Boeing tanker deal survives initial review by Pentagon

By Tony Capaccio
Bloomberg News

	John McCain
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WASHINGTON — The Pentagon's inspector general found "no compelling reason" to scrap a U.S. Air Force deal to lease and buy 100 refueling tankers from Boeing.

However, Pentagon Inspector General Joseph Schmitz said in a March 5 draft report the deal's terms may need renegotiating because of "unsound acquisition and procurement practices."

Schmitz was asked to review whether the deal should be killed because Boeing's former chief financial officer offered a job to the official negotiating for the Air Force. To that question, Schmitz said no.

"There's no smoking gun," said Howard Rubel, an analyst at Schwab Soundview Capital Markets. "The draft doesn't show any impropriety and it does show there's still a need for the tanker."

"It looks to me like the deal will go through," said Paul Nisbet, an analyst for JSA Research in Newport, R.I.

Boeing is dependent on defense contracts for more than half its revenue as commercial-aircraft sales have slumped, and CEO Harry Stonecipher is attempting to quickly rebuild the company's government relations.

The Inspector General's Office is the first of four Pentagon agencies reviewing the $17 billion tanker deal. In addition, the U.S. Securities and Exchange Commission is investigating the company's disclosures to investors of the potential conflict-of-interest.

Boeing fired Chief Financial Officer Michael Sears and former Air Force official Darleen Druyun in November after discovering the job offer was made during contract talks.

Chicago-based Boeing said last month it still expects to get the tanker order this year. Boeing also said it would take a charge of $310 million this year and possibly cut more workers. The company said Feb. 20 that it cut 150 last month at its plants in Wichita, Kan., and the Puget Sound region.

Boeing said it spent $270 million on the tanker program through December 2003 and has since been spending about $1 million a day.
 
The tanker contract would help Boeing avoid shutting the production line of its 22-year-old 767 model. It also would fuel sales in its defense business that totaled $27.4 billion last year when, for the first time, the company had more sales for military products than for jetliners.

Deputy Defense Secretary Paul Wolfowitz asked the inspector general on Dec. 1, "in light of recent revelations by the Boeing Co. concerning apparent improprieties by two executives, please determine whether there is any compelling reason why the Department of the Air Force should not proceed with its Tanker Lease Program."

Congress last year approved a deal that allows the Air Force to lease the first 20 aircraft under one contract and purchase the remaining 80 under a second five-year contract.

The tanker deal through 2015 is estimated to be worth $23.5 billion, the inspector general's draft says.

Boeing spokesman Doug Kennett said the company hasn't seen the audit and has no comment.

Pentagon spokeswoman Marine Corps Lt. Col. Rose-Ann Lynch said the inspector general had no comment on any aspect of the draft report.

Cheryl Irwin, a spokeswoman for Acting Assistant Secretary for Acquisition Michael Wynne, said he would review the draft when he received it. Air Force Major Cheryl Law said it would be inappropriate to comment on the draft.

When Boeing fired Sears and Druyun, who joined Boeing in January 2003, it said their discussions about Druyun's hiring were improper and they also lied to the company's board.

The Pentagon's independent Defense Science Board and its Industrial College of the Armed Forces also are reviewing aspects of the deal. Separately, the Pentagon General Counsel is reviewing the military's rules regulating post-government employment.

The Pentagon's Defense Criminal Investigative Service and the Justice Department continue to investigate whether the October 2002 contacts between the fired executives violated federal law and tainted the proposal the service submitted to the Pentagon for approval.

The inspector general backed up one persistent charge of Sen. John McCain, R-Ariz., the Senate's most vocal critic of the tanker deal — that the documents spelling out the tanker's war-fighting capability were crafted more to what Boeing could deliver quickly than what the Air Force, Navy and Marines required for aerial refueling.

"The primary operational implication of this concern is that it raises the question as to whether the KC-767A is indeed the right aircraft for the job," McCain wrote Schmitz on Friday.

McCain said these concerns might be a compelling reason not to proceed with the deal.

The inspector general concluded that the Air Force tailored its initial-requirements document "to correlate closely with the tanker that Boeing was producing for the Italian government," the audit says.

"As a result, the first 100 KC-767A tankers will not meet the requirements" for operating with the Navy and Marine aircraft or military requirements such as carrying passengers and performing medical-evacuation missions, the draft says.

The audit also recommends seven more changes, among them that the Air Force should replace fixed-price contracts the company agreed to with cost reimbursement-types or modified fixed-price versions that "would require Boeing to provide cost or pricing data as appropriate."

It also recommended the Pentagon re-evaluate whether leasing rather than purchasing the first 20 aircraft Congress approved "represents the best value to the government."

The Air Force also needs to reduce the negotiated price of a proposed 12-year, $4.8 billion noncompetitive contract to Boeing for logistics support to eliminate a $465 million error in the company's favor because the service "used a mix of pricing data from brochures related to other aircraft and escalated 1980s pricing data," the audit says.

"The Air Force did not demonstrate best business practices and prudent acquisition procedures in developing this program," says the executive summary.

"Consequently, the strategy did not provide the Air Force with sufficient cost data to make multibillion dollar decisions and did not demonstrate to an independent reviewer the level of accountability needed to conclude that the prices negotiated represent a fair expenditure of DoD (Defense Department) funds."

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