Heavy Lifting for Boeing: Sweetheart Deal Helps Defense Contractor and Hurts Taxpayers
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In the next several months, the U.S. Air Force is expected to act on a costly and possibly illegal proposal that puts the government in the business of subsidizing a commercial version of the Boeing C-17 military airlifter. Known as the "BC-17X Public/Private Acquisition Strategy," the proposal is an apparent attempt to meet the letter, but not the spirit, of the Congressional mandate to reduce the cost of future C-17 military procurement.
The December 2000 proposal calls for the plane that is being touted as the future backbone of the U.S. armed forces heavy airlift mission to be designated as a "commercial item" offered for sale to private freight haulers. (Appendix A) Reportedly suggested to the Air Force as an unsolicited proposal from Boeing, the plan would attempt to artificially create a commercial market to haul bulky and heavy "outsize" cargo.
Congress has granted the Air Force funding for a total of 120 military C-17s through 2003 at a cost of $232 million each, according to the Department of Defense Director, Operational Test and Evaluation. The Air Force, however, wants up to 60 additional C-17s. Congress has granted the Air Force approval to negotiate the 60 extra C-17s if the new contract reduces the unit flyaway cost by 25 percent. To reach this cost savings goal, Boeing has stated it will need to manufacture 15 aircraft per year without interruption. (Appendix B) Since the Air Force has failed to offer convincing evidence that it can't already meet its airlift needs, the plan is turning to private industry to keep the production line open after 2003.
The theory is that by increasing the number of total planes produced with an artificially-created commercial market, it would reduce Boeing's overhead costs per plane. This in turn, would allow the military to claim future cost savings for the additional planes bought by the government. Historically, such promises are rarely realized.
The plan is a bad idea. Here's why:
- There is no evidence we need more C-17s. The General Accounting Office (GAO), Congress' investigative arm, says the Air Force needs only 100 C-17s to complete its mission.
- Any professed cost savings would be misleading as they would not include the hidden subsidies and increased costs due to reduced financial oversight.
- The plan may be used to allow Boeing Company, the aircraft's primary manufacturer, to avoid complying with certain laws requiring defense contractors to provide financial reporting data that help insure that the taxpayers are not ripped off.
- The Air Force should not violate federal laws designed to insure that private contractors who do business with the government are not given preferential treatment. The plan features several government incentives for private freight haulers - kickback-style reimbursements - that place the financial risk of this plan squarely on the taxpayers rather than on the companies that will profit. These incentives include a reduced price to purchase the commercial aircraft, a contract to haul government cargo, and an offer to buy back the aircraft in the event the venture fails.
- The plan, which was designed by Boeing and given to the Air Force, a government agency that is notorious for its lack of financial accountability and business savvy, is highly speculative and would put billions of taxpayer dollars at risk.
Even the Pentagon's chief testing office recently noted that the "policies and procedures flowing from the push toward commercial acquisition are leading the C-17 down a risky path. A lack of fiscal, technical, and testing realism may be creating fleets that cannot meet effectiveness, sustainability, or interoperability requirements."1
Because of the plane's "commercial" status, Boeing would not be required to provide certain cost and pricing data for the C-17 to government purchasers. Additionally, the Air Force would be ignoring regulations that ensure contractors are not given preferential treatment by guaranteeing government business to C-17 commercial purchasers.
Calling A Military Plane Commercial
The proposal incorrectly uses a process designed to obtain true commercial items such as computers, office equipment, and automobiles that can be purchased in the everyday marketplace to a strictly military item. Boeing would be permitted to circumvent the Federal Acquisition Regulation Cost Principles, Truth in Negotiations Act, and Cost Accounting Standards - laws aimed at providing transparency in price and cost data so government purchasers know what they're getting for their money.
Of course, with real commercial items there is open competition. When a real market exists, competition gives an assurance of fair and reasonable pricing. For non-commercial items, contractors are required to submit cost or pricing data for negotiated procurement. However, in the case of the uniquely military transport plane, there would be no competition to set the price. Boeing is the sole manufacturer of the plane and the Air Force/Boeing plan would exempt Boeing from providing the price and cost data.
