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KC-46A Program Moving Forward

The Air Force and Boeing (BA) have been working hard on the KC-46A contract since its award. There have been some major developments including Boeing’s decision to move most of the work to Washington with plans to close their Wichita, KS military aircraft facility.

At the same time there is progress being made. Boeing has opened one of five simulation laboratories (SIL). This one is in Washington and will focus on avionics and software development. The use of the SIL will aid in risk reduction and program development.

There has also begun discussions of possible basing sites across the U.S. The first one chosen will be for crew conversion and training but ultimately the 767 based tanker will have several operational bases as well as flying from overseas locations such as Guam.

Bases also will be selected depending on how many aircraft the National Guard will operate. Already states like Vermont, Maine and Kansas are talking about being used.

“Burlington mentioned as basing possibility for new Air Force tanker” — Burlington Free Press

“McConnell awaiting decision on home for Air Force tankers” — The Wichita Eagle

“Military brass, state delegates christen new hangar for MAINEiacs” — Bangor Daily News

Pratt & Whitney and Boeing Representatives Sign Engine Contract to Power U.S. Air Force’s KC-46 Tanker — Press Release

MUKILTEO, Wash., March 27, 2012 /PRNewswire/ — Bennett Croswell, president of Pratt & Whitney’s Military Engines division, and Maureen Dougherty, Boeing vice president and program manager, KC-46 Tanker Program, hosted a ceremonial engine contract signing event today at Boeing’s Tanker Program Office in Mukilteo, Wash., for contracts previously awarded to Pratt & Whitney. The contracts support PW4062 engine purchases to power Boeing’s KC-46, the U.S. Air Force’s new airlift tanker. Pratt & Whitney is a United Technologies Corp. (NYSE: UTX) company.

“The PW4000 engine family that will power these aircraft has an exceptional track record of performance and reliability with numerous commercial customers operating the engine globally,” said Croswell. “We are confident these engines will continue to perform exceptionally well in a military application for Boeing and for our ultimate customer, the men and women in uniform.”

Two Pratt & Whitney PW4062 engines, each with a 94-inch fan blade diameter, will exclusively power each U.S. Air Force KC-46 aircraft. The program’s scope, if fully exercised, calls for as many as 368 PW4062 engines to be delivered between 2013 and 2027. Actual production engine procurement quantities will be determined over the life of the program as established by future purchase orders.

“Pratt & Whitney’s PW4062 engine offers the KC-46 program an engine that has proven performance, fuel economy, and durability – qualities that make it the clear choice to power the KC-46 Tanker,” said Dougherty. “These engines bring tremendous capability to the KC-46, which supports superior multi-role mission performance by delivering more fuel, transporting more passengers and cargo, and offering enhanced aeromedical capabilities to our United States Air Force customer.”

Pratt & Whitney has delivered more than 2,500 PW4000-94″ engines that have collectively logged nearly 110 million flight hours on commercial aircraft around the world. The PW4062 is the highest thrust model in Pratt & Whitney’s PW4000-94″ commercial engine family and is offered for both commercial freighter and military tanker applications. The two PW4062 engines that will power the KC-46 each deliver 62,000 pounds of thrust.

The PW4000 engine family has an outstanding safety record, high reliability, excellent performance and low maintenance costs. The PW4000-94″ family meets emissions and noise regulations, and offers superior fuel economy and maintainability. The PW4000-94″ engine operates commercially on the Boeing 767, MD-11 and earlier Boeing 747 models.

Pratt & Whitney is a world leader in the design, manufacture and service of aircraft engines, space propulsion systems and industrial gas turbines. United Technologies, based in Hartford, Conn., is a diversified company providing high technology products and services to the global aerospace and building industries.

