Own the Sky
The American military is the strongest and most agile on the planet for one reason - the refueling tanker. But replacing the 50-year-old airplane has turned into a decade-long saga, one that has cost a CEO his job, sent two officials to jail, and wasted millions of dollars.
Modern wars aren’t fought just with guns, tanks, missiles, and bombs. To fight wars today, the US military depends on a 27-foot telescopic rod that dispenses a torrent of jet fuel at the rate of 1,000 gallons a minute. Without this metal boom and the airplane that tows it across the sky, the American military machine doesn’t move beyond our own shores.
When the first American forces deployed to Afghanistan in 2001, they were carried in the bellies of cavernous transport planes that would never have completed the journey from base to battlefield without refueling along the way. When stealth aircraft launched a preemptive strike on the purported hideout of Iraqi president Saddam Hussein in 2003, a refueling tanker kept them from plummeting into the ocean. These essential rendezvous usually happen 25,000 feet above the earth.
The receiving plane approaches the tanker from behind. When the two planes are nearly touching, a boom operator lying on his belly in the tanker’s tail, peering out a glass window like a 1940s bombardier, guides his instrument into a fuel port near the nose of the thirsty plane and starts pumping. A tanker can top off the 35,000-gallon tanks of the gargantuan C-17 cargo plane in half an hour and smaller planes in less than five minutes. At that rate, it could refuel the average automobile in less than two seconds.
Take away the tankers and you neuter the US armed forces. As the attendants of these midair pit stops are fond of reminding their customers, “You can’t kick ass without tanker gas.”
Yet just how long the tankers can keep kicking ass is a question. The workhorses of the refueling fleet are 50-year-old airplanes that went into service when Dwight Eisenhower occupied the White House. To keep these 400 or so old planes flying—and from falling apart—they’ve been fitted with new engines, new electronic guidance systems, even new wings. But the planes otherwise are ancient.
Today’s tanker pilots are flying airplanes first flown by their grandfathers. These planes won’t all be replaced until the middle of this century, at which point they’ll be 80 years old. The pilots who will fly the planes then haven’t been born yet.
For nearly a decade, the military’s leadership and its overseers in Congress have tried and failed to replace the tankers with newer models. With any luck, they’ll achieve the mission sometime in the coming weeks. By late December, the Air Force has promised to award a contract for new tankers, potentially worth up to $40 billion, to one of two companies—Boeing, the largest aircraft manufacturer in the United States, or the European Aeronautic Defense and Space Company (EADS), which owns Airbus, the largest plane builder in Europe.
If the Air Force meets its deadline, the award will bring to a close the most controversial, politically contentious, and personally ruinous military contract in modern history. The damage this deal has wrought, measured in wasted taxpayer dollars and wasted lives, includes two people who have gone to prison; one CEO who has resigned in disgrace; two members of Congress who have died unable to close the deal and another who has been indelibly tainted by scandal; the destroyed credibility of some senior military leaders; and, in the end, a US military that is still being moved around the world by an airplane that will, sooner rather than later, be unfit to fly.
This is not the story of how the US government bought an airplane but of how it has failed to buy an airplane. And of how a generation of leaders has abrogated the wise stewardship of the public’s wealth in favor of narrower institutional concerns and petty grievances. It’s a story of how business gets done in Washington.
ACT I: THE PLANES ARE FALLING
On January 13, 1999, a KC-135 Stratotanker with the Washington Air National Guard was on its way back to Geilenkirchen Air Base in Germany after a refueling mission. While the tanker was approaching the runway, its horizontal stabilizer, a wing-like structure attached to the tail section, spontaneously locked into an extreme “nose-up” position. The tanker abruptly pitched and became almost perpendicular to the ground. Then it stalled and crashed short of the runway. All four crew members died.
The Air Force grounded 350 tankers and inspected their stabilizers. Investigators never determined the cause of the malfunction, but for the Air Force brass the crash was yet another reason to replace the aging KC-135 fleet. The stabilizer was so antiquated that it was no longer commercially manufactured. Air Force crews had to reverse-engineer the design and then build new ones out of spare parts.
And there were other spectacular accidents. Four months after the crash, a tanker blew apart during a routine cabin-pressure test. Photos of the demolished plane ran in the military trade press.
By 1999, the typical tune-up cost $3.5 million to $4 million a plane, a fourfold increase from a decade earlier. On average, a tanker spent 400 days at a stretch in the maintenance depot for repairs, almost three times as long as in the 1980s. Crews were also exerting double the number of normal work hours to keep the planes airworthy. Tinker Air Force Base in Oklahoma, the primary depot for the KC-135s, had to turn tankers away because there was no place to put them. “They are stacked up like cordwood,” one official told the Air Force Times.
The tankers were also coming apart. Senior Air Force leaders visiting the maintenance crews watched as workers peeled the skin layers apart and powder fell out from the middle. Corrosion and fatigue were overtaking the planes.
“We were in a race between the cost of operating the aircraft and trying to find money to replace this stuff,” says Whitten Peters, then the Secretary of the Air Force. “If this were your car, you’d trade it in.”