For this reason, the plan has drawn scrutiny from the Defense Inspector General. The Inspector General launched an audit in November after receiving a hotline tip alleging that the "DoD plans to inappropriately use Federal Acquisition Regulation (FAR) Part 12, 'Acquisition of Commercial Items,' procedures to acquire C-17 aircraft..." (Appendix F)
The C-17 plan also alarmed several members of the U.S. House of Representatives who have written a letter to Air Force Secretary F. Whitten Peters warning that they will block attempts to restrict oversight on the C-17. (Appendix G)
The Representatives' December 12, 2000 letter stated:
"Please inform us at your earliest convenience whether or not this bad idea has been stopped. We are sure you would agree that setting the precedent that our primary strategic airlifter, which was developed solely by the Air Force and which has never been sold commercially, is somehow a commercial item is very troubling to say the least."
Although some of the Congressional leaders met privately with Pentagon officials, they have not received a formal response from the Air Force addressing their concerns.
The Air Force Acts As Boeing's Marketing Agent
Under the proposal, a private air freight company that purchases a C-17 commercial aircraft would also be afforded preferential treatment. Specifically, it calls for private carriers to negotiate a reduced-price purchase of a commercial version of the C-17 and provides "an initial up-front and/or annual revenue guarantees" for the cargo carriers - a piece of the government's hauling business. It also includes a government "buy back" promise in the event that a purchaser of a BC-17X declares bankruptcy.
Federal law forbids giving contractors such favored status. For example, Section 3.101-1 of the Federal Acquisition Regulation states, in part:
"Government business shall be conducted in a manner above reproach and, except as authorized by statute or regulation, with complete impartiality and with preferential treatment for none." (Appendix C)
In fact, the Air Force has said that haulers who purchase commercial C-17s would be guaranteed roughly 20 percent of all civil air fleet business during peacetime, or about $600 million annually.2 However, government ethics regulations require that "employees shall not knowingly make unauthorized commitments or promises of any kind purporting to bind the government." (Appendix C)
What would the government get in return? The Air Force says the deal would require private cargo haulers who purchased BC-17Xs to allow military use of their BC-17Xs during time of war. This benefit to the government appears without merit as military requirements for transporting outsize cargo have declined since the end of the cold war. In fact, the GAO flatly states that an airlift fleet of only 100 C-17s, 20 less than Congress has approved, in conjunction with the Air Force's C-5 fleet would be enough to carry the military's cargo. (Appendix D) (The Air Force originally planned to buy 210 C-17s, but in 1990 Defense Secretary Dick Cheney reduced the program to 120 because of budgetary considerations and revised estimates of airlift requirements after the collapse of the Soviet Union.) (Appendix E)
This special offer to private haulers by the Air Force could be interpreted as a kickback, as defined in Federal Acquisition Regulation 3.502-1: "'Kickback,' as used in this section, means any money, fee, commission, credit, gift, gratuity, thing of value, or compensation of any kind which is provided, directly or indirectly, to any prime contractor, prime contractor employee, subcontractor, or subcontractor employee for the purpose of improperly obtaining or rewarding favorable treatment in connection with a prime contract or in connection with a subcontract relating to a prime contract." (Appendix C)
The decision for the government to explore the C-17 commercial market was based on a one-year study, acquired by the Project On Government Oversight, by a panel made up of mostly Pentagon employees and a few Boeing representatives.
But at $232 million per aircraft, a cost of up to two times that of other competitive aircraft, many cargo haulers have seriously questioned whether the proposal is economically feasible, or even if there is really a commercial market.
Nonetheless, the Air Force is moving forward with the plan after its study claimed that there is a potential outsize cargo market for the commercial version of the C-17. The military defines outsize cargo as a single item that measures in excess of 83.3 feet long, 9.75 feet wide, and 8.75 feet high.3 Even the Air Force study points out that there is widespread skepticism among private carriers whether the military aircraft can operate in a competitive civilian environment. In fact, some industry experts candidly say there is little or no interest among private freight haulers.