This press release contains forward-looking statements concerning future business opportunities. Actual results may differ materially from those projected as a result of certain risks and uncertainties, including but not limited to changes in government procurement priorities and practices, budget plans and availability of funding, and in the number of aircraft to be built; challenges in the design, development, production and support of advanced technologies; as well as other risks and uncertainties, including but not limited to those detailed from time to time in the companies’ Securities and Exchange Commission filings.

GAO Expresses Concerns with KC-46A Development

The Government Accountability Office (GAO) released a report on the KC-46A new aerial tanker program and expressed some concerns with the schedule. Boeing (BA) won the contract to develop a version of their 767 airliner and deliver 17 aircraft after a long struggle with EADS (EADS:P).

GAO is worried that some of the software that is being developed to control the mission planning, defense and routing of the aircraft is being done at the same time as production and testing. GAO also considers the new fuel boom operating station and control higher risk as it has yet to be demonstrated in normal operating environment and at a high maturity. Similar systems are in use on only 3 tankers operated by non-U.S. military.

The KC-46A contract as expected has had some cost increases and earlier this year the Director, Operational Test & Evaluation (D,OT&E) also expressed that the test schedule was not adequate and the program did not allow enough time for the necessary testing.

The Air Force and Boeing dispute the reports claiming the program is on track and risks manageable.

DoD Testers Express Concerns with KC-46A Schedule

One of the issues facing Boeing (BA) and the KC-46A new aerial tanker program is that it is already behind schedule. The Air Force originally planned to award a contract in 2001-2002 timeframe and have new tankers flying before 2010. The contract was not awarded until almost a decade later and the first aircraft will begin service in 2017. This was caused by three attempts to conduct the source selection with Boeing winning the third round from EADS North America, part of EADS (EADS:P).

This has meant the current initial development contract is very short. Boeing is planning on taking commercial B-767 aircraft off of their line, installing a new cockpit from the 787 as well as necessary military gear. They also need to demonstrate that the aircraft is able to meet the requirements of the Air Force and keep it all within cost as Boeing agreed to a fixed price development contract.

The Director, Operational Test & Evaluation (D,OT&E) which is an independent body within DoD responsible for evaluating programs performance as well as their overall test plans releases an annual report reviewing major defense programs and their test plans. They expressed concerns to Congress that the KC-46A is hoping to conduct a very aggressive test campaign. In their report, which may be found on their website here, they write that in their opinion “The DOT&E review of the post-Milestone B draft TEMP indicates the KC-46 test program is not executable.”

This is due for the following reasons:

 

  • The plan requires 42 hours of testing a month compared to an average of 30 on similar large aircraft military programs.
  • It assumes that only 15 percent of the tests would be repeated.  A higher repeat rate adds time to the overall testing program.
  • There is not time in the schedule to fix issues found in Developmental Testing (DT) prior to Operational Testing (OT).
  • There is not enough time allocated to test the fuel boom with Air Force and Navy aircraft.
  • The OT time is too short for the 750 flight hours planned to be flown and D,OT&E calculations estimate that 1,250 hours is the minimum required.

 

The organization recommends a new Test & Evaluation Master Plan (TEMP) be developed that includes a more realistic schedule for testing.

The Air Force, of course, disputes D,OT&E claims and believes the testing schedule is appropriate and executable. They feel that they have structured the program to support a proper OT decision and then into production and service.

The other pressure is on Boeing as an extension of the test program will cost them money. The fixed price contract has already reached a point where there is little slack or money left in it. More flight hours, more tests and more re-work will cost Boeing and reduce the potential for any profit on this contract. The Air Force recognizes this as they add in their defense of the program that they “structured the KC-46 development contract as a fixed price contract to protect the DoD and taxpayers from any cost growth on the program if the test program is not executed as planned.” So Boeing will pay for these issues if any.

D,OT&E can tend to be very conservative when it comes to these types of assessments but that does not mean they are right. One of the biggest issues affecting program development timelines is the need for more testing. Problems are discovered that were not necessarily anticipated and they take time to fix and then there is also time added to do the test again. The KC-46A is probably looking at a test program that will take some amount of time between their estimate and D,OT&E. Even if there is only a little growth it will affect Boeing’s cost and bottom line.

