ULA Withdraws from Launch Competition, Leaving SpaceX as Sole Competitor

Wow! That's big news.

from the article,

this is a gambit,

a negotiating tactic.

There's a lot of money involved.

NASA has a history of greatly overpaying in order to keep contracts inside their small fraternity.

Elon Musk is a threat.

Hi brian,

So it is your position that ULA can withdraw from competition and then rejoin it at a later date, after NASA has capitulated to its demands? Among other things, ULA would be demanding that NASA change its Section M evaluation criteria to de-emphasize the importance of price.

Brian, do you really believe that's a feasible strategy, a feasible "negotiating tactic"?

H2H

Hi brian,

So it is your position that ULA can withdraw from competition and then rejoin it at a later date, after NASA has capitulated to its demands? Among other things, ULA would be demanding that NASA change its Section M evaluation criteria to de-emphasize the importance of price.

Brian, do you really believe that's a feasible strategy, a feasible "negotiating tactic"?

H2H

H2H, I'm not Brian, however I really believe that this is a feasible strategy. Boeing certainly announced that it would withdraw from the AF Tanker competition a few years ago if the AF didn't amend the design and/or selection criteria. The AF revised it and went to LPTA and fixed price Incentive type contract.

Of course they won the contract. Within a few months, Boeing notified the AF of an expected multi-hundred million dollar cost overrun on the first 4 planes. I think it was about $700 million overrun beyond the target cost.

For those who do not read articles closely, the owner of the Washington Post, the source of the article, is a partner with ULA in the development of a future ULA rocket

Joel,

Your point is a good one ... the primary difference between this competition and the tanker competition being that it was Boeing versus EADS then -- i.e., USA versus Europe. There were significant political overtones involved.

Now, not as much.

H2H

H2H, still significant political overtones involved this time, too.

In the KC-X Tanker competition, the Air Force was apparently willing to pay more, initially, for a larger, more capable Tanker, which was based upon EADS' existing A-330 series Tanker . The Air Force was pressured (directed?) to change the selection criteria to LPTA, which effectively assured that the smaller B-767 would be selected. In my opinion, the Boeing supporters were unsuccessful in their attempts to keep the competition out of the USA.

EADS might not have wanted to eat the cost of building the assembly plant in Mobile, AL to lower their price at that time. In the end, EADS built an aircraft assembly plant in the USA, any way. As of this year, EADS is building A-320 series airplanes here in Mobile, in their new plant. As Carol Ann once said ( in the movie, Poltergeist) "They're here"...

The citizens and politicians from Kansas were vocal Boeing supporters, heavily criticizing EADS and the citizens of Alabama. The Wichita, KS Boeing plant was to be involved in Boeing's Tanker production. Less than a year after Boeing and state politicians celebrated winning the competition, Boeing announced that it would close the Wichita Plant*, which it did. Sorry, Kansas.

Oh, and I did I mention that Boeing announced within a few months that there would be a huge overrun on the Tanker contract? As an FPI contract, Boeing supposedly would eat some hundreds of millions of those dollars. They still didn't succeed in keeping EADS out of the USA.

Now, Boeing-Lockheed are complaining that price should NOT be the most important factor. They want to steer the emphasis toward experience and past performance (Capabilty), rather than price. Oh yes - they appear to be wanting Congress to lift the restrictions on RUSSIAN made rocket engines.

Joel,

My understanding is that Boeing has "written-off" (i.e., recorded loss reserves) on the Tanker program that have cumulatively exceeded $1 Billion to date. How fortunate for the DoD that Boeing's shareholders have the resources to take such profit reductions. Not many defense contractors have those resources.

My point was that in the Tanker competition (one of them, anyway) it was USA versus Europe. There were some very overt tugs at the heartstrings of nationalism.

In this latest competition, it is ULA versus SpaceX or USA versus USA. Nationalism doesn't seem to play as large a role. Accordingly, what worked (in strategic terms) in the KC-46 competition may not work in the current space launch competition.