The Air Force proposal is essentially attempting to bribe commercial air haulers to use an aircraft that is ill-suited for their overall needs, tantamount to requiring a NASCAR driver to race a sports utility vehicle lacking in cornering characteristics.
"There is no demonstrated market," said longtime aviation consultant Edwin C. (Ned) Laird, founder of Air Cargo Management Group and publisher of Cargo Facts. "It's like the taxpayer is being asked to buy this aircraft."
No wonder the Air Force study admitted that for some traditional cargo carriers, it was a "stretch" to envision a new niche aircraft in a market traditionally dominated by lower-cost freighters such as the Boeing 747 jumbo jet or Russian Antonov 124. Not only is the B-747 a cheaper aircraft to purchase than the BC-17X, but it can carry a load of 270,000 pounds a distance of 4,455 miles. By comparison, a commercial C-17 will only be able to carry a load of 173,300 pounds a distance of 2,877 miles. In addition, spare parts are not a problem for the B-747, which has been flying all over the world for decades. The C-17 is a different story: It would have a very limited pool of spare parts since there are less than 100 of the aircraft in existence, all owned by the military.
Because the B-747 is so cost-efficient and reliable, there have been attempts to modify the commercial industry's wide body workhorse to fit the military's outsize cargo needs. In 1994, just after the Pentagon postponed the C-17 program and essentially put McDonnell Douglas on probation due to flaws in the C-17, Boeing proposed a variation of the 747-400F. The aircraft, which the Air Force dubbed the C-33, would have included an enlarged door and a strengthened floor. At the time, Lockheed Martin also proposed an upgraded model of the gargantuan C-5 that featured improved avionics, reliability, and maintainability. Both offers were rejected.
Air Force officials said they chose to go with the C-17 as the military's future airlifter because its performance characteristics were better than those of the 747 and C-5. The C-17 can land on shorter runways and is more maneuverable than the 747 and C-5, which need longer and wider runways:
"In explaining the November 1995 decision to buy another 80 C-17s, DOD officials cited as a critical feature their calculations that eight C-17s could land and offload 3,852 tons per day in space where only three modified 747s could operate, delivering 1,754 tons per day."
Commercially, the most common users of an outsize cargo service are firms with "project business" who would otherwise transport their heavy, large cargo to destinations by ship, rail, and truck. According to the Air Force study, those who might have a need to ship outsize cargo typically include oil companies, mining companies, construction companies and companies that deal in nuclear waste supplies and equipment. Boeing and Air Force officials think the commercial version of the C-17 can compete with the An-124 in hauling such heavy objects as D-8 class bulldozers, rock crushers, pressure vessels, electrical power generating equipment, and oil drilling equipment.
This remains to be seen. An-124s, which can carry 85 percent more payload than a BC-17X and 25 percent more payload than a C-5A, have successfully hauled such gigantic items as 90-ton hydraulic turbines, large size cranes, dump trucks, the fuselage of Tu-204 passenger transporter, a 109-ton railway locomotive, and a sea yacht of more than 25-meters in length.
The relative success of the An-124 helped convince the Air Force study panel that the plan could work if it were made more attractive to private companies by using government financial incentives. At the same time, the report cautioned:
"The principal risk is the possibility that the venture will not become commercially viable as quickly as expected or will unequivocally fail. If this risk were to materialize, the USAF (Air Force) would be required to buy back and modify the commercial aircraft or lose the capacity provided by these aircraft."
There is only one historical example of such a commercial aviation deal - but it well illustrates the perils of designating military aircraft as commercial items. According to procurement experts, the C-130J cargo airlifter is the only other case when an entire military aircraft was designated "commercial."
