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Dueling View on Defense Competition

by: Matthew Potter
August 16, 2010

Category: Boeing, Business Line, Companies, Congress, Connecticut, Contract Awards, Department of Defense, development program, EADS, Events, Federal Budget Process, GE, Industry Analysis, Kansas, Military Aviation, Northrop Grumman Corp., Pratt & Whitney, production program, Proposal, Protest, Restructuring, Rolls-Royce, Services, Sikorsky, States, U.S. Air Force, UTC | RSS 2.0

Last week the former Reagan era U.S. Secretary of Defense John Lehman had an opinion piece in many newspapers across the country discussing the need for competition in large defense contracts. He specifically was writing in support of the dual engine track for the F-35 Joint Strike Fighter (JSF). This controversial program where a second source of engines for the advanced multi-role aircraft is being funded by Congress despite the objections of two Administrations, the Pentagon and the Air Force is being defended as risk reduction and as offering potential cost savings. This is how Lehman discusses it.

Certainly the idea is sound in that the second engine in development by General Electric (GE) and Rolls-Royce (RR:LSE) as an alternative to the main one being made by Pratt & Whitney, part of United Technologies (UTC), may end up costing less and be ready sooner but at a time when the program is struggling as well as the whole Federal budget it may be a luxury that the country cannot afford. Lehman cites previous examples of using alternate engines from when he was at the Defense Department that showed “benefits came swiftly and have endured. Reliability, performance and fuel economy improved steadily. Engine-caused accidents dropped. By the second year of full competition, the cost per engine had dropped 20 percent.” He points out that for the three major fighter programs of the Seventies and Eighties — the F-14, 15 and 16 — this approach was used successfully.

For both 2010 and 2011 the Obama defense budget request asked for no funding for the second engine. In the 2010 budget Congress found it by adding money and not taking it out of the core F-35 program. For 2011 the Senate has moved to try and not fund the program but the House markups so far continue it. If the final bills from each part of Congress contain differences it will have to be worked out in Conference. Obama has threatened to veto the bill if it contains the second engine but he did that last year and ended up accepting it. Obviously the Congressional delegations from the states where GE and Rolls-Royce are doing their work support it while the Connecticut delegation where P&W makes their engine have been trying to counter it.

In another view Congressman Tiahrt (R-KS) recently was interviewed about his efforts to promote the use of American contractors for programs. Tiahrt wants the Pentagon to maximize the use of American defense contractors even when it would have to lead to a sole source contract as there would only be one U.S. company able to do the work. The Pentagon does everything it can to avoid sole source contracts as that transfers most of the risk from the contractor to itself leaving little options of the program’s schedules and cost increases. Competition has long been one of the cornerstones of defense acquisition.

Tiahrt believes that the Defense Department must maximize the use of U.S. companies to provides jobs. At this time of current economic problems basically using the defense budget to provide “stimulus”. The problem this faces is that due to the decline of the U.S. industrial base in the Nineties there are often only one U.S. supplier for a product. Tiahrt uses the example of the buying of Russian Mil-17 helicopters for use in Afghanistan by the Afghan military rather then purchasing the UH-60 from Sikorsky, another part of United Technologies. The reasons given for the purchase are more driven by requirements and the needs of the Afghan environment and capability. This is a system they are familiar with, it is simple to maintain and matches well to the environment.

Tiahrt, a former Boeing (BA) employee, is also a big supporter of awarding the new KC-X aerial tanker to that company and preventing the European defense giant, EADS (EADS:P). He had criticized the previous award to Northrop Grumman (NOC) and EADS overturned on Boeing’s protest in 2008. Now that Boeing and EADS are in direct competition for the latest attempt to award this contract he has kept up the criticism.

The problem that the Pentagon faces is only Boeing and EADS have the capability to provide this aircraft. The last tanker that was purchased was the KC-10 in the Eighties made by McDonell Douglas, who are now part of Boeing. With those two companies merged there is no U.S. competitor for the KC-X. In the early part of this decade the U.S. Air Force did award Boeing a sole source lease for KC-767 tankers but this was overturned after Congress found collusion by Air Force and Boeing officials this decision launched the second contest won by Northrop and EADS in 2008.

Tiahrt is right in that the Defense Department should try to award to American companies but the number of those producing major systems has declined. The increase in spending since 9/11 has seen major market penetration by European companies mainly through acquisition of U.S. companies and the establishment of subsidiaries. This has been driven by the need for multiple sources for systems to help keep prices low.

Without a major investment in revitalizing the U.S. industrial base this will be the situation faced anytime a major contract comes up for award Congressman Tiahrt’s protests notwithstanding.

In order to meet Lehman’s desire for competition the U.S. has to allow foriegn bidders which is an unfortunate fact-of-life. Congress will need to face this unless they just want to give contracts to American companies which would counter their desire to do defense purchasing more efficiently and at less cost. The decline of the Nineties is the root cause of this situation and there is no easy short term answer.

KC-10 photo from Mr. T in DC’s flickr photostream.

F-35 photo from Rob Shenk’s flickr photostream.

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