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Pay no attention to the man behind the curtain.

January 25, 2012

On January 4 2012, Boeing announced that it would be shuttering its Wichita plant at the end of 2013, prior to beginning construction on the KC-X tanker contract that it had finally won in February of 2011.

“The decision to close our Wichita facility was difficult but ultimately was based on a thorough study of the current and future market environment and our ability to remain competitive while meeting our customers’ needs with the best and most affordable solutions,” –Mark Bass, Vice President and General Manager for Boeing

If you are unfamiliar with the KC-X Tanker debacle that has literally lasted the last decade, you can catch up on it here, herehere and here.  I should also note that while it was designated KC-X for the majority of the last 10 years, it has now been given the formal designation of KC-46 by the USAF.

The short version is that the US Air Force has been trying to decide whether their next tanker should be the Boeing 767 or the Airbus A330 for the last decade.  The program has been started, stopped and restarted so many times that its almost impossible to keep count.  People have been sent to jail over it, millions of dollars have been wasted on it and yet, to date not a single plane has been built.

However, thats not actually the point of this post…

I want to focus on the closing of the Wichita plant and use it to highlight exactly how large-scale defense acquisition decisions are actually made.  While Kansas and Boeing have played a key role for the duration of the debacle, I really want to focus in on roughly the last 5 years or so.  So, first, in the interest of full disclosure, let me lay this part out: I am originally from Kansas and my entire family still lives there.  Several members of my extended family live and work in Wichita, one of them directly for a aircraft manufacturer (not Boeing).  Suffice to say, the politics behind the KC-X competition have been the backdrop for much spirited discussion over the years with my family.

Additionally, you need to understand a few things about Wichita.  The first is that the aircraft manufacturing industry is far and away the largest employment sector in the city.  Its a huge industry made up of several companies and everyone who lives in and around Wichita is routinely effected by it.  Wichita even bills itself as ‘The Air Capital of the World.‘  Understandably, since aircraft manufacturing is such a large part of the local economy, community and state politicians are constantly looking for ways to promote the industry and steer new customers to the city.  New work means more gainfully employed citizens and corporations generating higher profits, both of which (at least in theory) translate into higher tax revenue for the city and state.  Additionally, military work has an added benefit of allowing politicians to campaign on the basis of national security contributions made during their terms.  For their part, the corporations are happy to accept the assistance from politicians and routinely do their part to keep campaign contributions flowing.  Boeing is routinely the largest reelection campaign contributor for Kansas politicians. (Also, check out Gulliver with a corollary to this topic over here)

So, thats the simple backdrop for the last 10 years of KC-X Tanker competition.  Over the entire duration, Kansas politicians continuously tried to steer the award to Boeing on the promise that the tanker would be constructed/modified at the Wichita plant…

<<Seriously, if you don’t know this whole KC-X story, go back and read Shane Harris’s great piece on it.  I’m glossing over the earliest, juciest ‘lease the planes’ fiasco that ran from ~2002-2005 that landed Darlene Druryen in the pokey for 9 months, got the CFO of Boeing fired, sent to jail *and* cost the company $615 million in fines.   Also, the hero of that story is a young, idealistic Arizona upstart by the name of Johnny McCain.>>

…now, the fact that if Boeing won the award the tanker was going to be built in Wichita was not some kind of smoky backroom deal made between Kansas politicians and Boeing executives.  This was an explicitly stated fact.  Here are some excerpts from Boeing press material from April of 2010.

TOPEKA, Kan., April 30, 2010 — The Boeing Company [NYSE: BA] today announced that Kansas will benefit from approximately 7,500 jobs and an estimated $388 million in annual economic impact if the Boeing NewGen Tanker is selected as the U.S. Air Force’s next aerial refueling aircraft.

“The national recession has hit the aviation industry hard, with thousands of Kansans out of work,” said Gov. Mark Parkinson. “The jobs from this contract can provide meaningful economic recovery to our state and country. The delays on this project have been frustrating, and unnecessary. I urge our military leaders to act swiftly and award this contract to Boeing. It’s time we bring these jobs home to Kansas.”