Recriminations in Kansas for Boeing

As can be expected with Boeing’s (BA) decision to close their Wichita, KS facility and move work to Washington and Texas the politicians who represent the state are not happy. Many Congressman and Senators who provided support to Boeing to win the KC-46A contract from the U.S. Air Force feel betrayed.

They cite the fact that Boeing executives basically promised the work would be done in Kansas if the contract was one creating thousands of jobs in that state.

The Mayor of Wichita, Carl Brewer, feels the same way. He claims Boeing has betrayed the city by their decision. Wichita has invested millions of the taxpayers money in the plant which has been open since the 1930′s and built bombers during World War II and the Cold War. Now in about 24 months it will stop work and the jobs will be eliminated or moved.

The decision by Boeing based the company claims on cost considerations alone highlight what may happen across the U.S. as the defense budget shrinks and programs are cut or eliminated. Similar scenes have happened before in the 70′s and 90′s as military spending has been reduced. Wichita may be the first of many cities this time around.

That, of course, does not make those who supported Boeing feel better but now they may join the Florida and Alabama representatives who tried to aid Northrop Grumman (NOC) and EADS North America, part of EADS (EADS:P) who worked for those companies to win the KC-X contract. The goal for them of course was investment and jobs in a time when manufacturing ones are hard to find.

As government spending is cut back there will be many other politicians crying foul.

Boeing to Close Wichita Facility

At a meeting today with its workforce Boeing (BA) announced that it will close their facility in Wichita, KS and move the work from their to Washington state. The closure will take about 2 years and lead to the elimination of over 2,000 jobs.

In their press release Boeing stated “The decision to close our Wichita facility was difficult but ultimately was based on a thorough study of the current and future market environment and our ability to remain competitive while meeting our customers’ needs with the best and most affordable solutions,” said Mark Bass, vice president and general manager for BDS’ Maintenance, Modifications & Upgrades division. “We recognize how this will affect the lives of the highly skilled men and women who work here, so we will do everything possible to assist our employees, their families and our community through this difficult transition.”

Even though the plant in Wichita is closing Boeing will still rely on Kansas suppliers for their aircraft programs.

The full press release follows:

Boeing to Close Wichita Facility by the End of 2013

– Defense budget reductions, limited opportunities for new work and competitive cost structure driving need to close facility

WICHITA, Kan., Jan. 4, 2012 /PRNewswire/ — The Boeing Company (NYSE: BA) today announced that the Boeing Defense, Space & Security (BDS) facility in Wichita will close by the end of 2013. The Wichita facility currently employs more than 2,160 employees.

“The decision to close our Wichita facility was difficult but ultimately was based on a thorough study of the current and future market environment and our ability to remain competitive while meeting our customers’ needs with the best and most affordable solutions,” said Mark Bass, vice president and general manager for BDS’ Maintenance, Modifications & Upgrades division. “We recognize how this will affect the lives of the highly skilled men and women who work here, so we will do everything possible to assist our employees, their families and our community through this difficult transition.”

Boeing Wichita is the base for the company’s Global Transport & Executive Systems business and its B-52 and 767 International Tanker programs. The facility also provides support for flight mission planning and integrated logistics.

Over the past five years, contracts in Wichita have matured, programs have come to a close or are winding down, and the site does not have enough sustainable business on the horizon to create an affordable cost structure to maintain and win new business.

“In this time of defense budget reductions, as well as shifting customer priorities, Boeing has decided to close its operations in Wichita to reduce costs, increase efficiencies, and drive competitiveness,” said Bass. “We will begin program transitions in the coming months, with the complete closure of the site scheduled for the end of 2013. We do not anticipate job reductions as a result of this decision until early in the third quarter of 2012.”

