement with selection of a new tanker. Likely candidates for the tanker include used commercial widebodies, new KC-767As and new EADS-promoted Airbus A330-200s.

The USAF is trying to get its derailed tanker modernisation back on track by mid-year. That process will be rooted in the tanker fleet recapitalisation options recommended by an ongoing analysis of alternatives, and a mobility capabilities study that will set a new baseline for air refueling needs to support transport missions.

Both documents were expected to be released next month, but are likely to be delayed until late May or early June, says Gen John Handy, chief of US Transportation Command. That timeline increases the pressure on Boeing to decide on the future of the 767 production line sooner rather than later.


Source: Flight International