Aerospace & Defense March 10, 2008, 12:01AM EST text size: TT
Boeing's Audacious Allies

Supporters of the planemaker cry foul when it loses a U.S. military contract to a foreign rival, but 70% of its commercial Dreamliner is made overseas
by Judith Crown and Keith Epstein

When is globalization a bad word? To Boeing (BA) backers, it's when the competition—a consortium led by European Aeronautic Defence & Space (EADS) and Northrop Grumman (NOC)—wins the battle for a lucrative U.S. Air Force contract for airborne-refueling planes. Ever since the Air Force announced its decision on Feb. 29, Americans from Seattle to Capitol Hill have railed about lost jobs and the risks of foreign-made military assets.
But what about when Boeing wins a big contract? You don't hear many complaints then, despite the fact that large portions of the parts and labor in its commercial planes come from overseas—70% of Boeing's new 787 Dreamliner and 60% of other models are made outside the U.S. Even many of Boeing's military planes have many foreign parts in them. Key portions of the fuselage and tail on the airborne-refueling plane Boeing wanted to build for the Air Force would have involved non-U.S. companies.
That far-flung supplier network is necessary to stay competitive, Boeing says. However, it can create headaches for the manufacturer, too. Boeing has been struggling to reassess its 787 delivery schedule since January, an effort that the company reaffirmed on Mar. 7 is ongoing. Analysts believe that means the first delivery of 787s to customers will be pushed back to the third quarter of 2009, from the current target of early in the first quarter. One reason: Problems with completing center and rear fuselages of the plane at a plant operated in Texas by an alliance of Italy's Alenia Aeronautica and Vought Aircraft Industries of Dallas.
Lost Jobs in an Economic Downturn
Getting all the 787 parts and components to the sub-assemblers at the right time has turned out to be more challenging than anticipated, says Cai Von Rumohr, an aerospace analyst at Cowen & Co. (COWN) "What was supposed to be their salvation now works against them." He says Boeing had projected deliveries of 109 Dreamliners in 2009. "I'm assuming 55, but that number could be 45."
A large military contract raises entirely different issues of nationality, of course. Foreign contractors have long complained they face long odds of landing the most lucrative and prestigious awards. Similar issues of U.S. jobs and national security were raised in 2005 when a contract for 28 helicopters for the President was awarded to a team consisting of Lockheed Martin (LMT) and the Italian company AgustaWestland, a unit of Finmeccanica (SIFI.MI), instead of the U.S. favorite, Sikorsky, a division of United Technologies (UTX).
Today, Boeing's champions are crying foul that the Air Force awarded a $40 billion-plus contract for aerial refueling tankers to a foreign rival, EADS (EAD.PA), albeit in partnership with the domestic Northrop. Some of them argue the Pentagon should have considered the cost in U.S. jobs during an economic downturn, not just military capability and cost. "I have talked about the dismay Boeing workers felt in my home state of Washington," Senator Patty Murray (D-Wash.) said in a speech on the Senate floor on Mar. 7. She added that she also worries about "the ability to control our national security once we've effectively turned over control of our military capability and technology to a foreign government."
Mulling Complaint to GAO
Boeing officials have been careful not to say that the Pentagon should have favored their "American" plane. They have kept their criticism focused on the terms the Air Force set for the competition and the quality of the two offerings. Yet they may still try to get the tanker decision overturned. On Mar. 7, after getting briefed by the Pentagon about its reasons for giving the contract to EADS/Northrop, Boeing executives said they will give serious consideration to filing a protest (BusinessWeek.com, 3/7/08) with the Government Accountability Office (GAO), the investigative arm of Congress.
They are sure to get plenty of support. "It's an irresistible issue during an election year," says Richard Aboulafia, vice-president of analysis for Teal Group. But to some observers, such protests ignore the realities of modern aerospace contracting, for both commercial and military projects. The aerospace giants increasingly look to suppliers with expertise, wherever they may be.
For example, two of the Japanese suppliers for the 787 had experience supplying composite parts for high-speed trains. In the case of the Dreamliner, so much new manufacturing space was needed—3 million square feet—that Boeing spread the work around the world so that parts could be produced concurrently, rather than sequentially, which would take more time. Given the complexity of the newest aircraft, any big order is likely to ship some amount of work overseas.