Bass said that Boeing will continue to have a significant impact on the Kansas economy and the health of the state’s aerospace industry.

“The company spent more than $3.2 billion with approximately 475 Kansas suppliers in 2011, spanning its commercial and defense businesses, making it the fourth largest state in Boeing’s supplier network,” said Bass. “Based on Boeing Commercial Airplanes growth projections for the next few years, Boeing anticipates even more growth for suppliers in Kansas. Boeing values its long-term partnership with Kansas, and we will continue to work with all of our stakeholders in Kansas in support of a robust aerospace industry in the state.”

Future aircraft maintenance, modification and support work will be placed at the Boeing facility in San Antonio. Engineering work will be placed at the Boeing facility in Oklahoma City. Although work on the KC-46 tanker will now be performed in Puget Sound, Wash., the 24 Kansas suppliers on the program will be providing vital elements of the aircraft as originally planned.

Boeing is providing employee assistance including retirement seminars, job search resources, and financial counseling, as well as help finding jobs inside or out of Boeing.

A unit of The Boeing Company, Boeing Defense, Space & Security is one of the world’s largest defense, space and security businesses specializing in innovative and capabilities-driven customer solutions, and the world’s largest and most versatile manufacturer of military aircraft. Headquartered in St. Louis, Boeing Defense, Space & Security is a $32 billion business with 63,000 employees worldwide. Follow us on Twitter: @BoeingDefense.

Boeing May Not Work on KC-46A in Kansas

Update – It has been reported that Boeing has called a mandatory meeting of all its Wichita employees tomorrow. It is also been reported that part of the new contract with the Machinists requires the KC-46A work to be done in Washington if the Wichita site closes.

Previously Boeing (BA) has done a great deal of their work on military and government aircraft at their facility in Wichita, KS. This has included the VC-25 Air Force One version of the 747, the KC-135 tankers and the E-4A command and control aircraft. It was assumed, especially by the Kansas Congressional delegation, that much of the work on the new KC-46A tanker would also be done at the facility.

Now word is leaking out that Boeing is planning on doing all of the necessary tanker effort at their main facility in Everett, WA. The 767 that will be converted to the tankers will be assembled there but rather then being militarized in Wichita they will remain in Washington. This, understandably, has roiled the media, the workers in Kansas and various Senators and Congressmen.

They feel that their support for Boeing to win the contract is now wasted as rather then seeing more work Boeing could be eliminating jobs and laying people off in Kansas.

Boeing has stated that until they understand fully the effects of changes in the U.S. defense budget that they won’t commit to announcing anything about the Wichita plant and their overall work structure. This may not be until later this year. It had been estimated that over 7,000 jobs will be created by the KC-46A militarization and support efforts with the idea that those jobs would be in Kansas. Now that is not guaranteed.

This may be an effect of the new contract Boeing signed with their main union that allowed them to successfully get the U.S. government to drop action against the company for opening a new facility in South Carolina. The National Labor Relations Board (NLRB) had filed a complaint against the company stating that the only reason Boeing expanded to South Carolina was to retaliate against unions in Washington. This was dropped after the company signed a new deal with the union that promised to keep a great deal of jobs in the Northwest.

Boeing intends to use the South Carolina facility to support commercial 787 production.

If the company does not send KC-46A work to Wichita it will cause severe problems with its relations to that state’s Congressional delegation which has in the past been very supportive of Boeing. The next few months could be very interesting for the company, the U.S. aerospace industry and Kansas.

KC-46A Selected Acquisition Report (SAR) Indicates Higher Costs

The Department of Defense is required to submit Selected Acquisition Reports (SAR) annually for Major Defense Acquisition Programs. A SAR is also submitted at the beginning of the program and if a change to the baseline is approved. The KC-46A new aerial tanker program submitted a SAR dated 30 September to Congress and it shows that the current Estimate for Completions (EAC) for the current contract are above the ceiling.

