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PARIS, Sept. 19, 2003 --- While little -- pro and con -- has been left unsaid about Boeing’s proposed lease of 100 KC767 tanker aircraft to the US Air Force, one aspect of the deal seems to have attracted less attention than it deserves: just how much the manufacturer stands to profit from the controversial arrangement.
Most critics have focused on how much more the lease would cost the air force -- $5 billion plus being a generally accepted figure – than an outright purchase, and have assailed it as a badly disguised corporate bail-out.
Just how generous a bail-out, however, was not clear until the General Accounting Office, long critical of the deal, issued its latest report on the issue on Sept. 4. It found that while Boeing promises to cap its profit to 15% of the tanker lease, the company’s normal profit margin is “about 6 percent on commercial 767s.” That’s two-and-a-half times as much.
If the KC767 lease costs $21.5 billion, then Boeing’s profit will amount to $3.2 billion. In other words, the company would need to sell 250 Model 767 airliners to make as much profit as by leasing 100 tankers to the US Air Force.
The lease plan was originally intended to help Boeing weather the loss of airline orders after the Sept. 11 terrorist attacks, and to help keep the 767 production line open pending a recovery. But the very size of potential profits now makes the deal much more difficult to justify on these grounds alone.
Another goal of the deal was to save US aerospace jobs, which could disappear if the 767 assembly line were to close for lack of orders. But Airbus and its corporate parent, EADS, have now jumped on the same bandwagon, and are basing their new run at the tanker business on the same jobs and economy issue.
EADS said Sept. 17 that it would invest more than $80 million to make its modified A330 tanker a more effective competitor for future US Air Force requirements, and noted that its ten North American business units already “contribute over $6 billion to the U.S. economy annually.”
Airbus aircraft also use US-made engines, avionics and systems; this would ensure that a large share of any Airbus tanker order would directly profit US subcontractors and thus support jobs, EADS officials note. And EADS co-chief Philippe Camus said in a Sept. 18 radio interview that Airbus could open an assembly line in the US sometime down the road.
Another factor is weakening Boeing’s case: persistent allegations that the company won the tanker competition thanks to less-then-ethical business methods.
The Pentagon’s Inspector-General has decided to broaden his investigation of how Airbus had lost the original competition to Boeing. Sen. John McCain, a long-standing critic of the Boeing deal, told reporters Sept. 17 that the inspector general, Joseph Schmitz, has concluded that “sufficient credible information exists to warrant” a formal investigation of Boeing’s conduct in the deal.
Boeing denies that it obtained information about Airbus pricing from Pentagon officials. “Boeing has said all along that we believe we received no proprietary information from any individual at any time at any time on any subject throughout the entire tanker lease process,” company spokesman Doug Kennett said.
However, allegations that Boeing’s business methods are less than ethical are not new. Just six weeks ago, the US Air Force found the company guilty of “serious violations” of federal law, suspended three of its units from competing from new contracts, and re-assigned more than $1 billion’s worth of Evolved Expendable Launch Vehicle (EELV) contracts to Lockheed Martin.
With a 15-percent profit margin, and renewed allegations of dubious business methods, Boeing may well find that its conduct on the tanker lease process has ruffled so many feathers, and raised so many eyebrows, that the Pentagon will have no choice but to open future procurement competitions to other bidders. And since there are fewer US manufacturers than ever before, the only credible competition will come from Europe.
Thus, Boeing may ultimately find that its conduct on the tanker lease has inadvertently accomplished what no European manufacturer has ever been able to achieve: throwing open the doors of the heavily protected US military market to foreign bidders.
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