Published: Sunday, March 7, 2010
Even if Boeing is sole bidder for Air Force tanker, it must choose its price carefully
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Chuck Schroeder / The Boeing Co.
An artist's rendering of two F-22s moving into position for refueling by a Boeing 767-based tanker.
EVERETT — Even if its rival for a lucrative contract drops out, the Boeing Co. will face challenges as it seeks to replace the Air Force's tanker fleet.
Both Boeing and the Air Force still are waiting to hear whether Northrop Grumman plans to submit a bid. Northrop, which teamed up with Europe's EADS for the contest, has said it may not bid on the $35 billion contract if Northrop officials don't think they can win it.
But Boeing still has issues to consider should it wind up as the sole bidder for the contract to replace 179 of the Air Force's aging KC-135 tankers. Its most pressing problem will be one of price.
“Without the threat of being undercut by a competing bid, it could price its offering high to reduce the risks associated with fixed pricing of a development contract,” wrote Loren B. Thompson, a defense analyst with the Lexington Institute, in a briefing on the tanker competition.
The Air Force has proposed a fixed price contract, forcing the competitors essentially to lock in a price over the life of the contract. Although the Pentagon built in a little more pricing flexibility in its final requirements compared with the initial ones, the Air Force still requires a set price.
Defense Deputy Secretary William Lynn expects the defense contractors to have a good grasp on the cost of production. Boeing has been building its 767 commercial jet for 30 years. And the Airbus A330, on which Northrop and EADS' KC-30 tanker is based, has been in production for nearly 20 years. However, Lynn said, the government doesn't expect the defense contractors to be held accountable for wild fluctuations in materials.
Still, should Boeing add in too much padding to its price as the sole bidder, it's likely to find itself in hot water with members of Congress. Lawmakers from Alabama, where Northrop and EADS would assemble their KC-30, will likely scrutinize every penny.
After the Air Force released its requirements in late February, Sen. Jeff Sessions, R-Ala., alluded to the Boeing scandal that brought down the company's first effort to replace the Air Force's KC-135 fleet. Boeing offered a Pentagon weapons buyer and her family jobs in exchange for steering the tanker deal its way.
“We know from experience that sole-source bidding leads to less capability, more costs and more fraud,” Sessions said.
But Boeing can't bid too low if it doesn't want to turn its tanker contract into a losing proposition for the company.
“Boeing execs will have to think through how to assure the program is profitable without getting more controversy in the bargain,” Thompson wrote.
Pentagon officials say they have a process in mind should Northrop decide to drop out of the tanker contest. Defense officials would prefer Northrop make an announcement whether it will bid soon rather than wait until the bids are due May 10. The Air Force is expected to pick the contest winner later this year.
Both Boeing and the Air Force still are waiting to hear whether Northrop Grumman plans to submit a bid. Northrop, which teamed up with Europe's EADS for the contest, has said it may not bid on the $35 billion contract if Northrop officials don't think they can win it.
But Boeing still has issues to consider should it wind up as the sole bidder for the contract to replace 179 of the Air Force's aging KC-135 tankers. Its most pressing problem will be one of price.
“Without the threat of being undercut by a competing bid, it could price its offering high to reduce the risks associated with fixed pricing of a development contract,” wrote Loren B. Thompson, a defense analyst with the Lexington Institute, in a briefing on the tanker competition.
The Air Force has proposed a fixed price contract, forcing the competitors essentially to lock in a price over the life of the contract. Although the Pentagon built in a little more pricing flexibility in its final requirements compared with the initial ones, the Air Force still requires a set price.
Defense Deputy Secretary William Lynn expects the defense contractors to have a good grasp on the cost of production. Boeing has been building its 767 commercial jet for 30 years. And the Airbus A330, on which Northrop and EADS' KC-30 tanker is based, has been in production for nearly 20 years. However, Lynn said, the government doesn't expect the defense contractors to be held accountable for wild fluctuations in materials.
Still, should Boeing add in too much padding to its price as the sole bidder, it's likely to find itself in hot water with members of Congress. Lawmakers from Alabama, where Northrop and EADS would assemble their KC-30, will likely scrutinize every penny.
After the Air Force released its requirements in late February, Sen. Jeff Sessions, R-Ala., alluded to the Boeing scandal that brought down the company's first effort to replace the Air Force's KC-135 fleet. Boeing offered a Pentagon weapons buyer and her family jobs in exchange for steering the tanker deal its way.
“We know from experience that sole-source bidding leads to less capability, more costs and more fraud,” Sessions said.
But Boeing can't bid too low if it doesn't want to turn its tanker contract into a losing proposition for the company.
“Boeing execs will have to think through how to assure the program is profitable without getting more controversy in the bargain,” Thompson wrote.
Pentagon officials say they have a process in mind should Northrop decide to drop out of the tanker contest. Defense officials would prefer Northrop make an announcement whether it will bid soon rather than wait until the bids are due May 10. The Air Force is expected to pick the contest winner later this year.
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