This would mean that Boeing (BA) would make no profit on the initial contract for 17 aircraft as it is responsible for all costs above it.

The Washington Post reports that Boeing’s EAC is a $5.1 billion and the Government’s $5.3 billion. The ceiling is $4.8 billion.

Estimated costs for this initial development of the program have been up-and-down over the last six months but last reports had Boeing still under the ceiling.

The SAR also shows that the Air Force plans to spend $40 billion on procurement for the 179 tankers with the last order placed in 2027.

U.S. Air Force and Boeing Complete KC-46A IBR

One of the first major steps with the execution of a new contract by the Defense Department is the Integrated Baseline Review (IBR). This is a meeting between the contractor and the Government acquisition community to review the contract and establish cost and schedule parameters. The data will be part of the Earned Value Management System (EVMS) used to measure the contract, and Boeing’s, performance and how well it is remaining on cost and schedule.

The IBR for this contract was completed in late August. According to Boeing the IBR went well and the program is grounded for success. The KC-46A will next have its design reviews and plans to deliver the first aircraft in 78 months. The flight of the first test aircraft will be in 2015.

AUSA 2011 Annual Meeting & Exposition

The Association of the United States Army 2011 Annual Meeting and Exposition is this week.

For more information check out this link.

Boeing Continues to Announce Sub-Contractors for KC-46A

As the KC-46A aerial tanker program moves forward headed up by Boeing (BA) they continue to announce the different sub-contractors and parts suppliers. The latest is that BAE Systems (BAE:LSE), the British defense giant, will be providing touch panels to operate some of the systems on the aircraft.

The panels are derivatives of the current ones they manufacture for Boeing’s 737 airliner indicating that Boeing will follow its plan of utilizing components from its different aircraft to support the 767 based tanker. The cockpit is planned to be a version of that used in the new 787 Dreamliner expected to enter service in the next few months.

Boeing Issues Contracts for Cargo Nets

September 21, 2011 by · Comment
Filed under: Boeing, KC-X, KC-X Tanker News, Syndicated Industry News 

Boeing (BA) issued a contract to AmSafe Industries Inc. to manufacture the internal cargo nets for the KC-46A tanker aircraft. The contract has a value of about $45 million.

The barrier net system will be used to restrain and contain cargo inside the aircraft. One of the secondary missions of the modified 767 tanker being built by Boeing is to carry cargo and these nets are key to ensuring a safe flight.

AmSafe is one of the world’s leading manufacturer of these type of systems. They also build safety curtains as part of this to prevent any fire and smoke from the cargo area entering the cockpit and crew areas.

The KC-46A program is continuing a pace with the first aircraft expected to be flown in 2015. Ultimately the Air Force could buy over 170 of the aircraft from this contract.

Air Force Continues Commitment to KC-46A

At a recent conference the Air Force Secretary, Mr. Michael Donley, discussed the key programs for the Air Force’s future. Facing a declining budget situation the Air Force as all of the services may be forced to choose which investments have a higher priorities then others. Not surprisingly the keys for the Air Force will be the F-35, Unmanned Aerial Vehicles (UAV), space and the KC-46A tanker.

The KC-46A currently being developed by Boeing (BA) will go into service later this decade to replace the aging KC-135 fleet. In terms of total cost it is one of the largest current defense programs. If the Air Force follows through with the first 170 odd aircraft the cost will be about $35 billion. There are plans to buy another 300 or more.

If there are as significant reductions to the defense budget as being discussed then the KC-46A like so many other programs may see quantities cut. This could be either the total procured or the annual buys. It could also see it being maintained at the expense of other investment programs such as new UAV or space programs.

Tankers are a key force multiplier for the United States. Declining amounts of strike assets increase the reliance on the tanker fleet. The need for the KC-46A is well established and it is a program now that the commitment to Boeing has been made that the U.S. really cannot afford to reduce. Whether this holds true remains to be seen.