But the Air Force faced a dilemma. As badly as the service wanted new tankers, the new F-22 stealth fighter topped its wish list. “The [Air Force] chief of staff came in to see the ranking member eight times in two years,” says one former staffer on the House Armed Services Committee. “Every time, the message was ‘F-22s.’ It was the Air Force’s end-all, be-all.”
Every new and expensive program—such as replacing the tankers—threatened to take money away from the fighters. But salvation was on the way, in the guise of a generous uncle.
Uncle Ted’s Idea
Ted Stevens, the senior senator from Alaska, had long been a booster of the Boeing Company. Not for reasons of constituency—the country’s largest aircraft manufacturer built most of its planes in Washington state, where it had an unflagging supporter in Representative Norm Dicks, whose beneficence toward his state’s largest private employer had earned him the title “the congressman from Boeing.”
But for Stevens, whose fellow Alaskans dubbed him Uncle Ted in tribute to his largesse with the pork barrel, the connection to Boeing—and aviation—was more personal.
Stevens joined the Army Air Corps a year out of high school, in 1943, and flew cargo runs behind Japanese lines in China and Burma. Decades later, when he became chairman of the Senate’s powerful Appropriations Committee, he grew incensed at the deterioration of the Air Force’s tanker fleet. According to one former service official, Stevens thought it a disgrace and a danger to those in uniform to ask them to fly planes coming apart at the seams. In the late 1990s, years before the Air Force brass made plans to replace the fleet, Stevens suggested a fast way to do it. Instead of buying the planes, the Air Force should lease them.
A formal competition could take two years. The Air Force would probably have to wait another three before the first planes arrived. Stevens thought it smarter to skip the first part of the process and lease existing commercial aircraft modified for military duty. For the cash-strapped Air Force, the math was obvious. Leasing tankers would cost more in the long run, but the up-front costs would be smaller and the payments would be spread out over time.
If anyone could grease the skids for a multibillion-dollar leasing deal—early estimates put the price around $20 billion—it was the man who held the government’s purse strings. Stevens’s staff on the Appropriations Committee wrote a draft lease. How it made its way into Boeing’s hands remains unclear. But in February 2001, Boeing approached the Air Force with an unsolicited offer to lease three dozen 767s—midsize wide-body jets put into service in 1982—for $124 million each.
That same month, Air Force officials said buying the planes would cost far less—about $52 million per tanker. That didn’t account for maintenance costs, but the lease, which would be run through a third party, clearly was the more expensive option.
In peacetime, replacing the tankers wasn’t a top priority. But Air Force officials warned that if the country went to war and had to deploy forces to a faraway battlefield, the strain would push the tankers to the breaking point. On the morning of September 11, 2001, hijackers flew a pair of Boeing 767s into the World Trade Center towers. Two more Boeing jets crashed at the Pentagon and in Pennsylvania.
America was at war, and the tankers moved to the front lines.
A Run Over the Hill
Air Force officials had never seriously considered any company other than Boeing to replace the tanker fleet. The Defense Department usually conducts long and high-stakes competitions for major weapons systems, pitting companies against one another to wring out the lowest price and the greatest innovation. But the Air Force wanted the planes quickly, and Boeing, which had built the KC-135s, needed a lifeline.
The 9/11 attacks crushed the market for commercial planes. The company laid off workers in its manufacturing plants. By the time airlines and foreign governments started buying planes again, they’d want the next generation of aircraft, not the older 767. Boeing needed a customer now. The Air Force was the only one with an open wallet.
Proponents of the lease deal in the Air Force, along with Boeing’s backers in Congress, made no pretense about using taxpayer money for a corporate bailout. In the throes of a national crisis and faced with the threat of losing a major military supplier, it seemed like an uncontroversial and even advisable move. The Air Force would get its planes. Members of Congress would score a win for their constituencies and American industry. And Boeing would be saved. The three points in the “iron triangle” of the defense business were all satisfied.
But the deal faced several opponents. Chief among them was Arizona senator John McCain, a former Navy fighter pilot who was constantly on the hunt for what he saw as pork-barrel giveaways. Because he was a member of the Senate Armed Services Committee, any leasing deal would come up for his stamp of approval.
To win support, the Air Force mounted a campaign that avoided a direct fight with McCain. Heading the charge was the service’s most senior career acquisition official, Darleen Druyun. In the small world of federal procurement, Druyun was notorious. Known inside the Pentagon as the “dragon lady,” she was a shrewd and stone-tough steward of the Air Force’s multibillion-dollar budget. She was also a political climber who “would rather burn you than be your friend,” says one former Hill staffer.
Five weeks after the 9/11 attacks, Druyun ordered a general and a colonel on her staff to keep negotiations with Boeing closely held. They were to discuss the deal only with company officials and Stevens’s chief of staff on the Appropriations Committee.
In October, Patty Murray, a Democratic senator from Washington state and a stalwart Boeing supporter, joined the company’s CEO, Phil Condit, in pitching the lease to members of the Senate Appropriations Committee and the majority leader, Tom Daschle.