“I am confident that the Air Force will select Boeing to build its new tanker because I know the strength of the Kansas work force. Our workers will provide the skills and expertise that a new generation of airmen will depend on to keep America secure,” said U.S. Sen. Sam Brownback. “I am excited for Boeing to win the contract and get these tankers rolling off of the line, and excited that we are working together to create new jobs in Kansas and grow the Kansas economy.”

“This announcement today confirms what we all know to be true, that Boeing will make the best next-generation aerial refueling tanker. Boeing’s proposal is based on a proven platform founded on the expertise of a well-established pool of skilled workers,” said U.S. Sen. Pat Roberts. “The tanker proposal must be based on a level playing field and not construed to accommodate the business needs of an illegally subsidized company at the sacrifice of American servicemembers.”

“While unemployment remains high and our economy is still sluggish, nothing is more welcome news than a possible 7,500 jobs coming to Kansas. An American tanker should be built by an American company with American workers — and that is the Boeing 767 — made by our highly skilled workers here in Kansas,” said U.S. Congressman Todd Tiahrt. “I will continue to press the Pentagon for a fair and level playing field for our American workers. With an equal competition, there is no doubt that U.S. workers can compete and win this tanker contract. I look forward to seeing these high-quality jobs come home to the Sunflower State very soon.”

In addition to the 2,586 Boeing employees in Kansas, the company also works with 464 suppliers/vendors around the state, resulting in an estimated $3 billion in annual economic impact and supporting an estimated 125,000 direct and indirect Kansas jobs.

(emphasis on key quotes and politicians names’ mine)

Now, go back and carefully read the politicians’ quotes.  Did you see the part where it said that the Boeing proposal represented the best value for the US Air Force and American taxpayers? Did you see the part where they emphasize the need to maintain a certain level of defense industrial manufacturing capability as a component of national security? Nope?  Did you see the part where each and every one of these (Republican) politicians emphasizes how this funding will stimulate the local economy and create jobs in an economic downturn?  Ahh….there it is.  Here my friends, here is the real story.  The KC-X competition turned 6 Republicans from the reddest of red states into unabashed disciples of John Maynard Keynes.

Here is the other way to illustrate my point.  Go back and review the quotes above you will see a couple of veiled references to unfair competition between Boeing (the “Americans”) and EADS (the “foreigners).  The recurring mantra for Boeing and their supporters was that the competition was inherently unfair because EADS/Airbus was subsidized by European countries and therefore their bid had an inherent advantage (FTR, the truth is much more complex and the World Trade Organization found that both companies benefited from a range of government subsidies).  Loren Thompson even wrote a somewhat mind-bending post where he states that closing the factory in Wichita is the fault of the US Air Force (and the Obama administration?) for having the gall to try and get their tankers at the lowest price and not allowing Boeing to build in their normal profit margins (yes, seriously).

The acquisition strategy that the Obama Administration put together to finally break the impasse over purchase of a new tanker was what people in the defense business call a “price shootout.” In other words, price was the key determinant of who won, because both bidders met all the other criteria for selection.

Subsidies were the main reason why the European company thought it could beat Boeing in its home market to win the tanker program. And they were the reason why Boeing management was convinced it had to bid very aggressively if it was to have any hope of besting its rival.

Pentagon acquisition officials were able to brag that they had secured a new generation of aerial-refueling tankers for less money than anyone thought possible. But here’s the downside: Boeing ended up having to cut costs everywhere it could to avoid losing money on the tanker program, including Wichita. Keeping an under-utilized, high-cost facility in the production mix would have eroded the program’s already razor-thin profit margin.  With Boeing’s resources over-stretched trying to match Airbus’s heavily subsidized development efforts on the commercial side, Wichita had to go. If I was one of the workers in Wichita, I’d feel betrayed too. But having watched the way the tanker competition played out in the nation’s capital, it’s obvious to me why Boeing couldn’t afford to be sentimental.