Boeing and DoD Release Latest Estimate for KC-46A First Phase Contract

The Hill is reporting that Boeing (BA) currently estimates the first phase of the KC-46A contract at about $5.2 billion or 6% above the $4.9 billion ceiling price. All of that increase if that is what it turns out to be will be paid for by Boeing. The cost share of the difference between $3.9 billion target price and the $4.9 billion ceiling will be split between the Government and Boeing.

There was some consternation when the reports of Boeing’s efforts costing a great deal more then the $3.6 billion price at which the contract was awarded. This led to charges that Boeing “bought in” the contract by bidding deliberately low so that competitor EADS North America, part of European aerospace giant, EADS (EADS:P), could not win.

As the contract goes forward the total cost will change depending on what challenges the program faces and if it needs more time and investment to develop the variant of the Boeing 767 airliner. It may end up being less then $5.2 billion or even more as the program evolves.

Department of Defense Not Really That Concerned with Boeing’s Costs for Tanker

At a recent public event the Undersecretary of Defense for Acquisition, Logistics & Technology, Ashton Carter, was asked about the projected cost increases for the KC-46A development. His response was that he, and OSD, are not really that worked up about the fact that Boeing (BA) may exceed the projected ceiling price of the contract.

In his eyes the U.S.’s liability is based on the $4.9 billion price. Boeing’s bid of $3.6 was a conscious business decision on their part. Some members of Congress, led by Senator John McCain (R-AZ), have raised concerns about the increase and the fact that the cost share structure of the contract obligates the U.S. to pay 60% of the first billion in increases.

There is also the idea that this situation would encourage contractors to submit low estimates for development contracts, or buy-in, with the goal of making up the difference in their production or by having the U.S. pay some of the overruns. McCain and the Senate Armed Services Committee (SASC) are also investigating the large cost increases in F-35 production that are requiring the U.S. to pay over $700 million as part of their cost share.

The idea that the Defense Department would accept this kind of business model is interesting. One of the criticisms of defense acquisition is this very point. In the late Sixties when Lockheed, now Lockheed Martin (LMT), did the same with the C-5 transport, although perhaps not deliberately, it is considered one of the examples of acquisition abuse and the program was almost cancelled. Now Carter is saying that as long as it involves a Firm Fixed Price Contract it is an acceptable practice.

This is just the beginning of the situation and Boeing certainly has the ability to not charge more then the ceiling price as they work the KC-46A development. Their current estimate of about $5.2 billion may be conservative and costs for the first 18 aircraft could be under $4.9 billion.

KC-46A Costs Reportedly Increase

A few weeks ago it was reported that Boeing (BA) had already informed the U.S. Air Force of at least a $300 million increase in the costs of the first phase of the KC-46A aerial tanker program. This led to Reuters asking the Air Force some follow up questions on the situation.

They are now reporting that the way the current contract is structured the Government and Boeing would share in the first $1 billion increase beyond the target price of $3.9 billion for the EMD contract which will also deliver 18 tankers. The original contract value was about $3.6 billion.

Once the price gets beyond $4.9 billion Boeing would be responsible for all costs. Up to that they would pay 40% and the government 60 or $600 million. The reports last month had Boeing predicting that they would spend at least $4.2 billion.

This was the third attempt by the Air Force to award the new tanker contract since 2001. An attempt to award a sole source lease to Boeing was derailed by fraudulent activity by Air Force acquisition chief Darleen Druyun and Boeing’s CFO. In 2008 EADS teamed with Northrop Grumman (NOC) won a contest that was overturned on protest by Boeing. This latest contract is the result of the new competition held due to Boeing’s successful protest. EADS was not able to match the price that Boeing offered which is now seemingly controversial due to the reported cost increases.

