USAF to Boeing, NGC: “Don’t Make Us Come Back There”
Reuters reports that the USAF met last week with Boeing and Northrop Grumman’s CEOs “to voice concern about the “vitriolic” tone of public statements over a $35 billion refueling aircraft program.” Particular concern was expressed regarding Boeing’s allegations of irregularities in the USAF’s KC-X competition process. Defense analyst Loren Thompson, of the Virginia-based Lexington Institute went so far as to say that: “The tone of the tanker debate has turned so negative that Air Force leaders are concerned that it could damage their long-term relationship with Boeing.”
Analysis: The effect of this meeting, if any, will depend on Boeing’s assessment of a straightforward question: If the potential prize is nearly $20 billion in work over 20 years, how much strain on their long-term relationship with the USAF becomes an acceptable risk in the current environment?
Industry trends are also playing a role…
Irregularities in the process are a key facet of Boeing’s GAO appeal, and also of the parallel political campaign required to change the decision. Which is why it features in the ad example displayed with this article. Without that element, Boeing’s complaint amounts to criticism of the customer’s decision criteria. True to recent trends, that kind of criticism is also being leveled, just as Northrop Grumman criticized the decision criteria when it lost the Joint Cargo Aircraft project. On its own, however, criticizing the customer’s chosen decision criteria is rarely a winning formula.
The defense procurement spiral, wherein costs for each generation of equipment rise faster than inflation, has reached a point where there are far fewer programs to fight over. Which means fewer second chances, and more of a “win or else” atmosphere that is making high profile program challenges an expected outcome of any major American procurement effort. In some cases, like the $20 billion ITES-II I.T. contract, that fact is having the effect of excluding smaller competitors from contracts, and reducing competition.
At the same time, the spiral has led to industry consolidation that leaves the Pentagon with a very limited set of choices in key categories (Lockheed Martin or Boeing in fighter aircraft, for instance), which erodes the credibility of any implicit threats to punish contractors.
Now throw in political divisions that are invested in each side of the KC-X aerial tanker contract, and act to drive the complaint process while also consuming its products.
Where, then, does one set the bar for relationship risk in that environment – especially if a firm feels genuinely wronged?
The current controversy is about to give defense industry observers an answer to that question.