Tanker Wars: Round 3 Starts

Last year, the Government Accountability Office overturned the Air Force’s decision to buy the replacement for its aged KC-135 airborne tanker from the European Air Defense Systems (EADS)-Northrop Grumman consortium that offered the French Airbus-330.

The GAO’s decision, as I wrote extensively then, was based in large part on the Airbus’s physical limitations. The aircraft simply cannot fly the tanker mission in accordance with longstanding Air Force requirements (read why). The Air Force’s decision to buy the Airbus despite those failures was such an incident of intellectual whoredom that Defense Secretary Gates took procurement authority from the Air Force and planned to buy the replacement tanker through his own procurement team.

But no more. The Air Force, now again the agency authorized to replace the 1950’s-vintage KC-135s, has launched a draft request for proposals setting out the terms it plans to use to ask for bids (really “proposals” in DoD contract lingo) from the only two likely competitors.  Again, it’s Boeing and Airbus-Northrop Grumman. And again, it’s Sen. John McCain working hard to get the contract for the French aircraft.

As Cong. Todd Tiahrt (R-Kan.) told me yesterday, “McCain has been advocating for the French company in the last cycle of this procurement. He’s advocating for the French company in this cycle.”  

Sen. McCain’s six-year war against the Air Force plans to replace the KC-135s goes back to at least 2003. Then, his outbursts against the proposed lease of the new aircraft from Boeing (coupled with a major scandal in which an Air Force procurement official cooked the books in Boeing’s behalf, for which she and a senior Boeing manager went to jail) stopped the deal altogether. 

But in the last go-round, which resulted last year in the award to EADS-NG, McCain played a different and even more important role.

In the tanker buy, even more so than in other huge Defense Department acquisitions, price competition is often the decisive factor.  But there’s a problem:  Airbus is a company that receives tens of billions of dollars in subsidies from European Union nations such as France and Spain. In short, the price they offer the Pentagon is hugely reduced — illegally under World Trade Organization terms — by those subsidies.

The last round of the tanker procurement began more than three years ago. Deputy Defense Secretary Gordon England wanted the formula by which the price competition would be judged to include the subsidies (called “launch assistance”) which the European Union nations pay to subsidize Airbus.  The U.S. government, through the White House’s foreign trade representative, had made a formal complaint to the World Trade Organization seeking a declaration that the subsidies to Airbus were illegal.

But Sen. McCain would have none of that.  In a letter to England dated September 8, 2006, McCain posed 13 questions to England and objected to any consideration of the subsidies Airbus received: “I respectfully suggest that Air Force follow an acquisition process based on extant legal and regulatory guidelines and remove any WTO element from its procurement evaluation supporting its tanker recapitalization program.” (Emphasis in original).

In the last round, the EADS-NG consortium had repeatedly threatened to not compete if the WTO case and its subsidies were considered.

Not content at that, McCain wrote again on Sept. 18, 2006 to ask, in part, why the questions in his September 8 letter hadn’t yet been answered. And in that letter, McCain took the EADS-NG line, saying that if the EU subsidies were included in the price evaluation, “…prospective offerors with cost-effective solutions that satisfy the warfighters’ requirements may be inclined not to submit bids in the first instance.”

And McCain wasn’t done. When Defense Secretary Donald Rumsfeld resigned after the 2006 elections and Robert Gates succeeded him, McCain was quick to jump ahead with the new SECDEF.

In a letter dated December 1, 2006 from McCain to Gates (before Gates was even confirmed), McCain asked Gates to stop action on the tanker competition until Gates could answer the questions McCain asked about it.  And the principal question in that letter was — like the September 18 letter — that prospective competitors may not bid if the information of the EU subsidies to Airbus were included in the price evaluation.

Now there’s a new draft RFP for the tanker, and the Air Force will be redrafting it with the view of obtaining proposals and awarding the new contract in 2010. And Mr. McCain is up to his old tricks. But in a different way.

In September, WTO ruled against Airbus on the U.S. complaint, finding that the subsidies paid to Airbus by the EU nations were illegal under international trade law. The details have not been released, but the WTO’s decision is clearly against Airbus. (A counterclaim against Boeing by Airbus hasn’t been decided but seems more politics than substance.)

On October 29, Sen. McCain wrote another letter to Gates. This time, McCain complains that the draft request for proposals includes in the price evaluation both the fuel costs and calculation of military construction costs.  “And why,” McCain writes, “would the FURA [fuel usage rate assessment] and MILCON [military construction] assessments, described above, not favor mostly smaller airframes offered in response to the Request for Proposals?”

The aircraft Boeing offered last time was its tanker version of the B-767 jetliner, which is vastly smaller — and equally better-suited to the Air Force tanker mission — than the enormous Airbus-330.

It is, unfortunately, just as Todd Tiart told me:  “Obviously the things he’s asking for weigh it toward the French company.”  Mr. Tiahrt is precisely right. The changes Sen. McCain is asking for would tilt the playing field toward the Airbus aircraft.

The United States made the complaint to the WTO to declare the EU subsidies to Airbus illegal, fought the case and won it. The Defense Department cannot ignore this result. It is essential for the Pentagon to include the full effect of the WTO findings in the cost evaluation of the new tanker. Without them, the competition is a EU-rigged sham.