International Supply Chain Grows
"It's a little hard to complain about foreign content on the future tanker when Boeing's Dreamliner was designed for manufacture by a global supply chain," says Loren Thompson, a defense analyst at the Lexington Institute with close ties to the military. In fact, he asserts, the 787 "will probably end up having more foreign content than the Airbus tanker."
Indeed, the Dreamliner's 70% foreign content compares with 40% foreign content for the winning refueling tanker as designed by Northrop and EADS, and 15% for the Boeing tanker design. Boeing spokesperson Daniel Beck dismisses the comparison "between an aircraft developed solely for an international commercial market and a tanker aircraft developed solely as a military asset." Still the technologies are similar. Both tankers are juiced-up commercial jetliners after all—in Boeing's case, an upgraded 767; in EADS/Northrop's case, an Airbus 330.
Boeing's supply chain was becoming more and more international even before the birth of the 787. Where previously it had outsourced parts for planes but completed assembly in Washington, with the 787 it contracted out design and sub-assembly responsibilities as well.
"Boeing's supply chain is global, its sales are global, and even its current ad campaign promotes its globalness," says Todd Malan, president and CEO of the Organization for International Investment, a Washington-based association representing U.S. operations of foreign companies. "It's a little disingenuous for them to criticize others in the industry for being globally integrated."
Crown is a senior correspondent for BusinessWeek and BW Chicago. Epstein is a correspondent in BusinessWeek's Washington bureau.

Defense Contracts March 4, 2008, 12:05PM EST

Tanker Deal: Why Boeing Shouldn't Protest
Despite its dismay over losing a huge Air Force contract, Boeing doesn't want to delay a plane the military needs
by Keith Epstein

Boeing (BA) executives, bewildered at losing a multibillion-dollar contract for a fleet of refueling tanker aircraft, are girding for battle as they lay legal groundwork for kicking up a more official fuss—the filing of a formal protest of a U.S. Air Force decision to buy from Northrop Grumman (NOC) and partner European Aeronautic Defence & Space (EAD.PA).
But even with billions at stake, shares tumbling, and an anticipated dent in earnings, there are some good reasons why Boeing shouldn't complain—and just might not. Sources say these downsides, too, are being debated in the company's executive suite and that no decision on a protest will be made until after a Pentagon briefing on the matter. Explains one Boeing source: "We certainly wouldn't want to aggravate our customer"—the Air Force.
Even crafting a statement the company issued Mar. 4 proved painstakingly tedious, as insiders strived to strike a balance in tone. Executives wanted to convey their sense that the company was misled by the Air Force. If Boeing had known the Air Force was seeking a plane with more fuel-carrying capacity and cargo space, say company insiders and a congressional source, it would have based its proposal on the larger Boeing 777 instead of the 767. The statement by Mark McGraw, Boeing's vice-president for 767 tanker programs, sidestepped some of the details but got to the point: "There may well have been factors beyond those stated in the [Air Force request for proposal], or weighted differently than we understood they would be, used to make the decision."
Boeing also complained about having to wait until Mar. 12 for a formal briefing on why it was not selected, but received the hearing on Mar. 7. Company spokesman Dan Beck said then that Boeing won't be deciding whether to file a formal protest for "a few days." The company then has 10 days. But a protest might not be necessary. Congress has already stepped into the fray, grilling two top Air Force acquisition officials, Sue Payton and Lt. Gen. John "Jack" Hudson, at a Mar. 5 hearing of the House Defense Appropriations subcommittee, during which the Democratic chairman, John Murtha of Pennsylvania, reminded them that Congress has the power of the purse and can cancel the contract.
Patchwork Planes
The realities are complex. A protest could add yet another yearlong delay to replacing the military's aged fleet of KC-135 Stratotankers. These Dr. Strangelove-era airborne gasoline stations first entered service in the 1950s and are routinely falling apart and patched up. Yet they remain critical to U.S. global warfighting because they enable U.S. fighter jets and bombers to continue missions rather than return to aircraft carriers or bases.
A protest also could prolong attention to a series of embarrassments and turbulence for Boeing in recent years, including a scandal involving an earlier replacement tanker bid. Boeing also had troubles delivering tankers to other countries. And development of its high-tech "virtual fence" along the U.S.-Mexican border has been plagued with so many problems that deployment is now stalled.
