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Boeing Testimony On 767 Tanker Lease

WASHINGTON, D.C. --- On September 3, John Sams, U.S. Air Force 767 Tanker program manager for Boeing, testified before the U.S. Senate's Commerce Committee to present facts on the proposed lease of 100 767 Tanker aircraft.

John Sams, U.S. Air Force KC-767A Program Manager, The Boeing Company
Testimony before U.S. Senate Commerce Committee
September 3, 2003

Mr. Chairman, [Sen. Hollings or Sen. Inouye], members of the committee, my name is John Sams and I am the USAF KC-767A Program Manager for The Boeing Company. Thank you for providing this opportunity to appear today before the committee. I do not have a written statement to submit for the record, but instead am prepared to provide very brief oral remarks.

Almost 24 months ago when we began this journey, we knew we would be breaking new ground pursuing a Federal Acquisition Regulation Part 12 commercial acquisition for 100 KC-767A Air Refueling Tankers. Commercial practices (like leasing) are both common and accepted practice in the commercial aircraft business, and business in general, but not in traditional U.S. government acquisition.

Indeed, if successful with a commercial approach to this acquisition, we could put these assets in the hands of our AF crews a full five years before a traditional government FAR Part 15 acquisition. In the process, we may perhaps jump-start a recapitalization of the fleet of 544 KC-135 aircraft; a process that would take almost 30 years to complete if this or follow-on aircraft were procured at similar rates. Perhaps we could invigorate new ideas that could reduce the time it takes to field new systems for our military by streamlining processes and reducing risks to the government.

We also recognized this would be a thoroughly staffed and scrutinized program, as well it should. To be successful, we had to accomplish three major goals: insure this was good for the warfighter, validate this was a good deal for the United States government, and lastly, insure it was a good deal for the taxpayer. We believe we have achieved these goals!

First, is this the right aircraft for the warfighter and the crews that will fly it?

Key to successful warfighting is the ability to operate joint and coalition forces interchangeably, and here the KC-767 excels. Able to refuel both boom and drogue capable receivers on the same mission, the –767 will provide enhanced interoperability and flexibility to the battlespace. With the ability to itself be air refueled, it could remain on-station as a tanker almost indefinitely.

While more than meeting the requirements of the Air Force, this aircraft can take off from an 8,000-foot runway (a standard the world over) and offload 40,000 pounds more fuel at 1200 nautical miles (radius) than the aircraft it is replacing. It would take two KC-135s to offload as much fuel at that distance.

On a cargo mission, the aircraft can deliver 19 pallets at a range of over 5,000 nautical miles. It would take three KC-135s to deliver this many pallets, and one pallet would be left behind on the ramp.

If the mission is to carry military troops into forward locations, like Mogadishu or Kandahar, places where commercial aircraft of the CRAF should not go, the KC-767A can carry up to 190 troops. It would take three KC-135s to deliver this many troops, and 19 would be left behind on the ramp.

Yes, this aircraft will be good for the warfighter.

Second, we must validate this is a good deal for the Air Force. When the negotiations began, we heard estimates from various agencies that the lease alone would cost up to $31 billion. In fact, after eighteen months of negotiations with the Air Force, the actual then-year cost is about half the estimate, or $16.6 billion. As indicated in the Air Force Report to Congress, when the net present value of this is taken into account, in FY’02 dollars, this value is actually $11.4 billion.

But the Air Force, only after congressional authorization, should certainly have the right to purchase the aircraft at the end of the lease. Therefore, we negotiated a purchase offer at the conclusion of the lease for a then-year price of $4.4 billion. Remember, these aircraft will be coming off lease in between the years 2012 and 2017, and when the purchase offer is applied to the same net present value assessment, in FY’02 dollars, the value is actually $2.6 billion.

And so, the bottom line. In net present value FY’02 dollars, the total cost of the lease, plus purchase at the end if approved by the Congress, is $14 billion. And the net present value assessment does not consider the over $5 billion in cost avoidance over and above the cost to fly and maintain the aging KC-135Es – dollars not spent on program depot maintenance, engine strut replacement and avionics upgrades.

Yes, I believe this is a good deal for the Air Force and the U.S. government.

Lastly, but no less important than the first two goals, we must validate this is a good deal for the taxpayer. To address this issue, we had to take some extraordinary steps not common in commercial FAR Part 12 acquisitions.

First, we sought permission for the Air Force to discuss price with a commercial airline customer of their choosing. Very un-commercial-like! They took advantage of this on three separate occasions, and Boeing was not party to the conversation.

Second, we validated to the Air Force we had not in the last 17 years sold this “green” commercial 767-200ER to any customer for less. We believe our commercial customers will understand this is the right thing to do. Additionally, we provided Most Favored Customer Clauses to the Air Force, contractually stating we would not sell either the –200 ER or the –200C, our new minor model for the tanker, to anyone else in the future for less. If we do, Boeing will rebate the difference to the U.S. government.

Finally, we contractually stated we would cap our earnings on the 767 “green” aircraft, and separately cap our earnings on the tanker modification to 15% return on sales. This is not guaranteed earnings – it is a ceiling consistent with DoD FAR contracting profit guidelines.

Yes, we believe we have negotiated a proposal that is fair and equitable to the taxpayer.

Mr. Chairman, and members of the committee, this is a very challenging firm, fixed price program for The Boeing Company, with the risks of development, production and on-time delivery all squarely on our shoulders – not on the government’s.

Thank you very much for this opportunity to address the committee, and I look forward to your questions.

Boeing Testimony before U.S. Senate Commerce Committee on U.S. Air Force KC-767A Air Refueling Tankers