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Project on Government Oversight

Fill 'Er Up: Back-Door Deal for Boeing Will Leave the Taxpayer on Empty


Table of Contents

Introduction
Are More Tankers Really Needed?
Playing Favorites
Deja Vu All Over Again
Paying More for Less
More Weapons Leases on the Horizon
Recommendations
Appendix
Endnotes



Introduction

In a deal sizzling with the smell of political pork, Congress, in December 2001, gave the U.S. Air Force the authority to lease 100 commercial Boeing 767 wide body jets and convert them into refueling tanker aircraft. The U.S. Office of Management and Budget (OMB) estimates the proposed 10-year lease plan would cost the U.S. taxpayers at least $26 billion, far more expensive than OMB's estimates for purchasing the tankers outright. (Appendices A & B)

In recent months, Air Force officials have said they want the new Boeing tankers to "kick start" the recapitalization of their fleet of refueling aircraft - which they claim is on average more than 40 years old and in frequent need of maintenance. This position represents a change of heart on the part of the Air Force. As recently as 1996, the Department of Defense (DOD) said the tanker fleet could last another 35 years.

The Air Force pursued the idea of leasing rather than purchasing the new tankers after it became clear that Congress would permit it. The lease could be paid out of the Air Force operations and maintenance funds rather than the usual procurement accounts already committed to the purchase of $61 billion worth of other new weapons systems, aircraft, and ships. That would, in effect, stretch the Air Force's procurement budget.

Not only would the lease with Boeing be more costly, it could, in the end, actually leave the Air Force with fewer tankers than it currently has. The leased 100 Boeing tankers are slated to replace older KC-135 tankers almost on a one-to-one basis. The lease would require the Air Force to return the 767 tankers to Boeing after only six to 10 years though they could last for decades. That would leave the tanker fleet with a net loss of 100 or more tankers after the Boeing 767s are returned to the defense contractor.

Because the lease idea was a hastily drawn addition by the Senate-House Conference Committee to the FY 2002 defense authorization bill, there was no public debate on its merits. It was a deal enacted without going through normal legislative channels that invite public discussion during committee and subcommittee hearings.

There is compelling evidence suggesting that some Members of Congress pressed for the tanker lease plan, not in response to any demonstrated critical need for new refueling aircraft, but as a taxpayer gift to help Boeing after claims were made by the nation's second-largest defense contractor that it experienced a reduction in post-September 11th commercial aircraft orders.

A new report by the U.S. General Accounting Office (GAO) pokes a hole in the notion that the lease of 100 new tankers is the only, or even best way to ensure the recapitalization of the Air Force tanker fleet. The GAO concluded that with relatively cheap engine and avionics upgrades, the current fleet of 545 KC-135 tankers would not need to begin being replaced until 2040. (Appendix C)

For these and other reasons, the lease deal, known officially as the Commercial Derivative Air Refueling Aircraft Program,1 has been harshly criticized by some Members of Congress and met opposition from OMB Director Mitchell Daniels, Jr. In November 2001, Daniels warned that a tanker lease could violate government budget scoring regulations which are designed to ensure that federal agencies don't pay more to lease goods and equipment than it would cost to buy them. (Appendix D)

Although the Air Force has recently complained that its fleet of airborne gas stations is aging, its top brass never requested funding from Congress until recently. The purchase of the 100 tanker aircraft was not even on the Air Forces's list of top 60 budget priorities last year. The Air Force budget wish list included requests for such areas as bomber and fighter upgrades, aerial drone targets, military family housing investment, a new C-130J, and readiness spare parts. (Appendix E)

 Are More Tankers Really Needed?

Today there are 545 KC-135 tankers in the Air Force fleet. Of that total, 134 are older E models and 411 are upgraded R models. The Air Force says it wants to use the 100 leased Boeing tankers to replace 127 of the 134 older E models beginning in 2006. The E models are the oldest and least capable tankers. For that reason, all of the E models currently are assigned to reserve and National Guard air units, while the newer R models are all part of the active Air Force fleet. (Appendix C)

While the average age of the KC-135s is high, the actual hours of aircraft use are relatively low. The Air Force itself projects that the E models have a lifetime of 36,000 flying hours and the R models can fly for 39,000 hours.

As of 1995, the GAO says the majority of the KC-135 fleet had logged a total of between 12,000 and 14,000 flight hours. Although tanker hours have increased slightly since the war in Afghanistan, from 1995 to late 2001, the average fleet tanker has averaged about 300 hours a year. That would bring the total average hours flown by most of the tankers to roughly 14,000-16,000, or less than half the total expected life of the aircraft. By these calculations, not one of the E models, the oldest in the fleet, would reach its limit until 2040, according to the GAO. (Appendix C)

Even if the Air Force's claims that there is an urgent need to replace KC-135 E models were true, the GAO says the quickest - and cheapest - solution may be to replace the engines of the older tankers and upgrade to R models at a cost of $29 million each. That means the bill to upgrade all 127 E models otherwise being replaced would only total about $3.6 billion, more than seven times cheaper than the $26 billion estimate to lease 100 new Boeing 767 aircraft.

