The U.S. Air Force’s attempt to develop a replacement for its KC-135 “Stratotanker” refueling planes is a poster child for what’s wrong with the modern Defense acquisition system. The original plan (announced in 2003) was to provide 100 Boeing K-767 tankers under a 10-year lease to the Air Force, with an option to purchase the planes at the end of the lease term.  Critics immediately pointed out that the lease/purchase plan was much more expensive than an outright purchase.  The Air Force subsequently announced it would purchase 80 planes and lease 20 of them, which did nothing to placate the critics.  It was reported at the time that the planes would cost $150 million each if purchased, while the cost of the lease/purchase contract would be $216 million per aircraft. Senator McCain called the planned acquisition a “sweet deal” for Boeing.

In November 2003 the Air Force announced that it had “frozen” its acquisition plans while it investigated a senior Air Force acquisition officer, Ms. Darlene Druyun, who had left her government position to join Boeing in January 2003 at an annual salary of US $250,000.

The Druyun scandal was later called the “biggest Pentagon scandal in 20 years” and led to her pleading guilty to providing Boeing with sensitive bid information about its competitor (Airbus) and to inflating the contract price to favor Boeing (her future employer).  Ms. Druyun was sentenced in 2004 to nine months in jail, fined $50,000 and given 150 hours of community service.  According to this Wikipedia entry, “The ramifications extended to Boeing CFO Michael M. Sears, who was fired from Boeing, and Boeing CEO Phil Condit, who resigned.  On February 18, 2005, Sears was sentenced to four months in prison.  Boeing ended up paying a $615 million fine for [its] involvement.”

It addition, the procurement scandal significantly undercut the credibility of so-called “commercial item pricing” because Boeing allegedly claimed its 767 aircraft were commercial items, which exempted the company from having to disclose its “cost or pricing data” to Pentagon negotiators.  This situation led to the Federal Acquisition Regulation (FAR) being revised, and to suspicion about the bona fides of commercial item acquisitions that is still being felt years later.

In early 2007 the Air Force attempted another procurement for its much-needed tanker fleet.  There were two competing teams:  Boeing and a joint venture between Northrop Grumman and EADS.  (EADS stands for European Aeronautic Defense and Space Company and is now the world’s largest aerospace/defense company.  It is the parent of Airbus, Boeing’s biggest competitor.) Boeing proposed (once again) a version of its 767 aircraft, while the EADS/Northrop Grumman team proposed a version of the Airbus 330 aircraft.

To prepare for a “rigorous” evaluation of the competing bids, the Air Force announced that had assigned more than 150 experts in order to make sure that every step of the process was done “by the book.”  As this story reports, “’The program office is being extra cautious in ensuring that each step of the source selection process is thoroughly documented,’ said Joe Leising, contracts chief for the 653rd Aeronautical Systems Squadron at Wright-Patterson Air Force Base in Ohio, where the evaluation team is sequestered.” The story continued—

Terry Kasten, director of the 653rd Aeronautical Systems Squadron, said in a statement that his team was keen to avoid any problems with the tanker competition. "When the dust settles, we'll have spent many tens of thousands of man-hours scrubbing the content of these proposals, conducting a legal review and preparing summary information for both an independent advisory council assessment and ... a source selection authority decision," he said.

Kasten said senior Air Force legal and contracting advisers were standing by to "answer questions, capture lessons from other programs, including the recent experience with the CSAR-X (helicopter) source selection, and ensure we do everything by the book."

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Lt. Gen. Jack Hudson, the Air Force Program Executive Officer for Aircraft at Wright-Patterson air base, said senior Pentagon officials had carefully monitored the tanker program. "Our leadership is very aware of our efforts and they have ensured we proceed in a deliberate and transparent manner, every step of the way, so that at the end of the day we have a program in which we all have high confidence that we can execute successfully," he said.