This designation on the C-130J prompted Senator Tom Harkin (D-IA) in 1997 to fire off a letter of protest to Secretary of Defense William Cohen: (Appendix H)
"How can Atlas rockets and C-130J aircraft be considered 'commercial' items? Obviously, these are not items found in the commercial sector. More importantly, they are not items that are priced due to the forces of supply and demand. Items bought solely or primarily by the federal government should not fall under the 'commercial' definition."
In addition, the GAO has documented serious problems when the aircraft was commercialized including:
- With oversight regulations waived, the cost of wiring harnesses on the C-130 increased by five times their original price after the aircraft was designated "commercial," going from $91 to $453. The GAO offered this spare part price hike as a real-world example of the difficulty involved in making the transition from pricing goods and services based on costs incurred, to an ineffective commercial model in which factors other than cost are the principal means used to establish prices.4
- The contractor, Lockheed Martin, overestimated potential sales of the C-130 by 20 percent in its agreement with the Air Force. The GAO has warned that the government may now have to absorb a greater share of the F-22's overhead costs as it is now produced at the old C-130 plant.5
Delays were another problem associated with designating the C-130 a "commercial item." The manufacturer had pushed back delivery dates while awaiting the required certification from the Federal Aviation Administration.
Overly optimistic production projections on the C-130J were so serious that in mid-1999 Lockheed Martin reduced its earnings outlooks for 1999 and 2000, in part blaming the aircraft for its business downturn. In subsequent reports filed with the U.S. Securities and Exchange Commission, the company charged a $210 million decline in operating profits during 1999 to the C-130J and forecasted that:
"...until further favorable progress occurs in terms of orders and cost, the Corporation does not intend to record profit on future deliveries of the aircraft, and will reduce production levels over time from 16 to 8 aircraft per year."
Concerns over the C-17 haven't been limited to discussions of the "commercial" designation issue. There have also been historical and recent questions about whether or not the aircraft can even fulfill its designated military mission of hauling heavy equipment such as tanks and soldiers long distances to short airstrips near the battlefront.
Moreover, it appears to be a fair-weather aircraft. While the Air Force claims it can land on a dry 3,000-foot runway, it concedes that a fully-loaded C-17 requires 6,300 feet to land when a runway is wet.
One agency that apparently does not accept the Air Force's claim that the C-17 can land on a 3,000-foot runway is the U.S. Agency for International Development. Its field operations guidelines say that a half-loaded C-17 needs 4,500 feet of runway for disaster assistance missions.6
A recent Pentagon report stated that the Air Force is experiencing increased problems with the C-17 that have resulted in one-third of the fleet being restricted to flying only in the U.S. Those problems have included misaligned cockpit window displays, broken landing gear, and navigation software glitches.7
In addition, almost from the start the C-17 has been plagued with cost, schedule, and technical performance problems. Since the early 1990s, the GAO has repeatedly raised serious questions about the aircraft's ability to operate in the manner it was originally envisioned.
In the early days of its development, numerous deficiencies were discovered. In 1993, disputes and dissatisfaction with the contractor, the McDonnell Douglas Corp., erupted. The Secretary of Defense threatened a reduction in the total procured number of C-17s to 40 unless the contractor could remedy its shortcomings.
Even today, there are concerns that the aircraft is not being used for its intended purpose. When the Pentagon first contracted with McDonnell Douglas to build the C-17 in 1982, it cited a need for extra long-range "intertheater" aircraft that could carry troops and equipment from the U.S. as far as Europe and Asia. So far, such use has been the exception.
A 1997 GAO study of the Bosnian military deployment noted that despite a heavy involvement in the airlift, the C-17 was not required to perform or demonstrate several of the roles and missions for which it was primarily intended. Its use in Bosnia was mostly limited to carrying equipment short distances within the European theater. None of the runways used during the operation were less than 7,874 feet, runways that could, and did, accommodate other U.S. transport planes. (Appendix I)
The study stated:
"Consequently, the C-17 was not required to perform many tasks which it had trouble doing, or did not do, during operational testing. These included several tasks the Army considers important like landing at small austere airfields on short, wet runways; performing strategic airdrops of both troops and equipment; and providing aeromedical evacuation capability."