But I guess we'll know in a few months ....

H2H

H2H:

Losses on the program or on production?

Jamaal,

It's all a development program at this point, isn't it?

From my Google search --

$300 - $400 million for Boeing's 40% share of FPIF cost-growth (reported in summer 2011)

$425 million "wiring problems" (reported in 2014)

$536 million from problems with the integrated fuel system (reported in 2015)

Hope this helps.

Silly question on my part. I haven't followed the KC-X, but despite it being a derivative of an existing aircraft and the timeline, you are probably right.

So the program so far, through development, is down $1B. Must anticipate some healthy earnings yet to come.

Jamaal,

Indeed. Boeing is (in)famous for using an accounting approach called "program accounting" where the final profit/loss is tied to the overall program and not to any particular contract/project. That approach permits Boeing to lose money on individual contracts/projects but make it up in the long run.

http://www.boeing.com/investors/accounting-considerations.page/

H2H

Appreciate the education.

Section 1608 of the 2015 NDAA states that the Secretary of Defense may waive the prohibition on Russian rockets if

(1) the waiver is necessary for the national security interests of the United States; and

(2) the space launch services and capabilities covered by the contract could not be obtained at a fair and reasonable price without the use of rocket engines designed or manufactured in the Russian Federation.

It does not appear that there is a need to go to Congress.

Also, the proposed 2016 NDAA, which is at the White House, requires a new acquisition strategy for the program no later than 12/31/2020 regardless of where the rockets are produced.

In the end, this could pit SpaceX (Elon Musk) against Blue Origin (Jeff Bezos), assuming ULA continues working with Blue Origin.

Jamaal,

Just to follow-up on Boeing's approach to accounting, the company is in the news this week for ... problems associated with its approach to accounting.

http://www.reuters.com/article/us-boeing-probe-accounting-idUSKCN0VL2K0

H2H

Ruh-roh...

$92.5 million in 2002 to settle a securities fraud suit related to its accounting of costs. Boeing denied wrongdoing in the case.

I wonder why they stick with this approach? The article says Boeing planned on dropping program accounting previously, and there are similar alternatives like percentage of completion accounting, which others use and mirrors program accounting.

Jamaal,

As I think I previously noted, program accounting allows the company to amortize start-up costs over the life of the program. It allows the company to lose a ton of money on the prototyping and development while still keeping shareholders happy. That is one of the reasons why Boeing can bid FFP development with confidence, knowing that they can lose money on the front end and make it up in production, and it all evens out over time.

Let's also note here that the alleged accounting problems all seem to be on the commercial side (BCA) and there are no allegations with respect to Boeing's government contracts.

H2H

Just thought I'd pop in there to note that the LRIP decision may be delayed on the KC-46 tanker until some technical problems are worked-out.

http://www.reuters.com/article/boeing-tanker-idusl2n1732ge?RPC=49

here_2_help said:

Just thought I'd pop in there to note that the LRIP decision may be delayed on the KC-46 tanker until some technical problems are worked-out.

http://www.reuters.com/article/boeing-tanker-idusl2n1732ge?RPC=49

Meanwhile, Airbus built its new factory in Mobile, AL. from scratch and its first A321 plane, destined for JetBlue, successfully completed its first test flight on 21 March.  It's expected to be delivered to JetBlue in the next few weeks.  !0 more planes are various stages of production.  EADS aerial tankers are already in service.

I guess that the Air Force can wait for its new Boeing Tankers, as long as they can keep the KC-135's patched up and flying.  They were flying 40 years years ago, when I left the Air Force and the newest were 10 years old then.  Our Base's were 15 years old then.

On April 1, 2016 at 11:42 AM, here_2_help said:

Just thought I'd pop in there to note that the LRIP decision may be delayed on the KC-46 tanker until some technical problems are worked-out.

http://www.reuters.com/article/boeing-tanker-idusl2n1732ge?RPC=49

Just thought I'd pop in there to note that, in the meantime ,  Airbus has built the new factory in Mobile, Al , has delivered its first plane to the airline, test flew the second plane bound for American Airlines yesterday and has tankers in use by several Air Forces..oh and they are going to step up production rates in Mobile.