Meanwhile, General John Jumper, the new Air Force chief of staff, tried to win over Kent Conrad, a North Dakotan who chaired the Senate Budget Committee and worried that federal regulations might prohibit the Air Force’s plans. Officials wanted to pay for the tankers not out of the service’s budget for planes but with funds marked for operations and maintenance. Those were separate pots, and in DC the color of money matters as much as the money itself. The Air Force was using maintenance funds for the lease because it didn’t have enough cash to buy the planes outright. That made some lawmakers queasy.
Jumper met with Conrad three times in October and stressed the desperate condition of the tanker fleet. The price was high, but the lease offered a solution to a dilemma. Eventually, Conrad agreed. But other members were still balking, unwilling to relinquish their authority to allocate the defense budget on an annual basis. That was their strongest advantage over the military.
The Virgin Birth
In November, Stevens held a fundraiser in Seattle, the city where Boeing was founded in 1916 and kept its headquarters for 85 years. Thirty-one Boeing executives gave $21,900 in campaign contributions. This was new money: All but one of them hadn’t given a penny to Stevens in the previous ten years.
The next month, Stevens slid a line into the mammoth Defense spending bill during a closed session after the bill had passed both chambers. The legislation authorized the Air Force to lease the tankers and specified that the service should procure the Boeing 767.
Stevens had pulled off a maneuver known as the “virgin birth.” In Washington, every dollar the government spends comes from the union of two parents: The authorizing committees in Congress decide what to buy, and the appropriators decide how much to spend on it. Stevens circumvented that process, planting a seed in the spending bill as if by divine intervention.
By dictating to the Air Force what planes it should buy, Stevens was acting like an authorizer. He’d crossed into the territory of the Armed Services Committee—worse, he’d crossed John McCain.
The anti-pork crusader suited up for battle. Decrying Stevens’s tactics, he publicly cited a letter from the Office of Management and Budget, whose director was skeptical of the lease, putting the total cost at $26 billion over ten years. That was $6 billion more than the Air Force, Boeing, and congressional proponents had claimed. The Air Force also wanted more tankers now—100 acquired through a combination lease/purchase deal. McCain called the plan an act of “gross negligence” and a giveaway to Boeing.
Just two days later, Stevens—who was known to wear an Incredible Hulk tie when he was battling in the Senate—took to the chamber floor in shocked indignation. “This is not a last-minute bailout hidden from public view,” he said. “It takes advantage of opportunities to be had.”
Stevens, the brash World War II pilot, had outmaneuvered McCain, the cocky Navy fighter pilot of the Vietnam era. But for McCain, it was a minor setback. For a presidential hopeful and a self-styled antiestablishment maverick, the tanker deal was a gift. The real fight had just begun—and McCain, who would make defeating the lease a personal cause, was about to face his fiercest adversary.
“I Will Not Yield to You”
Well before he went to work for the influential military contractor Northrop Grumman, James Roche had considered McCain a friend. A fellow Navy man, Roche was a onetime commander of a guided-missile destroyer. But in the tanker war, Roche and McCain were bitter enemies.
By the time of the lease deal, Roche had returned to government as Secretary of the Air Force. He was passionately committed to replacing the tanker fleet, believing, like Stevens, that asking “our kids” to fly in dangerous airplanes was unconscionable. In his role as Secretary, he cast himself as the protective father. McCain was trying to harm his charges.
The battles between McCain and Roche were seen publicly as a struggle between Congress and the executive branch. But what has never been reported is the real root of their conflict, at least from Roche’s point of view.
In May 1987, Roche’s son, Sean, died at age 22. Roche was still recovering from that shock three weeks later when he visited the Senate Armed Services Committee’s office. As Roche tells the story, McCain approached him and asked, “Jimmy, how’s it going?”
“Not so good, John,” Roche said. “We just lost our only son.” Roche recalls that without looking at him, McCain said, “Life’s unfair,” and then walked away.
“While used to the rough and tumble of Washington, I was shattered by this unmanly reaction by my supposed friend,” Roche says. During an interview at his home in Annapolis, tears fall from Roche’s eyes and his voice chokes as he recalls the exchange. More than a decade later, when it came time to defend the tanker deal from McCain’s assault, Roche says he vowed, “I will not yield to you.”
As Roche explains, “He tried to intimidate me from doing what I believed was right for our Air Force ‘kids.’ I was willing to go through hell rather than trade off their safety for John’s ambition.”
McCain’s position was, and still is, that the best way to get new tankers is through a public competition. Roche didn’t object to that in principle, but in his view there was no viable alternative to the Boeing aircraft because it was the only company that had an operational refueling boom.
But some lawmakers worried that without competition, the government would end up overpaying for the tankers. In February 2002, under political pressure, the Air Force asked EADS—the Airbus parent and one of the world’s top aircraft makers—what kind of tanker it might offer to lease. But because EADS hadn’t developed a refueling boom of its own, the Air Force didn’t see it as a viable competitor. There was also no great appetite in Congress for handing billions of US tax dollars to a European company, particularly because the lease was intended to help Boeing recover from its lost business after the 9/11 attacks.