Reports that KC-46 Contract Already Showing Cost Growth

Bloomberg is reporting that the U.S. Air Force has been briefing Congress in preparation for the FY12 budget that the KC-46 tanker contract with Boeing (BA) is already showing growth beyond the initial award price. The first part of the program is for development and testing as well as the delivery of the first 18 aircraft.

The value awarded was $4.9 billion but the indications are that it will be at least $300 million more. The way the contract is structured Boeing will have to cover that cost increase themselves. Boeing, though, seems confident that when all is complete the contract will be executed for close to the $3.9 billion and will not cost the company.

Boeing was awarded the contract in February for the new tanker program. The Air Force plans this as the first phase of a new program that could buy several hundred new tankers to replace the KC-135 and KC-10 fleet currently supporting operations. Boeing will ultimately build over 150 of the KC-46 tanker based on their commercial 767 airliner design. Boeing has also sold 767 based tankers to Italy and Japan with Italy just taking possession of their first aircraft.

The current estimate though of about a six percent cost increase is not a good sign for a program just starting which is going to be held to strict cost standards. One of the major reasons that Boeing won was their much lower price then their competition from Europen aerospace giant EADS (EADS:P) U.S. subsidiary, EADS North America. Their proposal based on the KC-30 tanker ordered by Australia and the U.A.E. was more expensive but was a larger aircraft that could carry more fuel. Further cost growth will only bring more scrutiny and criticism from Congress.

This was the third attempt by the Air Force to award the new tanker contract since 2001. An attempt to award a sole source lease to Boeing was derailed by fraudulent activity by Air Force acquisition chief Darleen Druyun and Boeing’s CFO. In 2008 EADS teamed with Northrop Grumman (NOC) won a contest that was overturned on protest by Boeing. This latest contract is the result of the new competition held due to Boeing’s successful protest.

Boeing Releases Video of the Italian KC-767

Boeing (BA) has released a video on their Youtube channel of the Italian acceptance of the first two of their four KC-767A tankers.

The video may be found here.

Recent Tanker News Link Round Up

The site has been quiet since the award of the KC-46A contract to Boeing (BA), but here are some links to articles about different aspects of the program and the companies involved in the contest:

Boeing is slowly releasing information about the KC-46A design.

World Trade Organization softens ruling against EADS (EADS:P). Boeing and U.S. still claim victory.

House puts strong cost controls on KC-46A with mandatory reporting requirements for Air Force.

First Australian KC-30 arrives at RAAF base for introduction into service.

Aviation Week to Feature Indepth Article on KC-46A and Acquisition Process

Aviation Week is announcing that they have a feature article on Boeing’s (BA) new tanker and the process to acquire it. It features a interview with Shay Assad, Director of Defense Procurement, Acquisition Policy and Strategic Sourcing.

The article will be in the 11 April edition and on their website.

Commercial Air Sales Turn EADS Back to Profitability

Sales of their Airbus commercial airliners has somewhat tempered EADS (EADS:P) feelings about losing the KC-X contract to rival Boeing (BA). In the last year thanks to large orders the European aerospace company returned to profitability after a few years of struggles.

Revenue in 2010 was over $60 billion and the company earned a profit of around $1.5 billion. The company has also been able to increase its cash holdings dramatically with an eye on expanding U.S. defense business through acquisitions.

Boeing and EADS unlike other large defense contractors do have the commercial aviation market to help temper ups-and-downs in military spending. They are though soon to be facing more competition from companies like China’s CAI who especially want to enter there own domestic airline market.

EADS has carefully looked at different potential acquisitions in the U.S. to help grow its nascent defense work there. Certainly they now have the necessary funds to do even a rather large one although something like buying Northrop Grumman’s (NOC) shipbuilding group would seem a little too large and ambitious. EADS will most likely target a medium sized defense contractor who provide services or limited hardware.

EADS NA Will Not Protest

At a press conference earlier today EADS NA (EADS:P) stated that they will not protest the KC-X tanker award to Boeing (BA).