The proposals were submitted in April, 2007 and in February, 2008 the Air Force announced that the EADS/Northrop Grumman team had won the competition—to the consternation of Congress and others who were concerned about a “foreign” manufacturer building planes for the Air Force. Published reports stated that Northrop Grumman spent $100 million on its bid for the $40 billion program.

Boeing protested the award decision before the Government Accountability Office (GAO) and its protest was sustained; GAO recommended that the tanker award be recompeted based on a number of fundamental flaws in the Air Force’s bid evaluation. The protest effort involved 15 lawyers on Boeing’s side, nine lawyers on Northrop’s side, and 19 lawyers from the Air Force.  According to the GAO, the Air Force’s bid evaluation (1) did not credit Boeing with satisfying more technical requirements than the EADS team, even though the RFP called for satisfying as many as possible; (2) the Air Force credited EADS with exceeding a key performance parameter (KPP), even though the RFP said that the KPP would not be treated that way; (3) the Air Force conducted “misleading and unequal” discussions with Boeing—among other fundamental “blocking and tackling” errors.

In mid 2008, Secretary of Defense Gates put the KC-X competition into an “expedited recompetition” with DOD Under Secretary of Defense John Young put in charge of the evaluation.  In essence, the Air Force was stripped of its authority and responsibility to choose its aerial tanker.  Selection of the new winner would be made by the end of 2008.  However, in September 2008 SecDef Gates cancelled the new RFP, calling for a “cooling-off” period and essentially punting the competition to the incoming Obama administration. According to one report, the Air Force was forced to pay the EADS/Northrop Grumman team “tens of millions of dollars” in termination fees.

One year later, in September 2009, SecDef Gates announced a new restart to the tanker competition, with source selection authority being returned to the Air Force.  However, the Office of the Secretary of Defense would maintain a “robust oversight role.”

What is interesting about the latest round of competition is that the draft Request for Proposal (RFP) reportedly has led to “grumbles” by both teams.  According to an article in the November 9, 2009 edition of Aviation Week & Space Technology magazine, more than 200 questions were submitted to the Air Force by the bidders.  In addition, Northrop Grumman has complained that its prior bid prices were released to the Boeing team during the 2008 protest process, jeopardizing its competitive position. Moreover, the EADS/Northrop Grumman team was unhappy with the 373 pass/fail attributes described in the draft RFP; reportedly, each of the attributes was equally weighted vice the prior competition, in which requirements were individually weighted.  For example, water flow in the sink and toilet were just as important as fuel offload rate.  In the words of the Northrop spokesperson, “If everything is important, is anything important?”

Notably, the draft RFP calls for fixed-price development efforts, vice the prior contract which was cost-reimbursable.  We have previously discussed this recent trend in Defense contracting. The AW&ST article quoted Air Force Secretary Michael Donley as saying, “As we go forward, I think we’ll try to put more pressure on our suppliers to keep cost down.  There are cases out there, and I think tanker is one of them, where the technology should be pretty mature.”  Our position on this has been consistent:  fixed-price contracts don’t control cost growth unless the customer controls requirements growth and other contract changes.  Believing that developing new defense technology can be done on a fixed-price basis ignores the past 50 years of U.S. acquisition history.  It is naïve at best and negligent at worst.

If the Air Force significantly revises the draft RFP, it may lead to an additional delay in developing, testing, and fielding the replacement tankers.  Moreover, it is possible that one of the bidders could pull out of the competition if it believes the playing field is not level.  If that happens, it will be less than surprising and entirely consistent with the history of this troubled acquisition.

Meanwhile, the Air Force continues to fly its 52 year-old KC-135 planes. Although it has been reported that the planes can continue flying until 2040 (albeit with increased maintenance costs), the KC-135 fleet is currently flying double its planned yearly flying hour program to meet airborne refueling requirements, which has resulted in higher than forecasted usage and sustainment costs. A 2007 Los Angeles Times story quoted Su Payton (then the Air Force’s chief acquisition officer):  "There is a saying out there that 'you can't kick ass without tanker gas,’ [but] we have tankers that should be flying around with an AARP card."