Meanwhile, Darleen Druyun, the “dragon lady” of the Air Force, began a quiet campaign to secure funding for the lease. Running what one Boeing employee privately called a “covert operation,” Druyun moved to put another rider onto a pending supplemental-spending bill to fund the global war on terrorism. The rider would make clear that the Air Force could pay for the lease using operations and maintenance funds. Air Force officials had managed to link the tanker deal to security at home and abroad. Behind the scenes, however, their strategy was less skillful, and it began to trap them.
Killing the Deal
In September 2002, Ralph Crosby, a veteran military contracting executive, became the CEO of EADS’s North American division. On hearing the news, Roche sent a menacing-sounding e-mail to his press officer: “Well, well. We will have fun with Airbus.”
Roche and Crosby had been rivals since their days at Northrop Grumman, where Crosby had run its aerospace division. His new employer, EADS, saw Boeing as a monopolistic force in the US aircraft market. The European company had dreams of North American expansion.
Eight months after Crosby came aboard, Michael Wynne, a senior Pentagon official, told Roche that he planned to meet Crosby for lunch and ask what an EADS tanker would cost. Roche was flabbergasted.
“Mike, you must be out of your mind!” Roche wrote in an e-mail. “Crosby has lots of baggage, as does Airbus. We won’t be happy about your doing this.”
Wynne was concerned about rules against so-called “sole-source contracting.” Roche was more worried about the politics of meeting with a European company. The United States had just invaded Iraq, and the French government’s lack of support had propelled members of Congress into a jingoistic furor. In Capitol cafeterias, French fries were replaced on the menu with “freedom fries.” EADS’s biggest aircraft-assembly plant, where it would likely build a tanker, was in Toulouse.
“Hello?” Roche wrote, implying a deafness on Wynne’s part. “Within minutes of the invite, Crosby most likely used your call to butter his personal croissant in Paris [with officials in the President’s office]. Be careful!”
What emerges from Roche’s colorful e-mails is a different portrait than that of the courageous public servant out to “protect the kids.” He looks more like a grudge-holding executive with an ax to grind. In one e-mail exchange with Druyun, who had just “read with disgust” an article on EADS and Crosby, Roche wrote, “I had hoped you would have stayed and tortured him slowly over the next few years until EADS got rid of him!”
McCain eventually got hold of these and many other e-mails, including those from Boeing employees, zeroing in on Roche as the official most responsible for the ill-advised tanker deal. “Secretary Roche’s e-mails,” McCain said in a Senate speech, “suggest that he is indeed a man who allows his personal animus to stifle competition.”
Roche says he worried that Crosby would try to convince Wynne that EADS was ready to compete when it really wasn’t, because it didn’t have its own boom. Nearly a year and a half had passed since Stevens’s “virgin birth” maneuver. Roche thought time was running out to complete the lease deal.
But while Roche was pushing against the system, Druyun was breaking the law. On October 17, 2002, while negotiating the price of the tanker lease, she met with Boeing’s chief financial officer and discussed taking a senior executive job at the company—a textbook violation of conflict-of-interest laws.
After the meeting, the Boeing executive, Michael Sears, wrote an e-mail to the company’s office of the chairman: “Had a ‘nonmeeting’ yesterday. Good reception to job, location, salary.” The job was a position in Boeing’s missile-systems unit; the salary was $250,000. Druyun went to Boeing in January 2003. The Project on Government Oversight, a watchdog group, called it “one of the most egregious examples in recent memory of the revolving door between the federal government and defense contractors.”
The “nonmeeting” wouldn’t be uncovered for several months, but as it turned out, that one 30-minute conversation killed the lease deal.
“We Can’t Fight This”
Air Force officials continued to plead their case. In 2003, a group of officers loaded pieces of a corroded tanker wing into the trunk of a car and drove it up to Capitol Hill to show lawmakers. But the tide was turning against the lease. In September, the Government Accountability Office, Congress’s auditing arm, found that the total cost could be $6 billion more than the service had said and that the terms might violate federal law.
Still, the lease proponents in Congress moved to slide money for the tankers into a high-priority $87-billion spending bill to pay for the war in Iraq and Afghanistan.
And then the bottom fell out.
Not long after Druyun went to work at Boeing, the company began looking into the backgrounds of former government employees it had hired. In the course of the investigation, Boeing discovered e-mails detailing the meeting between Druyun and Sears. The company fired them on November 24. A week later, CEO Phil Condit resigned.
Five months later, Druyun pleaded guilty to conspiracy and admitted she had increased the price the Air Force would pay for the tankers as a “parting gift to Boeing.” She also admitted to favoring Boeing in other negotiations in consideration of future employment for her daughter and son-in-law. Druyun received a nine-month sentence in federal prison. Sears, who pleaded guilty later, got four months.
As soon as the news about Druyun and Sears broke, members of Congress who had previously supported the lease began to back away. Along the way, some lawmakers who were undecided “smelled smoke” on the deal, says one former Hill staffer, but now they saw the fire and ran for cover.