Focus hard on what Loren Thompson is actually arguing here.  He is stating that an acquisition program designed with realistic technical criteria that drives industry to compete on price is a dangerous thing.  He also implies that the primary motivation of the Pentagon program managers was to be able to brag about how much money they had saved on this program (I wish).

Additionally, consider the “anti-subsidies” argument that Loren Thompson (and many others) put forth against EADS.  He is implying that the US government should not have allowed the cost of a giant defense acquisition program to be defrayed by previous investments from the governments of our European allies.  That if we would have just allowed for a “level playing field” that this wouldn’t have been a problem and the Wichita facility could have stayed open.  Now, I certainly agree that corporations need to adhere to laws surrounding international trade, but that isn’t really what he is saying.  Loren Thompson is basically saying that we have to prioritize “American” jobs over a frugal defense acquisitions community.  I use the quotes, because in this case had EADS won the award, they were formally committed to building a new plant in Mobile, Alabama.  Thus they would have also produced American jobs.

<<Thought experiment: Imagine the outcry if EADS would have won the latest contract and then stated that instead of building a factory in Mobile, Alabama they were just going to use their existing one in Dresden, Germany.>>

So, just what lengths did the delegation from Kansas go to in order to assure that the KC-X was awarded to Boeing?  Well, after the USAF awarded the contract to Northrup/EADS in Feb of 2008, they actually introduced bills (H.R. 5298 and S.3361) that would have essentially made it illegal for anyone but Boeing to win.

WASHINGTON – U.S. Senators Sam Brownback (R-KS) and Pat Roberts (R-KS) today introduced the KC-X Tanker Recompete Act. Representative Todd Tiahrt (R-KS) introduced companion legislation in the House. The legislation would prohibit use of any funds by the Department of Defense on the KC-Tanker unless the DoD chooses to outright award the KC-X tanker to Boeing or decides to fairly recompete the KC-X contract using the KC-135 criteria.

“The fastest way for the Air Force to get a new tanker is to award the contract to Boeing,” said Senator Brownback. “If the Air Force instead chooses to rebid the contract, this legislation would ensure a new competition assesses all of the relevant factors, including subsidies and foreign corruption. Only a thorough and complete assessment of tanker proposals will prevent further delays in the tanker replacement program.”

Representative Tiahrt said, “The Air Force used a flawed and incompetent process to evaluate the original KC-X tanker proposal. There is no way to get around this fact. My bill offers two choices. The Air Force can either award the contract to Boeing, the company that meets all the requirements set forth by the Air Force. Or, the Air Force can rebid the tanker contract on a fair and level playing field—the way it should have been done the first time. I urge the Air Force to respond quickly and not delay awarding the contract to Boeing, which represents the best tanker for the Air Force and the American taxpayer.”

“The full GAO report is in and it is now clear that the Air Force made critical mistakes and chose the wrong plane for our men and women in uniform, for our nation and for our Kansas workers,” Senator Roberts said. “It is time to get this contract awarded fair and square. Our bill will keep the Department of Defense from spending one dollar on the tanker unless it goes to the group that best meets the Air Force’s criteria. The GAO report indicates that this should be an easy decision for the Air Force.”  [source]

(emphasis mine)

According to the GAO press release, the Air Force did screw the pooch on this solicitation.  However, the reasons were technical, programmatic and accounting.  They  had nothing to do with illegal subsidies.  Also, the GAO report in no way states that the Air Force choose the wrong contractor, only that their process was flawed and that they *may* have chosen the wrong contractor.

Now, Kansas politicians may not actually be worse than any other politicians; as a matter of fact, Norm Dicks (D-WA) was actually known as ‘The Congressmen from Boeing.’  I just want to use them to illustrate a larger point.  In this case, they had a very understandable motivation to bring business, especially lucrative government business to Kansas.  The problem is this motivation trumped their responsibility to the national interests that they are also pledged to represent.  Their motivation is actually for the federal government to spend as much as possible on programs that benefit their district since the taxes to fund it are collected from across all 50 states and then focused on their state.  The real issue is that KC-X was not the exception.  It is just one example of many programs across the federal government that work much the same way.  Politicians, enabled by a legion of lobbyists, think tanks, and corporate PR people participate in variations of this process all the time.

