Boeing Co.'s high-stakes bid to boost its aircraft business with the help of a large military contract appears in danger after two Pentagon reports cast doubt on the scandal-tarnished program.
Although Defense Secretary Donald H. Rumsfeld has not yet ruled on the program, pressure is mounting to delay or abandon Boeing's $23.5 billion proposal to sell and lease 100 refueling tankers to the Air Force. The proposal, first suggested in 2001, came under fire following revelations that an Air Force procurement official improperly held job discussions with Boeing while still involved in the contract's negotiations. The Pentagon's inspector general found last month that the Air Force did not comply with contracting laws. The Defense Science Board, a key Pentagon advisory panel, has concluded that replacing the tankers is not immediately necessary and suggested alternatives to a lease of the planes, according to a summary of the unreleased report.
Any further delay in deciding the fate of the proposal would spell trouble for Chicago-based Boeing, which has said it will have to decide in the next few months whether to close its 767 production line. Commercial orders for the 767, which would be built to tanker specifications under the proposal, have been dwindling.
"We continue to stand ready to provide the only aircraft that fits the requirements as stated by the Air Force," a Boeing spokesman said.
If the Air Force begins studying alternatives to the 767, Boeing will likely face tough competition from rival Airbus, which has already won two foreign tanker contracts this year and is investing $80 million to bring its technology up to Air Force standards. Boeing will also have to fend off proposals to buy used 767s or other planes and modernize them for a fraction of the price of building 100 new aircraft.
"There is never going to be a lease. It seems to be radioactive on Capitol Hill," said Loren B. Thompson, defense analyst for the Lexington Institute, a think tank.
The program's delays already pushed back Boeing's earliest delivery date by more than a year, challenging the Air Force's original argument that the higher cost of a lease was balanced by faster replacement of the fleet.
"We are in the process of reviewing what the impact of a further program delay would be on our workforce and on the workforces of hundreds of our suppliers from across the country who contribute to the program," Boeing said in a statement. Boeing laid off 150 employees in February and announced last week that it would lay off 50 more because of delays in the tanker program.
Michael W. Wynne, the Pentagon's acting acquisition chief, will recommend to Rumsfeld that the department wait before deciding on the tanker program, Defense Daily, a trade newspaper, said yesterday. Wynne told reporters after a congressional hearing that Rumsfeld will likely decide by the end of the year so the move will fall under the fiscal 2006 budget.
Boeing's supporters have vowed to save the day, noting that tankers were heavily used during the wars in Iraq and Afganistan and at more than 40 years old are at risk of failure. "I am not going to give up; we're going in there fighting," said Rep. Norman D. Dicks (D-Wash.), who has thousands of Boeing employees in his district. Boeing will build part of the planes in Everett, Wash. He was encouraged by a provision in the 2005 Defense Authorization Bill passed by the House Armed Services Committee late Wednesday allocating $95 million to fund the lease of 20 tankers and the purchase of an additional 80.
The provision acknowledges, however, that the contract cannot move forward as written. The bill requires the Air Force to renegotiate the contract and establish a panel to review the new agreement to ensure the agency gets a good deal. The language was inserted to eliminate any taint left by Darleen A. Druyun, the former Air Force official who pleaded guilty to conspiracy for her role in improperly accepting a job at Boeing, according to a congressional source.
"Congress is going to have to step forward" and push the deal through, Dicks said. "The case is still extremely strong and we want this plane built by Boeing -- not Airbus."
But critics of the deal pounced yesterday following the release Wednesday of a summary of the Defense Science Board report indicating that the current tanker fleet could continue in service until 2040 and outlining several alternatives to the Boeing plan.
"I hope that it means the Air Force will do what we have been trying to get them to do ever since this odyssey began," said Sen. John McCain (R-Ariz.), who has advocated a study of alternatives.
Supporters of the leasing plan challenged the viability of alternatives suggested by the Defense Science Board. They say that one option -- putting new engines in old tankers and maintaining their aging frames -- would cost millions of dollars that would be better spent on new 767s. The report also raises the prospect of converting used commercial aircraft into tankers, but that is unlikely because many of those planes, now parked in the desert, are too worn for sustained military use, they say.
The delays have given Airbus, a unit of European Aeronautic Defence and Space Co., valuable time to upgrade its technology and prove its viability by winning contracts overseas. The two aerospace giants have already faced off four times in the tanker market with split results. Boeing won orders from Japan and Italy, while Airbus received approvals from Australia and Britain.
Boeing lost a bargaining edge and some credibility in its bidding overseas because of the delays in the U.S. tanker deal, industry analysts said. A stamp of approval from the U.S. Air Force would have carried a lot of sway in foreign markets and allowed Boeing to offer a price discount based on its U.S. production plans, said Richard Aboulafia, an aviation analyst for the Teal Group. Airbus's "A330 is a bigger plane, while the 767 has better airport access" but they're both good planes, Aboulafia said. But "with the U.S. Air Force order, Boeing would have been able to shut EADS out of the tanker market completely and would have had 100 percent of the market to itself."
An Airbus-Boeing competition is likely to set off political sensitivities. Sen. Patty Murray (D-Wash.) has attacked Airbus's push into the U.S. market as a challenge to the viability of the American aerospace industry. "The Airbus campaign of half-truths is on full display as the company works overtime in Washington, D.C., to recreate a competition they already lost to build the next-generation refueling tanker for the Air Force," Murray said on the Senate floor last week.
Airbus denies that it is lobbying against Boeing's tanker program, but company officials say they are ready to compete if asked. The company is recruiting a director of marketing to lead its effort "to capture a sizable share of the future U.S. tanker fleet" program, according to a copy of the job description.