Roche picked up the phone and called Secretary of Defense Donald Rumsfeld. “It’s over,” Roche said. “We can’t fight this.”
In May 2004, Rumsfeld officially “deferred” a decision on the tanker deal, in part based on recommendations from the Defense Science Board, a group of outside advisers who concluded that the corrosion problem in the tankers could be managed and that it might not be as expensive as some had thought to maintain the existing fleet.
Four months later, the Air Force grounded 29 more tankers. The pylons that hold the engines to the wings had corroded and needed significant repairs. Tanker crews had a temporary fix to bond metal to the pylon, but it would last only five years and cost $400,000 per plane.
Congress officially killed the lease in October 2004. Roche resigned three months later. Shortly after he left, the Pentagon inspector general cited Roche for two violations of military ethics rules, stemming from another ill-advised e-mail. In that message, Roche implied that he would help get a job for the brother of a White House budget official and friend if she would intercede on behalf of the tanker deal. “Give tankers now,” Roche wrote after forwarding her brother’s résumé to a contact at Northrop Grumman, Roche’s old employer. “(Oops. Did I say that?)”
In the first round of the tanker war, McCain had vanquished Roche. But in the senior reaches of the Air Force, some wondered if McCain’s real motivation had been to embarrass the service itself. Officials took note of his Navy pedigree—McCain was a pilot, and his father and grandfather were famous admirals—and speculated that McCain was taking sides in a military rivalry. “McCain is not a big fan of the Air Force,” says Whitten Peters, the former Secretary. “In fact, he hates the Air Force.”
ACT II: TWO COMPANIES, ONE PLANE
The leasing option might have been dead, but the Air Force tankers were only getting older. John McCain’s crusade had ensured that this time, companies would compete on a new tanker contract. For Ron Sugar, the CEO of Northrop Grumman, the question was whether his company should be one of them.
Sugar spent part of his Labor Day weekend in September 2005 reviewing Air Force documents that sketched out what kind of tanker the service wanted. The Air Force hadn’t yet released a formal request for tanker proposals, but Sugar knew it was coming and could pose a strategic turning point for the company.
Sugar’s predecessor had grown Northrop by gobbling up smaller firms in specialty and niche markets. Sugar continued that plan, but Northrop remained a “tier-two” contractor in Washington, good at comparatively smaller jobs or as the supporting player to larger companies. If Northrop was going to rise to tier-one status, it needed a huge win. Surveying the landscape of potential contracts, he saw that the tanker deal stood almost alone.
But Northrop wasn’t known for building airplanes. Its talent was in putting complex electronics systems inside other companies’ airplanes. That’s what it had done with Boeing on the B-2 stealth bomber as well as a radar-and-surveillance aircraft based on the Boeing 707. If Northrop was going to win the tanker contract, it first needed to find an airplane.
An Airbus jet was the leading candidate for several reasons. EADS and Northrop had a connection in Ralph Crosby, James Roche’s old nemesis. Crosby had worked at Northrop for two decades and had run its Washington, DC, office. Sugar had also said publicly that EADS’s Airbus A330 could topple Boeing’s 767 in a head-to-head competition. EADS also had invested more than $100 million developing the all-important boom, the lack of which had kept it out of the lease race.
EADS wanted to dethrone Boeing in the US commercial-aircraft market. The tanker deal would be its opening salvo. But politically, EADS still wasn’t equipped to go it alone on a high-profile American contract—despite its North American division, it was still viewed as a European aircraft maker.
Northrop needed a plane. EADS needed an American partner. Sugar signed off on the union and headed out to survey damage on the Gulf Coast, where days earlier Hurricane Katrina had torn through Northrop’s shipyards.
An American partner wasn’t enough, though, for EADS to beat Boeing on its home turf. The company would have to build its plane—or at least a major portion of it—on US soil.
In 2005, EADS launched a nationwide site search for a new manufacturing plant. The company fielded queries from 34 locales, including Boeing territory in Washington state and Kansas. The finalists all hailed from the same region—Florida, Mississippi, South Carolina, and Alabama. According to analysts who watched the process, that was no accident. EADS took advantage of Boeing’s high labor costs and its contentious relationship with unions. Says one analyst: “They wanted to beat Boeing by becoming a low-cost, non-union builder of planes. That naturally leads you to the Deep South.”
Ultimately, EADS decided to build a $600-million manufacturing plant in Mobile, where it pledged to build more than half of the tanker and employ more than a thousand workers.
Alabama government officials and its congressional delegation, now firmly rooted in the Republican Party, took an intense interest in the plant’s future. From then on, EADS would be publicly associated with the Republican Party. Boeing, with its major presence in Washington state, had a Democratic tinge. The two companies were poised not just for a corporate war but for a partisan one as well.
The Rules of the Game
Getting Northrop and EADS to pair up was half the battle. The Air Force also had to make the deal worth their while. Northrop insisted that the service use a “best value” procurement, which meant the bids wouldn’t be judged solely on lowest price. The Air Force’s evaluation team would apply a more subjective standard and evaluate each plane on its merits. As a matter of policy, the Defense Department was encouraged to use best-value judgments, largely as a way of ensuring the most bang for the government’s buck. But the approach also was essential for Northrop and EADS because they had the larger and presumably more expensive airplane. The team wanted extra consideration for the A330’s unique attributes, such as greater fuel and cargo capacity. If the Air Force judged the proposals on price alone, Boeing likely would win.
