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:: September 2003 Letter ::

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Dear Fellow Tanker Watchers,

How about that Boeing 767 tanker deal, eh? Excessive finance fees. Improper e-mails. Hyper-intense lobbying. Yep, you might think this would make a good scandal. If, that is, you never had any contact with aerospace, economics, or basic logic. The Pollyanna view of this deal—that it’s a happy juxtaposition of service requirements and industrial base needs—is a bit simplistic, but a closer look doesn’t reveal any smoking .38 Specials. It does, however, reveal some sad commentary about how our government functions.

First, the critics are now focused on the high costs associated with financing the lease deal. Let me get this straight. Leased planes cost more because of finance fees, and this is some kind of revelation? Simple question: do these guys have mortgages? Perhaps they should compare the cost of buying a house outright without a mortgage—they’d get a fantastic discount if they simply bought their houses with cash.

This finance cost debate reminds me of George Bush Sr. trying to come to terms with a supermarket price scanner. Senator Frank Lautenberg even said of the finance costs that "I come from a business environment and I just don't get it." Well, shucks, we’re a long way from Bedford Falls here, George Bailey. At some point, I want to assume the guise of an avuncular econ professor teaching a roomful of sophomores (think John Huston, but younger and much less charismatic). “You see kids, there’s this thing called opportunity cost….

One adjunct issue here could be congressional committee disempowerment. A lease deal removes congressional power from the annual budget battle. An ongoing aircraft lease needs to be fed regularly with cash. Congress can’t micromanage it, or threaten to withhold funding, or anything like that. There’s no stick of dispersal restrictions, no carrot of plus-ups. From Congress’s perspective, a lease deal would be even more disempowering than multi-year procurement contracts. So, although the virtue of leasing is as intellectually challenging as those beer ads in a NASCAR race, the budgeteers might be inclined to portray leasing as some kind of taxpayer shakedown. It’s disingenuous, but it keeps the rice bowls intact.

Related problem: how to make the true believers in government accounting live in the real world, even though they’ve never had carnal knowledge of a P&L sheet. Example: re-engining the B-52 fleet was a great idea 15 years ago when it first emerged, and it is a great idea now, when it is still being mooted. Trouble is, without a leasing deal for those new engines, all the expense has to be booked up-front. And the operations costs savings could only be realized gradually, as is the nature of operations costs savings. So re-engining doesn’t get done. But if engine leasing was used to spread the up-front costs over a long period of time, the sheer good sense of the proposition would become obvious.

Then there’s Darleen Druyun. She is accused of informing Boeing, via e-mail, that the competing Airbus bid was $5-17 million per plane cheaper. She also now works for Boeing. Yeah, this is aesthetically weird (nobody, ever, likes to talk about the revolving door between government and industry), and allegations of impropriety are the last thing Boeing needs after the EELV scandal. But that’s about it. It’s fair to say that all the parties involved in this process had their eyes wide open. If one possessed telepathic powers (other members of my family had “The Gift”; why don’t I?), and one could scan the inner thoughts of an Air Force contracting officer during the lease debate, they would say: “Let’s use a competing Airbus bid to pressure Boeing on price.” If you could scan the thoughts of an EADS/Airbus executive, they would probably say: “Yeah, we’re being used here, but at least we get to pressure Boeing’s KC-767 margins downward.” So, the Big Question: how could the Air Force pressure Boeing on price if they weren’t going to talk, even vaguely, about price? Perhaps everyone involved was expected to have “The Gift” too, and therefore have no need of e-mail.

Or, perhaps, this is a purely artificial scandal created to derail the tanker debate. To paraphrase the beloved Captain Louis Renault in Casablanca: “I’m shocked—shocked—to find that pricing data is being transmitted here. Round up the usual suspects.”

At this point, I might be construed as a Boeing flack. Since the serious corporate cash has been reserved for Senator Ted Stevens’ re-election campaign, I’ll make it clear that there is a respectable case to be made for not procuring new tankers right now. The requirement is certainly there, but it might not be the highest Air Force priority, particularly with the ongoing Iraq ulcer. And, you can make a case for coasting on the re-engined KC-135 fleet. But no one really seems to be making this point. Rather, there are all these futile arguments against leasing, coupled with associated scandal talk. This is all nonsense. Why isn’t the opposition sincere enough to debate the requirement, rather than the extraneous fluff?

What’s going to happen? As this is written, the latest “revelations” have a certain final defensive volley feel to them. SASC supremo John Warner has proposed a 25-aircraft lease, followed by a possible KC-767 procurement effort. Senator John McCain, the leading tanker lease opponent, has confusingly termed this “a concept that I think we ought to pursue.” So, a 100-plane lease is “an unsavory deal”, while a 25-plane lease is a good idea. Would 37 planes do? Is a 60-plane deal only mildly wrong? And does anyone involved know enough about real-world economics to realize what this move would do to unit costs? Perhaps the 25-plane proposal is just a way to make the whole lease idea look bad?

Ultimately, I think this whole thing is too far along to kill, and the long-term requirement too obvious. And without a tanker program, the 767 has five years left, at best (especially with a 7E7 launch). I don’t know whether KC-767s will be leased or bought. But I now know more than I wanted about our budgetary system.

Regarding this month’s Aircraft supplement, it’s got updates of the Military Transports Overview, plus the C-17, F/A-22, A380, AH-1, ATR, Ching Kuo, and the Tiger. Let me know if you want the latest spreadsheets. And enjoy the last days of summer.

Yours, ‘Til I Get That Third Home Mortgage,

Richard Aboulafia
(703) 385-1992 ext. 103 (office)
raboulafia@tealgroup.com
www.richardaboulafia.com

 

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  ~  Last updated on January 08, 2006