Jan. 1 budget ‘cliff’ threatens Boeing tanker

A budgetary stalemate in Congress could affect the Boeing Co.’s 767-based tanker program in Everett, although the implications are unclear.

Automatic government spending cuts of about 10 percent will go into effect Jan. 1, barring action by Congress that would reduce the federal deficit. A recent White House report included the tanker on a list of programs subject to the cut, known as sequestration and called by some the “fiscal cliff.”

But the report doesn’t specify how those cuts will be implemented, leaving government officials, including those at the Pentagon, uncertain how they’ll handle programs like the tanker.

Boeing, which won the $35 billion deal to supply the Air Force with aerial-refueling tankers in 2011, said it’s too early to speculate about what defense budget cuts will mean. Dubbed the KC-46A by the Air Force, the plane is in the design phase. The 767-based aircraft is to be built at Boeing’s Everett facility.

“Boeing strongly urges elimination of both defense and non-defense sequestration within the context of a balanced agreement that addresses the broader fiscal issues facing the nation,” the company said in a statement.

When Boeing won the contest in 2011, the company said the tanker program would support 11,000 jobs here in Washington state. The company declined to say specifically whether sequestration would lead to layoffs in the tanker program.

“I don’t want to break my contract, and I’m fearful sequestration may force me to do that,” Maj. Gen. John Thompson, tanker program executive officer and KC-46 program director, told the Air Force Times on Sept. 18.

Aerospace analyst Richard Aboulafia, with the Teal Group, said he thinks Boeing layoffs in the tanker program would be “highly unlikely.”

A study by the Aerospace Industries Association suggests that 17,024 defense jobs in Washington would be at risk should sequestration go forward. Another 24,661 jobs in fields outside defense also could be at risk. The report estimates that sequestration puts in jeopardy 2.1 million jobs nationwide, with 956,181 of those coming from small businesses.

Should it happen, Aboulafia said, the Air Force might have to void its contract with Boeing. Over the long term, that would be more costly to the U.S. government than it would be to Boeing, he said.

“They’re going to do their best to protect this contract,” Aboulafia said.

The contract is a good one for the government, Aboulafia said. It’s a fixed-price contract, which puts responsibility for cost overruns primarily on Boeing.

Plus the tanker deal isn’t a frivolous contract.

Boeing’s 767-based tanker will replace the KC-135, which joined the Air Force’s fleet between 1957 and 1965. The $35 billion contract was delayed for more than a decade by scandal and error. Not only are the quad-engine KC-135s less efficient than their replacement tankers, they also require extensive maintenance and prompt safety concerns due to their age.

Last Thursday, Pentagon officials answered questions about sequestration before the House Armed Services Committee. Larry Spencer, Air Force Chief of Staff, said the Pentagon was more likely to renegotiate a payment schedule with contractors like Boeing rather than cancel contracts.

Pushing contract payments into the future could drive up prices over the long haul, said Robert Hale, undersecretary of defense.

“In most cases, we will have to buy fewer weapons,” he said.

On Monday, several members of the U.S. Senate Committee on Armed Services, including Sens. John McCain, R-Ariz., and Carl Levin, D-Mich., called for a bipartisan solution in a letter sent to the Senate’s majority and minority leaders. Sequestration would take $4.3 billion from the Air Force’s operations-and-maintenance budget and shrink the service to the smallest size in its history.

“We do not believe that Congress and the president can afford to wait until January to begin to develop a short-term or long-term sequestration alternative,” the senators wrote.

Sen. Patty Murray, D-Wash., was one of Boeing’s biggest supporters in Congress during the company’s 10-year struggle to win the tanker contract. She also served on the joint deficit reduction committee that failed to reach a plan that would have prevented sequestration. On Monday, Murray said the White House report made it “clear that sequestration is unacceptable” and that she remains “hopeful” a solution can be reached.

Michelle Dunlop: 425-339-3454; mdunlop@heraldnet.com.

What is the sequester?

It’s a package of automatic spending cuts that’s part of the Budget Control Act, which was passed in August 2011. The cuts, which are projected to total $1.2 trillion, are scheduled to begin in 2013 and end in 2021, evenly divided over the nine-year period. The cuts are also evenly split between defense spending — with spending on wars exempt — and discretionary domestic spending, which exempts most spending on entitlements like Social Security and Medicaid, as the Bipartisan Policy Center explains. The total cuts for 2013 will be $109 billion, according to the new White House report.

Under the BCA, the cuts were triggered to take effect beginning Jan. 1 if the supercommittee didn’t to agree to a $1.2 trillion deficit-reduction package by Nov. 23, 2011. The group failed to reach a deal, so the sequester was triggered.

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