This means that the U.S. Air Force has awarded a new tanker contract successfully and the last decade of fits-and-starts is over. Now the emphasis shifts to Boeing and their efforts to meet the schedule and performance requirements of the program.

Hopefully this means in a few years the KC-46A will be flying over the United States.

Boeing Signs Contract While Waiting on EADS to Move

The Air Force and Boeing (BA) executed the first part of the new KC-X aerial tanker contract. This is a $3.5 billion development effort that will deliver the first four KC-46A aircraft.

Unlike many other programs of this sort the U.S. is going to try a Fixed Price contract for the development effort as a cost control measure. In the past it has been hard to do real development work this way as there may be unknown issues that cause more schedule and cost. The assumption is because the KC-767 (and the KC-30) were fairly mature systems already in production for other customers that this risk is minimal. Of course the KC-46A is not identical to the other 767 tankers Boeing has built for Japan and Italy.

At the same time it has been reported that EADS NA (EADS:P) received their debrief from the Source Selection Board and now has a few more days to file a protest. There would have had to be something fairly serious revealed in the briefings to warrant such a move but until the deadline passes without one being filed there is always a chance a protest will occur. Although all the reports are now saying that EADS will not protest now even though there remain few future programs for the European aerospace company to bid on and get into the U.S. market.

Will EADS Protest?

Now that the U.S. Air Force and Defense Department have awarded the KC-X new aerial tanker contract to Boeing (BA) for their KC-46A aircraft the major question is whether the losing EADS NA (EADS:P) bid will protest? In 2008 when the Air Force selected Northrop Grumman (NOC) and EADS Boeing did protest and the choice was overturned leading to this current iteration of the contest. Considering this is the only fixed wing aviation program in the near future or at least until the Next Generation Bomber program emerges it may be hard for EADS not to protest on the chance that they might win or at least there would be another competition.

In their public statement the company is non-committal about the chances of filing a protest with the Government Accountability Office (GAO). They say “EADS North America officials today expressed disappointment and concern over the announcement by the U.S. Air Force that it had selected a high-risk, concept aircraft over the proven, more capable KC-45 for the nation’s next aerial refueling tanker.” but they also say ““Though we had hoped for a different outcome, it’s important to remember that this is one business opportunity among many for EADS in the United States,”. So read into that what you may.

At a minimum the filing of an unsuccessful protest would delay the initiation of the contract for about 100 days making the delivery of any new tankers to the Air Force even later then they will be after an almost ten year process to build a new one.

KC-X Contract Will Have Spillover Effects

The award to Boeing (BA) of the contract to build the new KC-46A tanker will of course affect many other companies. It is one of the largest defense contracts for the next decade. While the total value if all of the planned aircraft are built is closer to $35 billion the initial contract is for $3.5 billion and provides for the initial development and production of the first batch of aircraft.

Because of its size and scope there will be significant work for the subcontractors on the program. Boeing will do final assembly of the aircraft but it needs to procure things like engines, software and aircraft components from other contractors. These are spread out across the country and provide a web of support for Boeing and the program.

The first company that will receive major subcontracts is Pratt & Whitney, part of United Technologies (UTC). They will provide two engines for each aircraft which will be a boost in revenue and work for the next ten years or so. This revenue stream will allow them to maintain production at their facilities and perhaps invest in new engines for other programs.

Rockwell Collins (COL) will also do well. They will make for Boeing the flight deck, software and communications systems. Interestingly they were also supporting the EADS NA (EADS:P) KC-30 program so if either bidder had been chosen they would have won. The company has a history of supporting Boeing aircraft.

The KC-46A contract if it is not protested and delayed will begin to have secondary effects throughout the U.S. defense economy. The Air Force also plans follow on contracts to buy more then the 179 planned tankers under this effort. Those could go to Boeing or to another bidder and they too will have a significant effect on many other defense contractors and suppliers.

Photo from Jerry Gunner’s flickr photostream.

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