If the need for new tankers is as critical as the Air Force would have the public believe, then someone forgot to tell General Richard Myers, Chairman of the Joint Chiefs of Staff. During a recent news conference, the U.S. military's highest-ranking uniformed officer said the Air Force KC-135 tanker fleet is "relatively healthy" with "lots of flying hours left on them."

"As you know they've been re-engined," Myers said. "We're putting new avionics in the cockpit. There's been a lot of work done on those particular aircraft to keep them modern."2

Myers' comments are consistent with the DOD's official position in 1996. In response to GAO criticisms, the DOD told the GAO that its tanker fleet would not need replacing for decades. "While the KC-135 is an average of 35 years old, its airframe hours and cycles are relatively low," DOD responded to the 1996 GAO tanker requirements study. "With proper maintenance and upgrades, we believe the aircraft may be sustainable for another 35 years."3

Playing Favorites

The tanker lease deal is a textbook case of bad procurement policy and favoritism to a single defense contractor. The legislative add-on permitting the lease does not even attempt to cover up the acrid smell of back room dealing. It brashly subverts the competitive bidding process by authorizing the Air Force to procure 100 new tankers only if it leases them specifically from Boeing. Boeing could not have structured a better deal had it drawn the lease proposal itself.

This appearance of favoritism was the subject of inquiry at a February 12, 2002, Senate Armed Service Committee hearing on the proposed fiscal year 2003 defense budget. When questioned about the deal, Air Force Secretary James Roche admitted that Air Force officials did not even discuss it with Secretary of Defense Donald Rumsfeld, Armed Services Democratic Committee Chairman Senator Carl Levin, or ranking Committee Republican Senator John Warner. Such communication is customary in the case of large defense appropriations.

During the hearing, Roche was asked by Republican Senator John McCain if there had been discussions with Airbus, a division of European Aeronautic Defence and Space Company (EADS), a Boeing competitor also interested in selling wide-body tankers to the Air Force.

"Yes, sir. Back as far as October I made the point that if Airbus could come in and do something, we would be delighted to have that happen," Roche responded. "...I have met with [EADS Chief Executive Officer] Philippe Camus and have opened up the door for him if he wished to do something."

"But doesn't the legislation say the loan can only be Boeing 767's?" McCain fired back.

"Yes, sir. But if Airbus did something that was particularly good, I would come back to the Congress, sir," Roche said.

Roche apparently was stung by hints of favoritism during the hearing. Only a week later, on February 20, 2002, the Air Force issued a formal Request For Information that gave interested tanker defense contractors only two weeks to submit a complex proposal for the lease of 100 refueling aircraft. Predictably, a formal proposal by Airbus was rejected, and the Air Force is currently in lease negotiations with Boeing. (Appendix F)

Deja Vu All Over Again

While the leasing of major weapons systems, aircraft, and ships are rare, the Boeing 767 lease proposal is not without precedent. It bears a striking resemblance to a handful of long-term lease deals by the Navy to quickly put several dozen tanker ships into commission during the 1970s and 1980s. Although at the time the leases were purported to be cheaper than buying the refueling ships outright, the GAO has since concluded the leases actually resulted in a higher cost to the taxpayers.4

In 1972, the Navy entered into agreements with two contractors to lease nine Sealift Tankers. The tankers were put into service in 1974 and 1975 but are no longer being leased. In 1982, the Navy awarded 13 separate contracts with three different companies to lease 13 Military Preposition Ships (MPS), with delivery to begin in 1984. That same year the Navy awarded contracts for the long-term leasing of five new T-5 replacement tankers. In recent months, the Navy has been attempting to purchase the T-5 tankers to get out from under the costly lease arrangement.

The Navy's motive for the ship leases parallels the justification the Air Force is using today to lease the tanker aircraft. The Navy said it needed to acquire the refueling vessels quickly because of readiness concerns and, at the time, could not afford to pay for the ships out of procurement fund accounts that were committed to purchasing combat ships. By leasing the tankers, the Navy thought it would be easier to spread out payments from the annual operation and maintenance appropriations over a longer term.

Much like the concern voiced on Boeing's behalf over reduced commercial aircraft orders since the September 11th tragedy, the financial health of the shipbuilding industry also was a concern of the Navy at the time it leased the ships. It said the industry was in decline and that the lease orders were necessary to avert the closing of several commercial shipyards.

But a June 1999 analysis by the GAO showed that the leases turned out to be far more expensive than the Navy originally estimated. The MPS vessels would each have cost $20.8 million less if they were purchased, rather than leased, the GAO said.

Since the Navy leases, Congress has increased transparency of long-term leases and tightened the process to evaluate long-term leases of military equipment and weapons. Through a detailed process called "budget scoring," the military services are now required to assess the cumulative impact of a long-term lease and compare it to the cost of purchasing equipment before Congress agrees to appropriate the funding.