McCain, along with Alabama’s senior senator, Richard Shelby, also pushed for the best-value strategy. In late November 2006, McCain heard that the Air Force evaluation team had met and not chosen that path; the deal was shaping up, from McCain’s perspective, as another giveaway to Boeing. Executives at Northrop were prepared to walk away from the competition if it came down to a price shootout. McCain intervened, sending a letter to Secretary of Defense nominee Robert Gates that, in so many polite words, warned him not to head down this road.
The Pentagon listened. When the Air Force’s proposal request hit the streets a month later, officials publicly announced their commitment to a “capability-based, best-value approach” and a “full and open competition” that didn’t rely solely on price.
Crash and Burn
Boeing and Northrop submitted their bids in April 2007. More than 150 experts examined their proposals. The Air Force intended to buy 179 new planes as a first set to replace the KC-135 tankers.
The February 2008 news that EADS and Northrop Grumman had won stunned most of the aviation industry—the pair hadn’t been considered the clear favorites. According to an EADS spokesman, a roomful of executives fell silent for several seconds on hearing of their victory. Though hopeful, even they were surprised by the announcement. But as soon as employees started celebrating, they started worrying. The early reaction out of Boeing was telling: The company wasn’t going down without another, even bigger fight.
Under procurement rules, any company can protest the government’s contract decision. Much like a court appeal, it takes its case to the Government Accountability Office, where a team of lawyers judges whether the government followed its own rules. The more technical requirements a contract has—and the tanker bid had hundreds—the more opportunities there are to find fault with the government’s evaluation.
Boeing filed its protest 11 days after the award announcement, alleging numerous instances in which the Air Force had unfairly and inappropriately evaluated its bid. The company hadn’t acted lightly. According to a spokesman, it was the first time in eight years that Boeing had protested a contract loss. The Air Force thought Northrop beat Boeing on overall value, but both bidders had turned in plans that were essentially the same price and that met the service’s demands; whichever tanker the Air Force chose would do the job, just differently.
But the GAO condemned the Air Force evaluators, who auditors found had “conducted misleading and unequal discussions with Boeing.” Air Force officials told the company it had met one of the key tanker requirements, but later they changed their judgment and failed to alert Boeing. Yet officials continued having discussions with Northrop about the same requirement. The GAO also said the Air Force had broken the rules of the scoring process by giving Northrop extra credit for exceeding certain minimum requirements. That, of course, was the strategy on which Northrop had based its proposal: The Airbus plane was bigger, could carry more fuel, and could double as a cargo transporter.
After reading behind-the-scenes accounts of the judging, some analysts concluded that the Air Force had sided with Northrop and EADS to avoid the wrath of John McCain. The evaluators were seasoned procurement professionals. And yet the GAO found basic mistakes as well as what looked like outright favoritism. People in such powerful positions weren’t supposed to make rookie missteps. The Air Force’s decision looked politically motivated.
McCain had long been an advocate for full and even competition. But in March 2008, as he headed toward the Republican presidential nomination, news broke that top advisers to his campaign had lobbied for EADS, “taking sides,” as the Associated Press put it, “in a bidding fight that McCain has tried to referee for more than five years.”
Two advisers had stopped lobbying for the aircraft company when they joined McCain’s campaign a year earlier. But a third, former Texas congressman Tom Loeffler, lobbied for EADS while serving as McCain’s finance chairman, his top fundraiser. EADS hired Loeffler’s company to work on its behalf a few months after McCain sent the letter to Gates urging him to judge the acquisition on best value, the path that seemed to favor EADS. “They never lobbied [McCain] related to the issues,” a campaign spokeswoman said at the time, noting that the senator sent the letter before EADS hired Loeffler.
Such technical explanations put a dent in the armor of the taxpayer crusader. “The aesthetics are not good, especially since he is an advocate of reform and transparency,” Richard Aboulafia, an analyst with the Teal Group, who had closely followed the tanker saga, said at the time.
The GAO urged the Air Force to reevaluate the tanker proposals. But the 2008 presidential elections were only five months away. After an intense period of negotiations, in which it looked as though the Air Force might be able to re-award the contract, it was clear neither Boeing nor Northrop would be completely satisfied with the outcome. Defense Secretary Gates saw that the clock was winding down on the Bush administration. He decided the Air Force couldn’t settle the deal before the next President took office. “Over the past seven years, the process has become enormously complex and emotional,” Gates said in September. The Pentagon and the companies needed a “cooling-off period,” he said, so the next administration could figure out what to do.
Gates didn’t know that in a few months, Barack Obama—who hadn’t even been born when the first tankers were built—would ask him to stay at the Pentagon and that the tanker decision would remain Gates’s problem. The Secretary later joked that he had punted the ball only to find himself catching it.