Boeing has had difficulties on the commercial airliner side as well. Delays in the 787 Dreamliner over the last six months have depressed the company's stock. The tanker deal, while potentially worth $100 billion over its life, amounts to a less impressive revenue source on an annual basis. But it represents one of the largest military aircraft contracts in modern times, and comes at a point when projected sales increases for Boeing's defense unit are modest—only about $1 billion above the current $32 billion a year.
Even before the Gulf War, the nation's fleet of Stratotankers was stretched thin and at risk of having trouble with failing parts and systems that would ground too many tankers at once. Some of the planes have plywood floors, cockpit windows that come loose, and cracks in the landing gear—among countless other costly maintenance headaches. Putty holding parts in place sometimes give the planes the appearance of having Band-Aids, which is essentially what they are. Before each Stratotanker takes off, a maintenance crew must check hundreds of items on a list the size of a phone book. The inspections require eight hours, compared with only two hours for the average modern jet. Sometimes, mechanics unable to find replacement parts have had to improvise their own. Once, in 2003, parts fell from a landing KC-135, prompting repairs to flaps on 14 planes.
Strategic risks and soaring maintenance costs made the Air Force eager for a new fleet—years ago. But bureaucracy and scandal delayed acquisition, most recently in 2003 when the Air Force, after a congressional investigation spearheaded by Senator John McCain (R-Ariz.), halted an order to lease 100 tankers from Boeing.
Prepare for Hearings
The Air Force now intends to "debrief" Boeing on Mar. 7, providing a detailed explanation about why it lost the contract. Boeing then has 10 days to file a protest with the Government Accountability Office. A decision from the GAO, which has adjudicated a rising number of protests from defeated contractors in recent years, could take 100 days.
If Boeing persists in a protest, the public noise surrounding the controversial award won't likely subside, either; the railing of Boeing supporters, Presidential candidates on the campaign trail, and grumbling by labor unions in recent days would likely have echoes in congressional hearings, possibly leading to still more delays in replacing the nation's refueling tankers. House Speaker Nancy Pelosi (D-Calif.) said Mar. 4 that Congress will schedule hearings on the Air Force decision. Pelosi said in a statement that the award to Northrop Grumman "raises serious questions that Congress must examine thoroughly."
While the Air Force has declined to disclose details of its extensive internal deliberations over the tanker contract, the choice may have been easier than advertised. Boeing, in fact, may have been woefully far behind. Loren Thompson, a Lexington Institute defense analyst well connected and widely respected in the Pentagon, said Mar. 3 that "Northrop Grumman's victory was not a close outcome."
While both Boeing and Northrop Grumman satisfied requirements established by the Air Force, Northrop was clearly the better buy. With Northrop, the military could have "49 superior tankers operating by 2013," Thompson said, while Boeing's proposal would give it "only 19 considerably less capable planes" by then.
Measuring Up the Aircraft
World markets, politicians, labor unions, and others may have been stunned by the upset, but Thompson insists that "Boeing didn't manage to beat Northrop in a single measure of merit"—not in flight range, fuel capacity, speed of delivery, or cost. "Boeing would have to find a lot of problems to overturn this outcome," Thompson tells BusinessWeek. The Northrop tanker carriers 250,000 pounds of fuel, compared to 202,000 on Boeing's—a crucial difference considering that refueling tankers must often circle for many hours when military operations require.
Thompson's information, which he disclosed Mar. 3, irritated Boeing officials, who are now seeking ways to craft a delicate statement that criticizes the military for speaking with Thompson and some members of Congress before explaining in detail to the company why it lost. Thompson, for his part, is a longtime military analyst with deep ties to the top military brass and defense contractors. Boeing executives also are said to be troubled by a "disconnect" between what the military said it wanted and the reasons given by the Air Force for why it chose Northrop. Now Boeing must wait a week before hearing from the Air Force the detailed reasons for its defeat.
Air Force officials are eager to put the controversy behind them and secure the tankers they need. And, in considering a protest, Boeing may risk delaying an overdue overhaul of the U.S. military's airborne backbone to refight a battle it can't win.
Epstein is a correspondent in BusinessWeek's Washington bureau.