Paying More for Less

A December 2001 analysis by OMB estimated the 10-year lease would total at least $26 billion from fiscal years 2002 to 2020. Of that total, OMB said $17.8 billion would go to direct costs of leasing the planes, $6.4 billion would pay for modifying the aircraft from commercial to military, and $610 million would pay for other costs such as spare parts, simulators, and program management. Because the new Boeing 767 tankers would be too large to fit in current Air Force hangers, the military would also need to spend another $1.1 billion to expand the size of the tanker hangers. (Appendix A)

By comparison, the actual cost of purchasing the Boeing tankers has not been disclosed. Boeing's web site says the tankers cost from $150 million to $225 million each, and earlier GAO estimates put the price tag at no higher than $125 million each. If the costs were as low as $150 million per tanker, a figure that OMB cites in its own research, then the entire package would only total $15 billion, not including construction costs. If the Air Force was charged the highest price of $225 million per copy, then the total price tag would only be $22.5 billion. Both figures, based on Boeing's own pricing data, are well below the OMB lease price tag estimate of $26 billion.

More Weapons Leases on the Horizon?

There is an impending danger that threatens to undo the hard work of Congress and others to ensure that leases are the best deal for the taxpayers. In the name of flexibility the DOD has, in effect, declared war on close financial oversight of multi-year leasing of weapons systems, aircraft, and ships.

Late last year, Pentagon Acquisitions Chief E.C. Aldridge, Jr., and DOD Comptroller Dov S. Zakheim announced a new multi-year leasing initiative, instructing key Pentagon officials to help "identify candidate programs for acquisition by means of multi-year leases." Their memo said that long-term leasing of weapons systems has historically been rare because of statutory and regulatory "impediments."5

The memo said that DOD planned to propose changes to laws and regulations, including the following:

  • Repeal statutory limits on the length of leases and seek authority to enter into long-term leases funded with annual appropriations;

  • Eliminate the legal requirement that funds be reserved to cover termination liabilities, allowing each year's budget to be only for the lease payments that have to made in that year;

  • Change OMB budget scorekeeping rules for leases; and

  • Change the methodology of the lease-purchase analysis required by the OMB.

The memo further asks that DOD managers and the military brass help identify other statutory or regulatory changes that would "facilitate an increased use of leases." Aldridge and Zakheim also said they were setting up a special Leasing Review Panel to identify and evaluate candidate programs for long-term leases.

The DOD won't say precisely how far the leasing initiative has progressed since the memo was penned, but there are clear indications that the future course of leasing deals similar to the Boeing tanker proposal could be the wave of the future. The Pentagon is on a course to negate the accountability provided in the Budget Enforcement Act of 1990 and Balanced Budget Act of 1997. If the Pentagon does effect such reforms, it will succeed in keeping Congress and the public in the dark on the actual cost of future defense leasing agreements.

Recommendations

  • Congress should kill the authorization for the Air Force to lease 100 Boeing tankers during the upcoming debate over the proposed Fiscal Year 2003 Defense Authorization Bill.

  • The Air Force should be required to publicly disclose an analysis of the cost of purchasing 100 Boeing 767 tankers versus the cost of leasing the aircraft.

  • The Air Force should be required to document its claims that it needs new tanker aircraft. Congress should make the Air Force complete and make public a long-term study of its future tanker needs.

  • The Air Force should be required to explore alternative ways to refuel bombers and fighters that don't fly in hostile air space. A pilot project by the U.S. Navy has demonstrated that some air refueling operations can be conducted by commercial operators, at a cheaper cost than the military.

  • Congress should require that all laws and regulations governing future leases of weapons systems, aircraft, and vessels are strictly observed and resist future efforts by the DOD to soften the requirements.

Appendix

Appendix A - Memo to Senator John McCain from Mitchell E. Daniels, Jr., Director, Office of Management and Budget, December 18, 2001.

Appendix B - Memo to Senator John McCain from Mitchell E. Daniels, Jr., Director, Office of Management and Budget, May 3, 2002.

Appendix C - "Preliminary Information on Air Force Tanker Leasing Issues," General Accounting Office, Briefing for Senate Armed Service Committee, May 2002.

Appendix D - Memo to Senator Kent Conrad from Mitchell E. Daniels Jr., Director, Office of Management and Budget, November 2, 2001.

Appendix E - FY2002 Air Force Unfunded Priority List, submitted by General John P. Jumper, Air Force Chief of Staff, October 22, 2001.

Appendix F - Letter and report to Senator John McCain from Department of Defense Inspector General Joseph E. Schmitz, May 3, 2002.


Endnotes

1 CDARA - Commercial Derivative Air Refueling Aircraft, notice, April 9, 2002,

2 Pentagon media briefing, Air Force General Richard Myers, Chairman, Joint Chiefs of Staff, April 8, 2002.

3 "U.S. Combat Air Power:  Aging Refueling Aircraft Are Costly to Maintain and Operate," General Accounting Office, August 8, 1996.

4 "Defense Acquisitions: Historical Analyses of Navy Ship Leases," General Accounting Office, June 1999.

5 Memo to DOD secretaries of military departments and directors of defense agencies from Pentagon Acquisitions Chief E.C. Aldridge Jr. and DOD Comptroller Dov S. Zakeim, November 1, 2001.

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