Boeing Drags Its Heels on Air Force Bid

The USAF tanker contract bidding process added yet another wrinkle Friday as Boeing (BA) asked for an extended deadline before it submits a bid to the Department of Defense. As we have posted previously, the contract was originally awarded to Northrop Grumman (NOC), but after an extensive lobbying effort that greatly politicized the deal, the bidding was re-opened. Boeing has traditionally been the Air Force's supplier of previous tanker fleets, and many in Washington began to whine about a non- American country benefiting from the $35-$40 billion contract. Now, Boeing contends that because the government amended the way it plans to price the planes as well as the long-term expenditure of operating the tankers, that it is essentially an entirely new bid. If they were to submit the same modified 767-200, which is likely too small with too little capacity, the Boeing bid would again be defeated.

Boeing may have a point that they need to adjust their design and bid for the tanker in order to compete, but they also run the risk of pushing too hard on the Department of Defense. Boeing has made it clear that they will not submit a bid if the deadline is not extended beyond the original October 1, and they say they need six more months in order to properly bid. They are confident that the government, after all of the mess this contract has created, will not be in favor of letting this become a no contest bid. According to the Wall Street Journal, it is rumored that a compromise could be reached to extend the timeline by 15 days. This would be the second time that Boeing and its political clout have been able to bend the will of the Air Force and Department of Defense. At what point does the Secretary of Defense tell Boeing to buzz off? That remains to be see but it appears Boeing is itching to find out.

Clearly, whoever wins the contract will benefit from a guaranteed stream of revenue for many years to come; remember that the current fleets is approaching 50 years and must be phased out over a course of years. Looking at the stocks of Boeing and Northrop Grumman, we still rate Boeing a Buy and find it to have the more compelling valuation. One of the tools we use to value companies is looking at what the market has historically been willing to pay for each stock, based on a variable level of revenue and cash flow. For Boeing, the market has normally paid 9.8 to 14.8 times cash flow per share, but it is currently only getting 8.1 times. NOC, on the other hand, is currently trading at 9.5 times cash which is well within their normal range of 8.8 to 11.4 times. Both BA and NOC are trading within their normal range for price to sales but Boeing is closer to the low end.

Comments

[Respirate:]

Good summary. I for one would be glad to see the Pentagon call Boeing's bluff. They have tried to cheat and strongarm the procurement process in the past. A fair playing field has no part of this process. I say let the crybabies at Boeing take their toys home and sit out the game; the Lockheed consortium can provide the needed equpment.

Alas, that's wishful thinking. Corporations run the government, and because Boeing knows that, they can afford to sulk.

2008 Aug 23 03:01 PM

[outrigger:]

You fail to mention the fact that Northrop Grumman\EADS made a similar move prior to this previous round which they successfully asked that the Pentagon alter key metrics that would make a larger plane better. Also you forget this is the 3rd round of competition for this replacement. Lastly, you fail to point out that due to the size of this procurement that the Congress has stated they want it to be a contested bid. All of this leads to one point, who has the power. Unfortunately for the Pentagon it is not them!

2008 Aug 23 04:28 PM

[Julius Ceasure:]

The cost of assembling a bid on a major contract like this is astranomical. This is the third time Boeing has been forced to do it and th rules keep changing. All they are asking for is a reasonable amount of time to gather data and put togather a proposal on the new requirement for a bigger plane. Respirate should wake up - Boeing isn't bluffing. Although it would be a loss for Boeing; loosing this contract would not be a back breaker for them, although they may become more subjective in their future decisions whether or not to compete on RFPs. If the Air Force wants EADS that bad they may be stuck with them! Even corporations can take only so much crap before they say, "piss off"!

2008 Aug 23 06:40 PM

[Please ente...:]

Possible "conflex" (some call it "double" dipping) with the $35B tanker competition
Report Commentby Joseph S. @ 7:19pm - Sat Aug 23rd, 2008
There appears to be "conflex" (some call it "double" dipping) of interest and/or get "double" paycheck from retired US civilian and military officers in this contract with Boeing. How? Well it's well known that before high ranking civilian and military officers "pack up" classified material which they mail using US government security to potential employers to the security office to where they plan to work for when they retire.

BINGO, they could be dumb as hell, however during job interviews to foreign (and US) companies, they know before what projects they will be working on which is what they are already working on before retiring. Now the foreign and US companies hire the individual which increase pay and a higher chance to winning the contract.

All one has to do is review the foreign and US company working in and around the US see their names and the types of work they are now doing. In addition, every year the USAA, AFA, NASA, and others have show and tell at convention centers in Washington, DC, Los Angeles, and a few other cities and see what is happening to our industry.

