Northrop paper sees savings from split tanker buy

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Northrop paper sees savings from split tanker buy
 By Andrea Shalal-Esa

WASHINGTON, June 4 (Reuters) - Buying aerial refueling tankers from both Northrop Grumman Corp (NOC.N) and Boeing Co (BA.N), on a competitive basis, could offer significant long-term savings, according to a report prepared by Northrop.

Northrop said it compiled earlier analyses to answer questions posed by U.S. lawmakers about such a competitive dual procurement approach, which the Pentagon strongly opposes.

Defense Secretary Robert Gates says buying two tankers would result in higher development and logistics costs, but some lawmakers say that may be the only way to avert further protests and get new tankers into the Air Force fleet faster.

"Northrop Grumman is not advocating a dual procurement acquisition process for the tanker replacement program," said Northrop spokesman Randy Belote, noting his company had won a $35 billion Air Force contract for 179 tankers in early 2008, and expected to win again.

But he said the report showed that buying tankers from both companies at a rate of about 24 a year for $5 billion could pay off in the longer term, while replacing the aging current tankers at least seven years faster. The current plan calls for procurement of about 15 tankers a year for $3 billion.

"We believe the report stands on its own merit and its conclusions have not been disputed," Belote said.

Gates has said buying two tankers would cost $7 billion to $14 billion more than awarding a single contract, but other officials have since the figure was closer to $7 billion.

The Pentagon is due to submit soon a detailed assessment of the costs associated with buying two tankers, under a deal worked out with Senator Daniel Inouye, head of the Senate Appropriations Committee and its defense subcommittee.

The Northrop paper said other factors would offset higher near-term acquisition and development costs, including savings generated by retiring the older planes sooner, especially since KC-135 depot costs were slated to rise substantially in 2018.

The Air Force currently plans to replace 415 KC-135s, which are nearly 50 years old on average, through three separate procurements, but that would result in three sets of separate design, development and procurement costs, Northrop said.

Using dual procurement would replace the first two processes, saving money by reducing the number of developmental planes and allowing better risk mitigation, the report said.

The Air Force's current plan could eliminate competition for the second and third procurements, since the losing bidder in the first competition was likely to exit the market.

Sole source programs also usually suffered from high cost growth, it said, citing research by former chief Pentagon arms buyer Jacques Gansler, who last year reported that 10 other sole-source aircraft programs average 46 percent cost growth.

Assuming the purchase of 360 tankers at $175 million each for a total program cost of $63 billion, a sole source approach could result in cost growth of $29 billion.

Seven aircraft bought under competitive programs showed cost reductions of 16 percent on average, Gansler found. In the tanker case, that could amount to savings of $10 billion, the report said, for a total higher cost associated with the sole source approach of $39 billion, Northrop said..

Finally, the report said the Air Force's plan to have three separate procurements would also result in two logistics and training infrastructures, just like a dual award, but buying two tankers would allow the Air Force to retire its costlier KC-135 logistics and training programs sooner. (Reporting by Andrea Shalal-Esa; Editing Bernard Orr)

Source
http://www.reuters.com/article/marketsNews/idUSN0441993120090605