If you pay attention to defense spending at all, you are probably saying something along the lines of “duh” right now.  I know this isn’t exactly a shocking revelation, but my concern is that it should be.  It seems that we have lost our capacity to be appalled.  There have been millions (billions) of dollars spent on the KC-X competition over the last 10 years and that money has not yet trickled down to any of the working class people that these politicians were so quick to point to as the beneficiaries.  Instead, this money has gone into the pockets of people who produce nothing more than PR campaigns, PowerPoint Slides and “parting gifts.”

So, going back to the factory in Wichita, what should we take away from this?  Well, lets ask some of those Kansas politicians that fought so hard for it…

…Boeing pledged that a win would bring approximately 7,500 jobs to Kansas, including hundreds of Boeing jobs associated with the finishing work on the new tankers. It is hard to believe that conditions would have changed so rapidly over the past few months to bring about the decision to not only move the tanker finishing work elsewhere, but to also close down the entire facility. The fact that Boeing is now refusing to honor its commitment to the people of Kansas is greatly troubling to me and to thousands of Kansans who trusted that Boeing’s promise would be kept.

I have urged Boeing leadership to meet with state and local officials to discuss alternatives to the closure of its facility. To my dismay, Boeing’s senior leadership chose not to meet with local Wichita officials or even give them a serious opportunity to work together on a different plan for the future. I am astonished Boeing would make such a hasty decision without considering all of the alternatives or the significant impact this decision will have.  [Sen Jerry Moran R-KS]

_____

Regrettably, we have now learned that Boeing will not only walk away from its commitment to the people of Kansas to finish the KC-46A tanker here, but it will also leave the state altogether—a state that helped make Boeing successful for more than 80 years and a state whose pride in its heritage with Boeing is second to none. Do not be fooled by Boeing’s announcement that it will continue to rely on sub-supplier work in Kansas. While economically important, that development is not news. That work in no way substitutes for the decade of promises made by the Boeing Company with regard to defense work on the KC-46A tanker at the Boeing-Wichita facility.

As I have said repeatedly—both publicly and to Boeing—Boeing, like every company, has the right to change its business plans and operate in the best interests of its stakeholders. What neither Boeing, nor any other company, has the right to do is make false statements, violate long-held commitments to communities or to receive federal contracts based on representations that it knows are not accurate. The fact that Boeing now appears determined to leave our state will not prevent me from seeking to hold the company accountable for its promises and commitments.  [Rep Mike Pompeo R-KS]

Its seems pretty clear that these politicians now realize that they were played by Boeing.  They understand that the decision to close the Wichita plant has been in the works since well in advance of the KC-X contract award.  They also recognize that at this point, they have no real recourse against Boeing.  Despite the implications from the Kansas delegation, I assure you that there is nothing in the KC-X contract that states that the aircraft will be assembled in Kansas.  Boeing may very well have broken, “promises and commitments” but they did not break any contractual obligations.  The fact is, Boeing and the Kansas politicians always had two very different goals.  Boeings’ goal was to be awarded $35 billion dollars worth of work and to have the largest possible percentage of that go into profits.  The politicians’ goal was to have the largest percentage of defense dollars possible come to their state.  When those two goals overlap it gives the appearance that they are on a team.  When those goals diverge you get what happened in Wichita.

For the record, I have no idea how to solve this issue.  Saying Congress should stay out of these decisions is easy, but it’s not realistic.  Saying that corporations should be less concerned with profits and more invested in communities is probably equally naive.  The reality is that unless there is more sincere public scrutiny on the machinations of large government awards this kind of activity will continue.  The real shame in this case is that neither the Kansas politicians nor Boeing writ large will actually suffer any true damage from this decision.  The only people that are going to pay the price are the Boeing workers of Wichita who are being laid off by their employer and should be embarrassed by their elected officials.

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One Comment
  1. Fred permalink
    January 31, 2012 7:27 pm

    Now the fine folks in Wichita know how Detroit has felt for the last decade or so.

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