The 767-200-Based Tanker Deal Still Looks Sweet for Boeing

The General Accounting Office, after having first been blocked from even looking at the 'done deal' the USAF and Boeing were presenting for funding, finally had a better look at the proposed Air Force/Boeing deal for KC-767A tankers, and issued a more-comprehensive report last month. Senator John Warner (R-VA), the Chairman; and Senator Carl Levin (D-MI), the Ranking Member of the Senate Committee on Armed Services, though, had some questions as to how both the Air Force's and GAO's figures were arrived at. The GAO has now addresed the senators' questions, and has, in its dry and professional way, opened up more questions, especially concerning how the Air Force tortured its numbers to make the proposed lease deal look less-expensive, relative to a purchase deal. [Even after all the bending and twisting was finished, the lease deal -- the Air Force's preferred plan -- came out 'way more-expensive than a purchase deal, in the September report. That seemingly hasn't changed --ed.]

Below are excerpts of the GAO's letter to the senators, along with our explanatory headers:

Let's average this together, and have the numbers come out at the top...

"...provided by the Air Force in October 2003 showed that they used six different methods to estimate the cost of the basic B767-200ER aircraft. The prices developed under the approaches ranged from $60.0 million to $80.5 million per aircraft for an average of $71.1 million. Air Force officials ultimately used a weighted average and concluded that a reasonable price for the basic aircraft would be about $79.0 million per aircraft."

Quantity purchases lead to... higher prices?

"However, the Air Force did not provide sufficient evidence to explain how negotiating for 100 aircraft would necessarily lead to a higher price than the average unit price for 100 aircraft given that IDA did not assume that a volume discount would be given."

...a price cap above all likely pricing, um, isn't very functional:

"While the draft contract does include a “best price guarantee,” this provision only guarantees that The Boeing Company will not sell comparable KC-767A aircraft for less than the Air Force would pay but it does not address the question of whether the Air Force could have obtained a lower price. Moreover, as we testified before the Senate Committees on Armed Services, and Commerce, Science and Transportation,11 it is not clear to us why the sales cap is 15 percent as negotiated, when a financial analysis has concluded that Boeing’s profit on commercial 767 aircraft is in the range of 6 percent."

It's a 'belief' thing. So have faith.

"In oral comments on a draft of this correspondence, representatives from the Air Force did not disagree with our analysis or our conclusions. However, these officials believe that they negotiated a reasonable price for the aircraft as planned to be configured by the Air Force and in the quantity to be delivered..."

[If you're really looking for other options, Senators Warner and Levin asked the GAO to look at another idea: lease the first 25 tankers, and buy the other 75. The GAO had a look along those lines, too --ed.]

FMI: www.gao.gov/new.items/d04164r.pdf