Water Makes US Troops in Iraq Sick
The Associated Press
Sunday 09 March 2008

Washington - Dozens of U.S. troops in Iraq fell sick at bases using "unmonitored and potentially unsafe" water supplied by the military and a contractor once owned by Vice President Dick Cheney's former company, the Pentagon's internal watchdog says.
A report obtained by The Associated Press said soldiers experienced skin abscesses, cellulitis, skin infections, diarrhea and other illnesses after using discolored, smelly water for personal hygiene and laundry at five U.S. military sites in Iraq.
The Defense Department's inspector general's report, which could be released as early as Monday, found water quality problems between March 2004 and February 2006 at three sites run by contractor KBR Inc., and between January 2004 and December 2006 at two military-operated locations.
It was impossible to link the dirty water definitively to all the illnesses, according to the report. But it said KBR's water quality "was not maintained in accordance with field water sanitary standards" and the military-run sites "were not performing all required quality control tests."
The report said KBR took corrective steps and was providing adequate water quality by November 2006. But military units at the two sites they controlled were still failing to perform required quality control tests and maintain appropriate records by that time.
"Therefore, water suppliers exposed U.S. forces to unmonitored and potentially unsafe water," at the military sites by late 2006, the report said.
The problems did not extend to troops' drinking water, but rather to water used for washing, bathing, shaving and cleaning. Water used for hygiene and laundry must meet minimum safety standards under military regulations because of the potential for harmful exposure through the eyes, nose, mouth, cuts and wounds.
The KBR sites were Camp Ar Ramadi, Camp Q-West and Camp Victory. The military sites were Logistics Support Area Anaconda and Camp Ali.
The inspector general's study confirmed AP reports on the contaminated water in early 2006 and provided additional details on the scope of the problem at the Iraq bases. In January that year, interviews and internal company documents disclosed the problems at Ar Ramadi and showed that KBR employees could not get the company to inform base residents.
Halliburton Co., then KBR's parent company, disputed the allegations even though they were made by its own employees and documented in company e-mails. In March 2006, the AP obtained an internal Halliburton report that, in one instance, the company missed contamination that could have caused "mass sickness or death" at Ar Ramadi.
The report said the event at Ar Ramadi could have been prevented if KBR's reverse osmosis units on the site had been assembled, instead of relying on the military's water production facilities.
Halliburton is the oil services conglomerate that Cheney once led. Congressional Democrats long have complained that KBR has benefited from its former ties to Cheney.
KBR, responding to the inspector general's report, said its water treatment "has met or exceeded all applicable military and contract standards." The company took exception to many of the inspector general's assertions. "KBR's commitment to the safety of all of its employees remains unwavering," the company said in a statement to the AP.
KBR provided water treatment to U.S. troops under a large-scale defense contract that also included housing and food to soldiers in Iraq, Afghanistan, Kuwait, Djbouti and Georgia.
The military has "taken the appropriate measures to correct the problem and ensure we provide the appropriate oversight of the system," said Navy Capt. James Graybeal of the U.S. Central Command, which oversees U.S. troops in the Middle East.
North Dakota Sen. Byron Dorgan, who has led Democratic inquiries into contracting abuses in Iraq, said the inspector general has backed up what those earlier hearings uncovered. "KBR was not doing its job" and U.S. forces had water that did not meet Army standards, Dorgan said.
"I think it's outrageous that KBR tried to deny that there was a problem, especially when it turned out that there were dozens of U.S. troops reporting water-related illnesses," he said.
The inspector general investigated the 2006 reports at Dorgan's request.
The inspector general's report said some troops noticed problems with the water. Between October 2004 and May 2005, troops at Camp Ar Ramadi said bathwater was discolored and had an unusual odor. The report said KBR failed to treat the nonpotable water and monitor water quality during the same period.
At Camp Q-West, KBR inappropriately delivered chlorinated wastewater for showers and latrines without informing military preventive medicine officials, the report said. "KBR did not monitor or record the quality of water at point-of-use containers before April 2006, even though the ... contract required the company to do so," the report added.
Medical records for troops at Camp Q-West indicated 38 cases of illnesses commonly attributed to problem water. These include skin abscesses, cellulitis, skin infections and diarrhea. Doctors diagnosed 24 of the cases in January and February 2006, the same period when medical officials warned of a rise in bacterial infections at the base.
In addition, military medical records - tied to no particular base in Iraq - showed 26 cases of food and waterborne diseases, including hepatitis, giardiasis and typhoid fever.