I see the same with the Boeing and Northrop Grumman Corp. with its partner Airbus parent European Aeronautic Defense and Space Co. I'm almost sure it happen with the helicopter contract for the President. It's also happening with the Ballistic Missile Defense Contracts.

AW&ST had some good data that GAO missed on regarding to this $35B tanker competition.

I believe GAO got this one wrong since they only looked at one piece of the entire $35B tanker competition with Northrop and EADS in Europe.

This is only the "tip-of-the-iceberg".

2008 Aug 23 10:08 PM

[Ramses II:]

There is one important point that is missed in this discussion. We, as a country, cannot expect to remain an independent and secure nation if we continue to farm out our manufacturing, train competing countries all we know, and allow the skills to disappear from the American labor force.

If we were to go to war with China at this point we would would be obliged to humbly ask them for a good price on supplying our military's uniforms to us. We are no longer able to produce our own clothing, military or otherwise. Only a couple of decades ago, textile manufacturers from around the globe were traveling to the southeastern United States to take tours of our then state-of-the-art facilities. Not any more.

Skilled workers such as machinists and tool and die makers will soon be a thing of the past in the US. How is this good policy? We are systematically dismantling and selling the greatest manufacturing industry in the history of humankind.

This will clearly impact national security, but not enough Americans seem to get terribly upset about it. I believe the author of this "piece" (I won't say of what) referred to this as "whining."

This trend is foolish and perhaps even traitorous.

Now there is actually a debate as to whether we will begin to farm out our ability to produce military equipment and airplanes. Dumb, dumb, dumb...

2008 Aug 24 05:27 AM

[bdb:]

Regarding offshore manufacturing, how far would the average American be forced to pay to keep textiles factories in the US? Will they stop going to Walmart and pay 5x the price at "Made in America" store? Textiles, electronics, cars, shoes, etc. Where does it stop? Also, since Americans are willing to shell out 100USD for a pair of shoes made in Vietnam for 5USD, what does that say about American companies and consumers?

2008 Aug 24 06:08 AM

[User 249704:]

Let me get this straight.

1) After the Boeing/Druyun fiasco, Air Force wants to replace tankers and now needs a competition with at least two bidders.
2) Air Force releases a "solicitation" (draft Request For Proposal) to the two only interested parties, Boeing and Northrop.
3) Boeing and Northrop check out the draft RFP.
3) Northrop takes a look and says that draft RFP in current form does not warrant them to develop a bid (not to be confused with "pulling out" since they have not yet agreed to participate.
4) Air Force amends RFP (to both Boeing and Northrop) to make it fair and to allow Northrop to participate in the bidding process.
5) Unlike most analysts, Northrop now thinks it has a real, albeit outside chance of winning.
Important to Note here: Air Force doesn't know what Northrop's bid will contain, therefore it's impossible for them to slant the RFP towards Northrop - right?
6) Boeing and Northrop agree in writing with final RFP and its fairness.
7) Both parties submit bids to the Air Force.
8) Air Force evaluates bids and, against all odds, Northrop wins the competition with a product offering more bangs for bucks.
8) Boeing is shocked - it never in their wildest dreams occurred to them that they could lose this one.
9) Boeing launches protest with the GAO, claiming that the rules were changed midway through the competition to unfairly favor Northrop. (this refers to the amendment the Air Force made to the draft RFP to allow Northrop to compete in the first place. Boeing delivered a bid and as such must have agreed to the final RFP wording. This is not midway through the competition but PRIOR to the competition).
10) GAO upholds 8 points in Boeing's protest and Air Force agrees to let the Pentagon deal with the problem.
11) Pentagon drafts clarifications to RFP relating to the 8 points of contention and allows competitors to submit revised bids addressing these 8 points only - i.e not a completely new competition.
12) Boeing, knowing now a lot more about Northrop's bid and why it won, threatens to not submit a revised bid (reported by the media wrongly as Boeing pulling out of the competition. They cannot pull out anymore since they are already in the midst of it - protest and all. All they can do is to fail amending their bid...in which case the Pentagon should evaluate the 8 points in the (revised) bids as submitted by the new deadline). Boeing still may win because costs are calculated over 40 years instead of 25.

Sounds all fair to me so far. It would however be extremely unfair to allow either competitor to enter an entirely new product whilst knowing that their original proposal has failed. This is then called a "Dutch Auction".

BTW, both competitors are American entries and have qualified to bid under the "Buy American" rules.

2008 Aug 24 06:33 AM

[nobody cares:]

Ah yes, the war profiteers fight over the contracts. An ugly necessity, but if we're going to enrich a multi-billion dollar corporation with our tax money, it might as well be one of our own.

"Regarding offshore manufacturing, how far would the average American be forced to pay to keep textiles (or any) factories in the US?"