- The Air Force should abandon its proposal to commercialize the C-17. While Pentagon officials should be encouraged to "think outside the box," they should not be permitted to abuse government oversight laws and regulations.
- The Pentagon should be stripped of its right to unilaterally declare a weapons system, aircraft, or naval vessel a commercial item, or to waive financial reporting requirements.
- An equally disturbing alternative proposal that has reportedly been floated within Air Force circles should also be scrapped. The proposal would rely on administrative waivers from the various contract cost oversight laws that would govern the Air Force's purchases from Boeing. Use of the administrative waiver procedure would mean that the C-17 had not technically been designated as a "commercial item," but it would still allow Boeing to be exempt from cost and audit oversight under the C-17 contract with the Air Force.
- The military should restrict the use of the C-17 to its intended purpose - transporting heavy and outsize cargo rather than artificially inflating its use to justify a need for more planes.
1. Annual Report FY 2000, Department of Defense, Director Operational Test and Evaluation, Air Force Programs, C-17 Globemaster III Airlift Aircraft, February 2001, http://www.dote.osd.mil/reports/FY00/index.html.
2. "Boeing Renews Push for Commercial C-17 Variant," The Los Angeles Times, January 31, 2001.
3. C-17 Globemaster: Support of Operation Joint Endeavor, General Accounting Office Report GAO/NSIAD-97-50, February 1997, p. 6.
4. Statement for the Record, Henry L. Hinton, Jr., Assistant Comptroller General, National Security and International Affairs Division, before the House Committee on Government Reform, Subcommittee on Government Management, Information, and Technology, Federal Acquisition: Trends, Reforms, and Challenges, General Accounting Office, GAO/T-OCG-00-7, March 2000.
5. Statement for the Record, Louis J. Rodrigues, Director, Defense Acquisitions Issues, National Security and International Affairs Division, before the House Committee on Government Reform, Subcommittee on National Security, Veterans Affairs, and International Relations, Defense Acquisitions: Progress in Meeting F-22 Cost and Schedule Goals, GAO/T-NSIAD-00-58, December 1999.
6. Field Operations Guide: Types of Aircraft That May be Used by the Office of Foreign Disaster Assistance During Disaster Operations, Version 3.0, http://www.usaid.gov/ofda/fog/FOG_v3_ch6.html.
7. Annual Report FY 2000, Department of Defense, Director Operational Test and Evaluation, Air Force Programs, C-17 Globemaster III Airlift Aircraft, February 2001, http://www.dote.osd.mil/reports/FY00/index.html.
Appendix A: "BC-17X Public/Private Acquisition Strategy: Request For Information," United States Air Force and The Boeing Company, December 8, 2000.
Appendix B: "Commercial Application of Military Aircraft (CAMAA)," CAMAA Team, October 2000.
Appendix C: "Excerpts from Various Federal Ethics and Acquisition Regulations," compiled by The Project On Government Oversight, March 2001.
Appendix D: "Military Airlift: Options Exist for Meeting Requirements While Acquiring Fewer C-17s," General Accounting Office, February 19, 1997.
Appendix E: "C-17 Cargo Aircraft Program," Congressional Research Service, Updated March 20, 2000.
Appendix F: "Memorandum: Audit of Hotline Allegation Concerning the Use of Federal Acquisition Regulation Part 12 Contract to Acquire the C-17 Aircraft," from David K. Steensma, Deputy Assistant Inspector General For Auditing, November 13, 2000.
Appendix G: "Letter to The Honorable F. Whitten Peters," from Members of Congress, James V. Hansen, Solomon Oritz, Walter B. Jones, Saxby Chambliss, J.C. Watts, Jr., December 11, 2000.
Appendix H: "Letter to The Honorable William Cohen," from Senator Tom Harkin, October 31, 1997.
Appendix I: "C-17 Globemaster: Support of Operation Joint Endeavor," General Accounting Office, February 14, 1997.