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Rumsfeld orders delay on Boeing tanker deal

By David Bowermaster, Alex Fryer and Dominic Gates
Seattle Times staff reporters

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Boeing's controversial deal to build 100 767 aerial-refueling tankers for the Air Force was effectively scrapped yesterday when Secretary of Defense Donald Rumsfeld placed all decisions about modernizing the fleet on hold for at least six months.

Congressional sources said the $23.5 billion plan authorized by President Bush in January isn't likely to survive in its current form. Rumsfeld has instructed the Air Force to re-examine its tanker-modernization plan and consider other planes.

But Boeing and its congressional supporters said it's still possible the Air Force could negotiate a different deal for 767s.

The plan to lease 20 767 tankers and purchase an additional 80 from Boeing drew heavy criticism on Capitol Hill for its cost and the way it was negotiated.

A Boeing spokesperson said Rumsfeld's decision will not have any near-term impact on the 767 production line in Everett, though it has just two dozen unfilled orders left.

Boeing's tanker saga The proposal: A $23.5 billion deal for the Air Force to lease 20 767 tankers and buy 80 to modernize its refueling fleet. What's new: Defense Secretary Donald Rumsfeld put all tanker decisions on hold until two studies of tanker options are completed in November. The implications: Boeing's 767 production line in Everett has orders for two dozen of the planes. The Air Force deal is seen as crucial for the airplane's future. What's ahead: The Air Force could still opt for 767 tankers in a renegotiated deal or choose a different plane. The history: First proposed in October 2001.

Rumsfeld's decision was widely expected after the Defense Science Board earlier this month concluded new tankers were not needed immediately because corrosion on the existing fleet of KC-135s was "manageable."

Boeing officials and their supporters on Capitol Hill remained confident Boeing would sign a contract with the Air Force. "We respect the Secretary's decision to defer his decision until November," Doug Kennett, a Boeing spokesman, said in a written statement. "We firmly believe that the 767 tanker is the only solution that fulfills all 26 of the Air Force's stated requirements."

But Rumsfeld's decision sets up a showdown between the House and Senate over the tanker fleet.

Rep. Norm Dicks, D-Bremerton, inserted language in the 2005 Defense Authorization Bill that sets a March 1, 2005, deadline for the Air Force to complete negotiations and sign a contract with Boeing. The bill was passed by the House last week. The Senate version of the defense legislation states: "There is no clear path forward on the lease or purchase of the KC-767 aircraft."

Senators adjourned for a weeklong recess Friday without passing the defense bill. But if the Senate's tanker language wins approval, House members will push for their version when the two chambers hash out compromise legislation, said Dicks' chief of staff, George Behan. "We're expecting to move forward with expedited negotiations on a new deal that is signed hopefully by the end of the year, but at least by next March," he said.

Sen. Patty Murray, D-Wash., released a similarly upbeat statement: "I am confident that at the end of the day America's military will get new tankers and that Boeing workers will build them."

Rep. George Nethercutt, R-Spokane, who is seeking Murray's Senate seat, voiced dismay about Rumsfeld's decision, saying, "I am very disappointed that the government is again delaying. We need new tankers, and they need to be American-made."

The biggest foes of the proposed 767 tanker deal have been Sen. John McCain, R-Ariz., and Sen. John Warner, R-Va., who sit on the powerful Senate Armed Services committee. The two were especially critical of the leasing arrangement, which they said would cost taxpayers much more than purchasing new jets.

A Senate staffer who has supported the Boeing plan said no movement is likely until McCain and Warner get a deal they can live with.

"The Air Force and the secretary of defense are not going to go through with something that the Senate Armed Services Committee says no on," said the staffer, who spoke on condition of anonymity.

Watchdog groups critical of the lease deal were encouraged by Rumsfeld's announcement.

"Although the fat lady was yet to sing about the Boeing deal, it sounds like she's humming a few bars," said Keith Ashdown, vice president for Taxpayers for Common Sense. "We hope that the Pentagon's decision to go back to the drawing board will result in their ripping up Boeing's gold-plated contract."

The Boeing tanker deal has been dogged by ethical and financial controversy since it was proposed after the Sept. 11, 2001, terrorist attacks.

The U.S. Attorney's Office in Alexandria, Va., is investigating possible criminal wrongdoing during the negotiations between Boeing and the Air Force.

Former Boeing Vice President Darleen Druyun pleaded guilty in April to a conspiracy charge for speaking with Mike Sears, Boeing's former chief financial officer, about a job while she was overseeing tanker negotiations as an Air Force acquisitions official.

Boeing fired Druyun and Sears after it uncovered evidence of the contacts in November. Phil Condit resigned as Boeing's chairman and chief executive officer a week later.

The current backlog for the 767 includes 20 commercial orders and four refueling tankers for Italy and Japan. Deliveries of the military planes don't begin until 2005 and would trickle out at one a year thereafter.

The current 767 production rate is about one plane every six weeks. At that pace, the commercial orders could nominally see the line through 2006.

Indeed, absent a tanker deal, a review of the future of the line would not be necessary until next spring, according to a Boeing spokesperson.

But 13 of the remaining orders are from All Nippon Airways and Japan Airlines, with the possibility that some will be converted to 7E7 orders. If that were to happen, the 767 order list could be reduced to as few as a dozen commercial jets.

Boeing 767 suppliers, who must deliver parts in advance of final assembly — known as lead time — will need to be told early if Boeing decides to halt production. "If the real order book is only something like 12 airplanes, then we're almost into lead time right now," said Richard Neill, CEO of Magellan Aerospace, a Toronto-based supplier that makes parts for the 767 engine pylons, underbelly, landing gear and engines.

The first 767 tanker for the Air Force is sitting inside the Everett factory, its airframe completed. Boeing began production before a contract was signed because it was confident a deal would get done this year. No further work will be done on the airplane unless the deal is resurrected.

Boeing disclosed earlier this year that it could take a substantial charge against earnings if it closes the 767 line and that possibility remained at the front of many people's minds yesterday.

"Boeing has invested over $300 million in developing these tankers," said John Rogers, an investment analyst with D.A. Davidson. "As a result of this decision, much of this cost is now likely to be written off."

David Bowermaster: 206-464-2724 or dbowermaster@seattletimes.-

com. Alex Fryer: 206-464-8124 or afryer@seattletimes.com. Dominic Gates: 206-464-2963 or dgates@seattletimes.com.

Material from The Associated Press is included in this report.

Copyright © 2004 The Seattle Times Company

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