As for that, it's too bad people automatically default to the assumption that we have to send our jobs and money overseas to obtain cheap goods for America instead of focusing on redesigning our manufacturing process for greater efficiency. After all, that's how Toyota beat us.

2008 Aug 24 07:07 AM

[jerry F:]

If you read the GAO report, it is quite clear that the Air Force's decision was far from balanced. There was no fair playing field and that was finally recognized. The fact the several of John McCain;s staff were lobbyists for Northrop seems to escape many. This bid has become terribly convoluted and political beyond the boundaries that make for a reasonable and objective choice. Boeing has been forced to spend millions on a plane that is more than adequate and is asked to comply with a changing set of demands in two weeks. It has become absurd.

2008 Aug 24 08:42 AM

[Miata:]

The article seems to ignore that Boeing did not strong arm the Government into reopening the bid process. The GAO told the A/F that they had MAJOR flaws in the review. They gave extra points to areas where they had told Boeing that they would not give extra credit. Clearly unfair. If Boeing had known the "true" evaluation criteria they probably would have offered a different solution.

All the A/F has done in the "new" competition is give formality to the bias that they gave NG. In order for Boeing to adequately compete with the new requirements they need time - which is very reasonable. If the A/F had stayed with their original requirements and evaluation criteria none of this would have happened.

2008 Aug 24 12:33 PM

[Privatejetter:]

I bet the Government doesn't grant a six month extension for submission of a bid for the tanker but maybe they'll split the difference and grant three months instead.

2008 Aug 24 03:23 PM

[corona:]

You obviously don't know what you are talking about. The Air Force has clearly changed it's requirements by requiring a larger Tamker/Freighter than previously by the original Request for Proposal.
If they want Boeing in the competition, they will have to give them time to propose one of their larger airplanes.

2008 Aug 25 01:15 AM

[Y2KPony:]

I might have made a mistake, User 249704 is a bigger moron than Respirate.

"Important to Note here: Air Force doesn't know what Northrop's bid will contain, therefore it's impossible for them to slant the RFP towards Northrop - right?"

Are you kidding me? From the start of the competition, the USAF knew exactly what plane the NG team was going to use.

And in regards to #6, the Air Force changed specifications DURING the competition WITHOUT telling Boeing, but they DID tell NG.

In regards to #9, this change was made AFTER the initial RFP, not before. Check the 67 page report on the GAO's website.

To make this whole thing fair, here's what I suggest.

1.) Do not re-bid, go back and use the original submittals from both EADS and Boeing.

2.) Re-evaluate based on the RFP Boeing was originally given, not the revised one that Boeing didn't see until after the competition was over.

3.) This time base it on a 50-year life cycle cost, not the 25-year cost to account for real-world conditions. (You have to admit that the aircraft had better last more than 25-years. Boeing's will, but will EADs?)

4.) Adjust for any costs required such as airport construction, hangars, additional training, etc.

Based on that above criteria (which you pretty much said was fair), the Air Force along with help from the GAO and the Pentagon should be able to re-evaluate the original proposals from both suppliers and come up with a fair answer.

What do you think? Or would you complain about that too?

2008 Aug 25 11:05 AM

[for america:]

The Boeing plane is by far the best plane for the job! The taxpayer and the pilots will benefit greatly if the DOD can stop trying to cover up their mistakes and make the selection of the best aircraft. The Boeing plane can land at more airfields, does not require larger runways and is more manueverable and fuel efficient. The AF does not need the larger plane. The 135s return to their bases now usually with over half the fuel in the tank!!

2008 Aug 25 02:55 PM

[kmanm:]

I am not an American nor live in US but I am BA share holder. It boggles my mind why US Air Force is willing and wanting to give the contact for a foreign company. Based on what I read, both companies (BA and Airbus) are presenting comparable product to the air force. I do realize BA's proposal which is based on 767 is smaller but BA can also use the 777 given enough time to bid.

I am not saying other countries don't buy foreign products but for most part they buy foreign products because the foreign product is much better and it's no way comparable.

I don't know but I just feel that Air Force is willing to do anything to make it harder for a domestic company. If anything, they should make it easier.

2008 Aug 25 04:39 PM

[Kapil Kumar:]

Northup is saying how many jobs are coming to America and Airbus is saying how many job are not leaving Europe....already retraction of statements and confusion is surfacing. My husband flew tankers in 2 gulf wars.
----------------------...
kapil kumar
----------------------...

[url=www.fastrealestate.net]Real Estate[/url] - Real Estate

Feb 10 07:10 AM

[Kapil Kumar:]

Northup is saying how many jobs are coming to America and Airbus is saying how many job are not leaving Europe....already retraction of statements and confusion is surfacing. My husband flew tankers in 2 gulf wars.
----------------------...
kapil kumar
----------------------...

[url=Real Estate[/url] - Real Estate

Feb 10 07:12 AM