Joel,

Noted. Are you suggesting that we hold the SSA accountable for a poor award decision? If so, how?

Do you think Airbus could have done that under contract to the U.S. Air Force?

Maybe what's being suggested here is that the USAF could have gotten a better product, faster and cheaper, if they would have acquired the tankers under Part 12 procedures?

I doubt that the Air Force would try to apply Part 12. Do you recall the thread about the Army's pistol acquisition?

Vern,

Yep. I also remember some points of contention in previous USAF attempts to acquire/lease Boeing aircraft as commercial items....

On April 20, 2016 at 9:35 AM, here_2_help said:

Joel,

Noted. Are you suggesting that we hold the SSA accountable for a poor award decision? If so, how?

No. It was a politically decreed decision. 

Unfortunately for the Kansas delegation, Boeing closed the Wichita Plant that they said they would use as part of the Tanker program, even after the Kansans lobbied for Boeing, against EADS.

On April 20, 2016 at 9:41 AM, here_2_help said:

Maybe what's being suggested here is that the USAF could have gotten a better product, faster and cheaper, if they would have acquired the tankers under Part 12 procedure

Not cheaper using Part 12, Faster, perhaps yes.

Vern Edwards said:

Do you think Airbus could have done that under contract to the U.S. Air Force?

Yes. Their A330 MRTT variant tanker was already developed and in service with some Air Forces at the time that Boeing won the second round of the competition a few years ago.

EADs planned to build the initial 4 KC-45s in its A330 plant in Dresden, Germany, while the Mobile, AL plant would have been under construction. EADs also planned to build an A330 factory in addition to the KC-45 plant in Mobile. 

They kept faith with Mobile by later deciding to build the new Airbus A321 plant here. They finished it last year and began production last Fall.  

I think that EADs could have already been delivering the first KC-45s to the USAF by now.

And ... today Boeing announced yet another KC-46a charge, reportedly $162 Million. No details.

There are not very many defense contractors that could stand this kind of profit degradation. I daresay that, for all but the largest of the large, this kind of financial performance would spark talk of financial insolvency.

They'll make it up on long term production and FMS.

Vern Edwards said:

They'll make it up on long term production and FMS.

Yes, that's what they are telling their shareholders and their auditors. But cash flow matters, even to multi-billion dollar companies

Think B-52. Think KC-135. Think CH-47. Think F/A-18. Shall I go on?

Update on Boeing's 787 program accounting.

--------------------------------------------

I corrected the link and deleted the post after it since I have fixed the link.

bob7947

Go to fool.com and search for "Boeing."

This article from fool.com is more relevant to the thread. 

http://www.fool.com/investing/2016/07/23/boeings-kc-46-pegasus-problems-are-already-fading.aspx

That link worked when tested. If it doesn't, go to fool.com and search for "Boeing."

Keep in mind that the story was posted in June. I think that some of the technical problems it described have been solved. Take note of this:

Quote

Clearly, Boeing has done a poor job of managing the KC-46 development program. There have been too many unexpected problems during the past several years, causing delays and substantial cost overruns. But on the bright side, now that Boeing has demonstrated the tanker's key refueling capabilities, it can start shifting its focus to production.

As disappointing as the past few years have been, the KC-46 Pegasus is still likely to be a major profit center for Boeing in the long run. The Air Force already plans to buy 179 aircraft. Including potential follow-on orders from the U.S. as well as international sales, Boeing believes it could eventually sell 400 KC-46 tankers for $80 billion.

The KC-46 fleet will also generate high-margin service and support revenue for Boeing for decades to come. Twenty years from now, the recent spate of earnings charges will probably seem like a small price to pay to get a valuable franchise off the ground.

And remember the learning curve: unit production costs decline significantly as production quantity doubles.