ACT III: DAMAGES
After Obama took office, there was scarcely an official left in the Pentagon or the Air Force who’d worked on the tainted deal. At Boeing, EADS, and Northrop Grumman, the executives calling the shots had moved on. New administration officials who would be deciding on the tanker fleet weren’t there when the Air Force decided to buy new planes. To inherit this decision would mean taking charge of a time bomb.
In early 2009, the easiest thing to do was cut the fuse. Except the Air Force still needed tankers. It had been eight years since Ted Stevens’s back-door funding maneuver, and there wasn’t a single new plane in the fleet. Meanwhile, the United States was still fighting two wars on the other side of the planet.
The system was broken. The Air Force had seen what came with the best intentions of best-value purchasing. Amid charges of political favoritism and professional ineptitude, officials’ only choice was to make the next contract protest-proof. To do that, they stripped the evaluation of any subjective judgments. The fewer gray areas in the contract, the fewer pitfalls.
In late 2009, the Air Force released its draft request for proposals: As long as each bidder’s plane met every one of 372 technical requirements, the company with the lowest price won. It was precisely what EADS and Northrop had wanted to avoid—a price shootout.
In procurement parlance, the term was “lowest price, technically acceptable.” At Northrop Grumman, executives called it “a race to the bottom,” believing that cost was the predominant evaluation factor over capability. The Air Force’s approach didn’t appear to favor the larger Airbus plane. Northrop thought the Air Force would end up with a less capable and less dynamic tanker. The request for proposals “clearly favors Boeing” and its smaller plane, said Wes Bush, the new CEO at Northrop.
To sidestep another costly and protracted fight, some had hoped the Air Force might strike a politically expedient compromise: buy some tankers from EADS/Northrop and some from Boeing. The biggest backer of the seemingly Solomonic solution was John Murtha, the Pennsylvania Democrat who chaired the influential Defense Appropriations Subcommittee in the House, himself a master of the pork barrel.
In late January 2010, Murtha had routine surgery to remove his gallbladder. A week later, he was in intensive care suffering from complications. Murtha died on February 8, and with him went any hope of a compromise.
Then, in a twist of fate that sent chills through the boardrooms at EADS and Northrop, Murtha was replaced as committee chairman by a man presumed hostile to their team: Norm Dicks, the “congressman from Boeing.” A month later, Northrop officially bowed out of the competition.
Eleven years after the KC-135 crash in Germany underscored the importance of fixing this problem quickly, the Air Force was back where it had started—with no viable alternative to buying the planes from Boeing, and probably a more expensive plane at that. With Northrop out of the race, Boeing was theoretically free to raise its price. Whereas once a full competition had seemed like a nice idea to the Air Force, now it was essential.
Compete or Perish
In a joint news conference with President Obama on March 30 of this year, French president Nicolas Sarkozy waded into the deliberations. EADS was willing to bid, he said, only if the competition was “free, fair, and transparent.” The nearly decade-long tanker ordeal now threatened to spark an international row.
Obama replied that he wouldn’t “meddle” in the process. But the next day, Secretary Gates stepped in, granting EADS a 60-day extension to recover from losing Northrop, revise its proposal, and submit a new bid. The Pentagon was unwilling to move forward without competition. A Pentagon spokesman insisted, with nearly a decade of evidence to the contrary, “Politics are not part of this process. Never have been, never will be.”
Boeing’s friends in Congress were outraged. Washington-state Democratic senator Patty Murray called Gates’s offer “completely unacceptable.” The state’s junior senator, Maria Cantwell, complained that there was “no reason” to give EADS more time because it had already submitted a lengthy proposal with Northrop. For its part, the Alabama delegation was delighted by the news. Republican senator Richard Shelby called it “the right decision.”
But would EADS see it that way? The company wanted high-level assurances that if it competed, it wouldn’t get blindsided by political forces.
Fortunately for the company, it had just hired a Washington ace. In November 2009, Sean O’Keefe, a seasoned government insider and onetime acolyte of Ted Stevens, became CEO of EADS’s North American division. O’Keefe had run NASA during the Bush administration and was the number-two official at the Office of Management and Budget. He had begun his career in the Pentagon as a budget analyst and later was Stevens’s staff director on the Senate Defense Committee. He’d also been comptroller and chief financial officer of the Defense Department and acting Secretary of the Navy under President George H.W. Bush. One could scarcely find a chief executive who knew the complex relationships of the “iron triangle” so thoroughly.
O’Keefe ran the traps in the Pentagon, meeting with the brass to determine whether EADS would get a fair shake if it bid on its own, without its American partner.
In the end, the decision to compete was as much political as it was practical. Tankers weren’t the ultimate prize for EADS. The company wanted to erode Boeing’s dominant position in the US aviation market. This wasn’t a fight for money; it was a struggle for the future of a business. If EADS didn’t charge forward, it would cede the market to Boeing on the most crucial battlefield.
In July of this year, when bids were due, Boeing and EADS submitted their written proposals to an office at Wright-Patterson Air Force Base in Ohio. Each ran more than 8,000 pages. EADS’s showed up in a private airplane and stood almost four feet tall. The company also brought a backup copy by truck.
