Deal is So Secret, GAO Can't Get a Copy

There has been a lot of controversy surrounding the Air Force's plan to lease 100 Boeing 767 tankers, now known as KC-767A aircraft. The deal has had a number of unusual aspects since its inception, which have raised various congressmens' hackles, for various reasons.

Boeing's unusual behavior, too, has contributed. For reasons that were not obvious outside the Pentagon, Boeing has kept up a PR blitz on these aircraft, on their merits, their strengths, their economies -- their absolute necessity. It has directed this blitz to news agencies, to relate to the public... who don't have much to say about military deals. Meanwhile, Boeing kept reducing the price, without any overt prodding from the Air Force.

That these airplanes are to be leased is a departure from SOP, as well; and that they are to be "convertible" between tanker and transport duty is another new thing.

The lease itself is a big secret, yet our electeds are supposed to be scrutinizing it. Congress asked the General Accounting Office for its take on the lease, and, according to its just-released report, testimony before the House Committe on Armed Services delivered by Neal Curtin, who is GAO's Director, Defense Capabilities and Management, "We received the report... when it was sent to the Congress on July 10. We subsequently received a briefing from the Air Force and some of the data needed to review the draft lease and lease versus purchase analysis. However, we were permitted to read the lease for the first time on July 18 but were not allowed to make a copy and so have not had time to fully review and analyze the terms of the draft lease." They also had from just Friday until Tuesday to prepare the report.

Big secrets, that the GAO can't work on, and that Congress is supposed to make an informed vote on:

Boeing, for its part, has been on an embarrassing PR blitz, sending out releases at least weekly, about how the 767 tanker is such a good deal, how it's necessary, how the current tanker fleet is so inefficient, how the lease is more-economic than a purchase... one wonders if Boeing dost not protest too much.

Enough background. What's up with the GAO's take on the lease?

How old is, "old?"

The report notes that, "The KC-10 aircraft are relatively young, averaging about 20 years in age. Consequently, much of the focus on modernization of the tanker fleet is centered on the KC-135s, which were built in the 1950s and 1960s, and now average about 43 years in age.

"While the KC-135 fleet averages more than 40 years in age, the aircraft have relatively low levels of flying hours. The Air Force projects that E and R models have lifetime flying hours limits of 36,000 and 39,000 hours, respectively. According to the Air Force, only a few KC-135s would reach these limits before 2040, but at that time some of the aircraft would be about 80 years old."

Thus, even the chronologically old, 707-based KC-135s, are only in midlife, based solely on their expected service lives. There's more to "age," though.

Looking at mission readiness, these old machines are pretty good, and the GAO says so: "By most indications, the fleet has performed very well during the past few years of high operational tempo. Operations in Kosovo, Afghanistan, Iraq, and here in the United States in support of Operation Noble Eagle were demanding, but the current fleet was able to meet the mission requirements."

...but what if something really bad happened?

Apparently, the Air Force has just now awakened to the risks of trusting a mission to just one design. Never mind that the design has been proven for over forty years; never mind that the introduction of a different airframe, half that old, may introduce a risk that doesn't even exist in the current fleet. "Moreover, the report indicates that the Air Force believes it is incurring a
significant risk by having 90 percent of its aerial refueling capability in a single, aging airframe." The report notes, "The Air Force considered maintaining the current fleet until about 2040 but concluded that the risk of a 'fleet-grounding' event made continued operation of the fleet unacceptable, unless it began its re-capitalization immediately."

Of course, there's more to life than cycles, hours, and ADs. Plain old age is a factor (unless you're a B-52). "The Air Force indicated that KC-135 aircraft (right, in ancient photo) are aging and becoming increasingly costly to operate due to corrosion, the need for major structural repair, and increasing rates of inspection to ensure air safety."

They've been here before.

Of course, the question isn't whether the current fleet will eventually need replacement; the specific question is whether this particular lease agreement is a responsible move to make with taxpayers' money, or whether it constitutes a bailout of Boeing. Prior art exists: "Office of Management and Budget Circular A-94 directs a comparison of the present value of lease versus purchase before executing a lease. In its report, the Air Force estimated that purchasing would be about $150 million less than leasing on a net present value basis." It's a lot bigger than that, though: "In a footnote, however, the report points out that if the comparison were to a multiyear procurement, the difference in net present value would be $1.9 billion favoring purchase."

Boeing has attempted to assuage a growing suspicion that this lease deal is a handout, though, by setting up a lease that would, depending on the accounting and auditing involved, keep the publicly-traded company from making "too much" money for its stockholders: "If Boeing sells comparable aircraft during the term of the contract to another customer for a lower price than that agreed to by the Air Force, the government would receive an 'equitable adjustment.' The report also states that Boeing has agreed to a return-on-sales cap of 15 percent and that an audit of its internal cost structure will be conducted in 2011, with any return on sales exceeding 15 percent reimbursed to the government." Whether Boeing will be allowed to sell 'comparable aircraft' at all, is not really in question... Besides, the report properly asks, "...since this aircraft is basically a commercial 767 with modifications to make it a military tanker, a question arises about why the 15 percent profit should apply to the full cost."

They need to do something, and have, since at least Clinton's reelection...

"As far back as our 1996 report, we said that the Air Force needed to start planning to replace the KC-135 fleet, but until the past year and a half, the Air Force had not placed high priority on replacement in its procurement budget," the report says; but not until Boeing's crisis of the last two years or so, did the Air Force apporach this need. Some speculate that the Air Force's reluctance to address the known problem had to do with the mindset of the then-administration toward the Pentagon, and with Congress's attitude toward balancing the budget.

There's a few other details, outside the lease money.

For instance, somebody has to maintain these birds, and someone has to train the trainers. To that end, the Air Force, "has negotiated with Boeing for training costs and maintenance costs related to the lease agreement that could total about $6.8 billion over the course of the lease."

There are a lot more details, including some important details, that the GAO had at least a brief look at. If you'd like to read them for yourself in your free time, we've included a link. Read it before you call your congressman...

FMI: www.gao.gov/new.items/d031048t.pdf