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GAO: Future Combat Systems network still more concept than reality
By Bob Brewin bbrewin@govexec.com March 10, 2008

The number of lines of software code the Army needs to develop for its Future Combat Systems program has tripled to 95.1 million lines since 2003, and "it is not yet clear if or when the information network, which is at the heart of the FCS concept, can be developed, built and demonstrated," the Government Accountability Office reported on Monday.
The Army tapped Boeing Co. and SAIC in 2002 as lead systems integrators to develop FCS, an ambitious project estimated to cost anywhere from $164 billion to more than $230 billion. The project's aim is to link manned and unmanned ground and air vehicles, sensor systems and military commanders in a complex network designed to allow soldiers to see and hit the enemy first, rather than relying on heavy armor to withstand attack.
That involves writing software and implementing technology to link the people, platforms, weapons and sensors together. The basic FCS Brigade Combat Team network will stitch together 5,000 nodes on more than 1,500 radios supporting multiple subnetworks connected by gateways with 3 million information exchange requirements. But GAO noted in the report GAO-08-409 that to date the Army and its contractors have only demonstrated basic network concepts, such as connections and exchange of information between a limited number of network nodes.
The Army is still stabilizing its requirements and hardware and software designs have not matured, GAO reported. The first major demonstration of the FCS network will take place in fiscal 2012, about a year before the Army plans to start low-rate initial production of FCS hardware, such as infantry and reconnaissance vehicles, cannons, mortars, and robotic air and ground vehicles.
Congress, in the fiscal 2008 Defense authorization measure, said it would not approve production of such hardware until the completion of a successful network test.
The Army told GAO that the sharp increase in the lines of code needed to run FCS systems stems from an underestimation of the amount of operating system software required. The report found that the Army, Boeing and SAIC contributed to code growth with "inaccurate software sizing estimates," and noted that the Institute for Defense Analyses has estimated that the growth in code will add $3 billion to the overall FCS development cost.
Lack of stable development requirements also contributed to an increase in the amount of code required, GAO said, reporting that four out of five of the FCS software developers it met with (out of a total of 14) reported that problems with requirements have resulted in functionality being deferred to future versions.
"Deferring work into the future means that the associated software code writing and testing will take place later than planned, meaning that more code will be written later and the associated functionality will not be testable until later," the report stated.
This, GAO said, "indicates that less functionality than planned has been delivered and that software estimates will only grow larger in future builds."
The basic architecture of the FCS network also could frustrate Army efforts to develop the battlefield networks at the core of the system, the GAO report said. Unlike commercial wireless systems in which every node is connected to the Internet by a single link, in FCS, most network nodes will not have direct access to the network.
Instead, each radio must act as a router, meaning it will pass voice, video and data traffic from its subscribers as well as other radios and their subscribers. This, GAO said, could lead to a situation in which all fixed capacity on the network is consumed for routing traffic between radios and nodes, and there is no capacity to transmit information.
The magnitude, size and complexity and of the network and software development required for FCS are "unprecedented" in the history of the Defense Department, GAO said. "Because the performance of the network and the success of the software effort are not assured," the report said, "decision-makers should allow for the possibility that full success will not be achieved.... it will be wise to keep alternative courses of action viable to guard against such an eventuality."
John Pike, a defense analyst and director of GlobalSecurity.org, said that the Army should restructure FCS, backing away from a grand plan of developing everything at once and taking an incremental approach. Pike said the Army also might need to scale back the scope of FCS to focus on what it needs rather than what it desires.
Philip Coyle, senior adviser with the Center for Defense Information, a security policy research organization in Washington, agreed, and said developing FCS piecemeal would be a better approach. Coyle also faulted the Army for outsourcing responsibility for FCS to Boeing and SAIC, saying "this does not put the Army in the position of a good customer."
Pike said FCS is yet another example of "the lead system integrator concept being oversold." But, he added, Defense cannot hold onto people with the capability to oversee projects such as FCS "when they can make more money in the private sector."

FBI Investigates Missing GOP Money
By Philip Shenon
The New York Times
Thursday 06 March 2008
Washington - Hundreds of thousands of dollars are missing and presumed stolen from the chief fund-raising arm of House Republicans, according to party officials who described the findings of emergency internal audits.
