KC-X Aerial Tanker Contract Starting To Become A Farce

(MoneyWatch)  The Air Force's ten-year effort to purchase a new aerial tanker continues rapidly seems to be disintegrating. The third attempt at awarding a contract for what has now become one of the most critical needs for the Department of Defense has been roiled by international trade, politics and concerns about the whole approach.

Boeing (BA) made things much more confusing last week by leaking that maybe it's not really interested in bidding on the program. There are two reasons the only American company capable of building the aircraft might be floating that notion: First, the government's proposal to use a fixed price contract for the development and production, and second, fears that EADS (EADS:P) would underbid Boeing thanks to the "illegal subsidies" it receives from European governments.

At the same time Republican legislators have introduced bills into Congress that would allow the Pentagon to take into account World Trade Organization (WTO) rulings on companies. The intent here is obviously to punish EADS -- which, the WTO ruled, did receive illegal payments from France and Germany that allowed it to lower the price of its products. The DoD has made clear that existing procurement laws and regulations do not allow it to adjust pricing based on such rulings. The proposed law would allow them to do so. Because the Constitution does not allow bills of attainder, the law would apply to any company, not just EADS.

It's clear many in Congress, the media, unions and across the U.S. want Boeing to have this contract no matter what. At the same time, the government is trying to get a little competition to avoid sole-sourcing the contract, which could lead to a worst-case scenario in which Boeing fails to deliver on cost and schedule. Further delays would only lead to less capability and further expenses as money will be needed to keep the old KC-135s flying.

It's also possible that Boeing is simply trying to negotiate through the media. There are real concerns with the fixed price approach. If the winner's cost estimates aren't solid, or if unexpected problems arise, things could escalate to the point where there is no profit for the contractor. Unfortunately, this has happened in the past on fixed-price deals, and Boeing is right to be worried.

The government is also under self-applied pressure to rein in acquisition costs. Fixed-price contracts are a major component of its strategy. These transfer a great deal of risk to the contractor, and the idea has yet to be really proven out. The contractors though, like Boeing, are losing out on the chance to win contracts if they feel the fixed price is too risky.

If only one of the two companies does bid -- or if neither does -- then it may lead to another stop-and-start-over moment. If Boeing doesn't really go through with its proposal all of the supporters will really look bad. Using the law to punish potential non-American competitors is also a road that the U.S. may not want to go down.

All of those industrial base decisions made twenty years ago are coming back to haunt the Air Force and the government. Having only one source for a critical aircraft is now becoming a major problem.

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