PARIS --- There is an undoubted elegance to the position adopted by Northrop and EADS in pulling out of the US Air Force tanker competition. We won, you stole our victory, and now you can live with the consequences, they seem to be saying, and we’ll be damned if we’ll play along just to give the appearance of fairness.
This position, laudably based on principle, also makes good capitalist sense: it costs too much to bid, with too small a chance of winning, so we’ll keep our money, Northrop Grumman CEO Wes Bush said in a March 8 statement.
And, thirdly, Northrop takes the moral high ground by saying it will not protest what it sees as an unfair selection process, in the interest of US soldiers who urgently need new tankers: “Taking actions that would further delay the introduction of this urgent capability would also not be acting responsibly,” Bush said.
He also offers a more practical explanation for Northrop’s refusal to compete: he believes the new Request For Proposal “clearly favors Boeing's smaller tanker” and “does not provide adequate value recognition of the added capability of a larger tanker, precluding us from any competitive opportunity.”
This is all the more incomprehensible, Northrop implies in its statement, that while “the fundamental military requirements for the new tanker have not changed since the last competition, the Department's new evaluation methodology now clearly favors the smaller tanker.” The only real change, Bush implies, is the will to change the outcome.
Not at all, replies US Deputy Secretary of Defense William Lynn in his own March 8 statement: “We made changes to reduce the out-year risk” to bidders, but “we did not change … requirements to accommodate either offeror.”
Amid all this principled elegance, however, Bush also found space to lay a booby trap.
He notes that, in the previous competition, the US Air Force “determined that it would pay a unit flyaway cost of approximately $184 million per tanker for the first 68 tankers, including the non-recurring development costs.” So, he adds, “with the Department's decision to procure a much smaller, less capable design, the taxpayer should certainly expect the bill to be much less."
And that is where the danger lies for Boeing, the Air Force and indeed the Pentagon.
Boeing has already had major problems in developing the KC-767 tanker for Italy and Japan, and has now further complicated its task by adding a new digital flight deck (taken from the Dreamliner) and a new, fly-by-wire refueling boom to its proposed NewGen Tanker.
This adds more risk to an already risky design, inevitably making the NewGen Tanker much more costly to develop than its KC-767 predecessor.
So either Boeing keeps the NewGen Tanker unit cost under $184 million, and shows it deserved to win but ends up losing money; or it goes over, thereby proving that the whole competition was slewed in its favor, confirming that it is gouging the warfighter and taxpayer, and leaving itself and the Pentagon open to the biggest lawsuit in procurement history.
And this is assuming that the RFP goes through, and that Boeing will manage to develop the NewGen Tanker without any of the technical problems that so far have plagued the development of the KC-767.
Finally, depending on Boeing’s performance on the KC-X program, EADS and Northrop will still be able to bid, if they wish, for the follow-on KC-Y and KC-Z programs, with the advantage of knowing all about Boeing’s tanker pricing and economics when the time comes to take that decision. Having lost KC-X, Northrop/EADS could well end up winning the rest of the tanker procurement, and possibly at higher profit margins than would have been possible for KC-X.
Somehow, seen in this light, Boeing’s victory by default takes on a decidedly Pyrrhic flavour.