The financial records of the group, the National Republican Congressional Committee, may also have been falsified for several years, Republican officials said. The campaign committees of several Republican lawmakers may also have been victims of a scam that is now under criminal investigation by the F.B.I.
The audits were ordered after the abrupt departure several weeks ago of Christopher J. Ward, who had been treasurer of the committee. Lawmakers said that Mr. Ward, who served a similar role for dozens of individual members of Congress and their political committees, is the focus of the F.B.I.'s criminal investigation.
The committee has acknowledged publicly that it was aware of "irregularities in our financial audit process" and that it had called in the F.B.I. in February because "these irregularities may include fraud."
But until now the committee has not acknowledged that any money was missing from its bank accounts or that the financial irregularities might extend beyond the national committee to the campaign funds of individual Republican lawmakers who also worked with Mr. Ward, a longtime party operative.
The Republican officials said they could not discuss the details of their findings on the record because of the continuing criminal investigation.
A lawyer for Mr. Ward, Ronald C. Machen of the Wilmer Hale law firm in Washington, had no comment. A spokeswoman for the F.B.I.'s Washington field office acknowledged that the bureau had opened an investigation at the request of the Republican committee.
The F.B.I. investigation comes at an especially awkward time for House Republicans, who are struggling to raise money for Congressional races in November.
Their job has been made even more difficult by the large number of Republican lawmakers - more than two dozen from the House - who have announced their retirements, and by a series of unrelated criminal and ethics investigations of other Congressional Republicans.
Mr. Ward had been treasurer of the national Republican committee since 2003. He had also been a partner in a private campaign consulting firm, Political Compliance Services, that gained notice in the 2004 presidential campaign because of its work on behalf of Swift Boat Veterans for Truth, a group that ran advertisements that criticized the military record of Senator John Kerry of Massachusetts, the Democratic presidential nominee.
Committee officials said that bookkeeping irregularities were discovered in January after the chairman of the panel's auditing committee, Representative Mike Conaway of Texas, a certified public accountant, repeatedly asked to meet with representatives of the audit firm that was supposed to be reviewing the committee's books.
"I just kept insisting that we meet with the auditors," Mr. Conaway said in an interview. "It finally came into my head, and as the circumstances unfolded, that no audit had been done."
He said that Mr. Ward had promised to set up a meeting with the auditors and scheduled the gathering in late January.
But 30 minutes before the scheduled meeting, committee officials said, Mr. Ward sent an e-mail message to colleagues announcing that, in fact, no audit had been done. The officials said the fund-raising committee had since determined that its books had not been audited since 2003 and that Mr. Ward had submitted a series of falsified audits. The committee then called in the F.B.I. It is not clear, lawmakers said, if any fees were paid to audit firms in recent years by the committee, or where that money ended up.
"This was a longtime trusted employee and there were no obvious signs that he was living beyond his means," Mr. Conaway said.
Mr. Conaway said that the many Republican lawmakers who used Mr. Ward for their campaign funds or for bookkeeping for their political action committees were now hurriedly reviewing their own books for evidence of missing money or other improprieties.
"If you were one of the members who had a relationship with him, you should go back through your records extensively to see if you were caught up," he said.
Committee officials said that at least two Republican lawmakers who were clients of Mr. Ward's had reported to the committee in recent weeks that they had also found discrepancies in their campaign accounts.
Representative Rodney Alexander, Republican of Louisiana, said he ended his ties to Mr. Ward in February after learning of the concerns at the national committee. "Until then, we hadn't seen anything to indicate there was a problem," Mr. Alexander said, adding that his bookkeepers had found no evidence of missing money or other wrongdoing.
Mr. Ward was named treasurer of the national Republican committee five years ago by Representative Thomas M. Reynolds of New York, who stepped down as the committee's chairman last year. Mr. Reynolds has found himself under attack on the campaign trail at home because of the reports of financial irregularities at the committee.
"Does Tom Reynolds ever accept responsibility for his poor leadership or does he just pass the buck?" asked John Gerken, campaign manager for Jon Powers, a Democrat who is challenging Mr. Reynolds.
Mr. Reynolds said in a statement that he and the national Republican committee were possible victims of "an elaborate scheme resulting in financial irregularities" by a "long-serving professional staff member," a reference to Mr. Ward. "At no time were there any red flags raised," the lawmaker said.
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