Things being what they are, the tanker story couldn’t have come to a close without one more complication, and this time it bordered on farce. Just eight days before the competition ended, a Ukrainian airplane manufacturer, Antonov, announced it was making a bid along with U.S. Aerospace, a tiny American company with few obvious qualifications for building billions of dollars’ worth of Air Force planes. Publicly, the group suggested as its tanker model an airplane that didn’t currently exist in the Antonov fleet. Its proposal showed up at Wright-Patterson via messenger, in an envelope.
The courier also arrived late. Air Force officials received the proposal at 2:05 pm, five minutes after deadline. Antonov and U.S. Aerospace were disqualified. The companies said that guards at the entrance to Wright-Patterson had delayed the messenger and then given him wrong directions to the office. They alleged a Cold War conspiracy: The US military was desperate to keep an ex-Soviet satellite out of the race, so it literally put up roadblocks in Antonov’s path. The Government Accountably Office found that the allegations were baseless.
Throughout this past summer, as federal officials convened behind closed doors to pore over 16,000 pages of documents, Boeing and EADS launched a media war. In political publications across Washington, they placed dueling full-page ads touting their respective tanker proposals and trashing the competition’s. Their essential themes were the same: Our plane is the best for the job, and the other side is misleading you about what theirs can do. Rarely in Washington does a company run such extensive high-priced advertising for a military contract, much less engage in such mudslinging. The fact that Boeing and EADS placed the ads in publications read mostly by members of Congress and their staffs leaves little doubt about who the rivals think is calling the shots; the ads ran nearly daily in publications such as Politico, the Hill, Roll Call, and National Journal. Both sides are also laying the groundwork for another campaign. Whoever wins the tanker contract, most analysts consider it a certainty that the loser will protest.
On August 9, former senator Ted Stevens finished lunch with his longtime friend and fishing buddy, Sean O’Keefe, at a lodge in the remote wilderness of southwestern Alaska. The two men, their six companions, and a pilot climbed aboard a red-and-white DeHavilland float plane and headed for a salmon fishing camp.
Fifteen minutes later, while flying through thick clouds and rain, the plane crashed into a mountainside, killing Stevens and four others. O’Keefe and his teenage son were among the four survivors. The float plane, which could land on water and on land, had gone into service in 1957, the same year as the first Air Force tankers. A local radio personality who’d flown in the aircraft a month earlier told reporters, “The plane is old, but it was meticulously maintained”—a line that echoed what Air Force officials have been saying about the KC-135 for years.
In obituaries of the longest-serving Republican senator in history, the poignant irony of his ultimate fate was lost. The man who’d set the tanker saga in motion with a sweetheart deal for Boeing had died in a plane crash, and Boeing’s competition had nearly died with him. If you tried to write it as a movie, you’d be laughed out of every studio in Hollywood.
As O’Keefe recovered, attention turned to the pending announcement of the winner, expected by the end of the year. If Boeing loses the tanker race, it could herald the demise of the company’s defense business. In 2001, days before Stevens launched the lease deal, Boeing lost the biggest military contract in history, the $200-billion Joint Strike Fighter contract, to Lockheed Martin. In 2008, Boeing lost again to Lockheed, this time on a $3.5-billion deal to build global-positioning satellites.
While the news for Boeing hasn’t been all bad, several analysts believe that losing the tanker program could deprive the company of the lifeline it needs to keep building planes for the military. With that dire scenario on the horizon and with defense budget cuts in store, rumors circulated in late summer that Boeing might save itself by merging with Northrop Grumman, which does business in a variety of other sectors where Boeing would like to be. The combined companies would create the largest defense business in the world.
For EADS, the stakes are lower but still significant. It has been besting Boeing in competitions around the globe. But to lose to Boeing now would be politically disastrous. The company won the first round following a process that many in Washington believe was neither credible nor fair. If EADS loses this time, many members of Congress—rightly or wrongly—will call it justice. Boeing will remain the undisputed champion of the American market.
However the story ends, the damage done to the Air Force’s reputation, and indeed to the entire military procurement system, may be longstanding. The people who know this contract well believe that military officials are being influenced by members of Congress, who have taken sides in the deal along party lines. Politics has always factored into Pentagon programs, but never on a contract of this size that was already stained by corruption and criminality.
The Air Force had intended to pick a winner before the November midterm elections, but then the date slipped to “sometime in the fall,” which officially ends December 20. This timeline solidified the impression that the military brass was using a cynical calculus: If the Democrats maintain their majority, Boeing wins; if the Republicans take over, EADS gets the nod. That this is the prevailing wisdom shows how poisoned the competition has become.
Meanwhile, the price to the taxpayer is climbing. The Air Force estimates that by 2018, the annual cost to maintain the tanker fleet will be $6 billion, three times what it is now. Just the expense of dealing with corrosion and aging will add up to about $18 billion. For many years to come, maintaining the tankers will cost the country more than buying new ones would.
And this isn’t the end. The current procurement is dubbed KC-X. The Air Force still has to buy two more sets of airplanes before it finally replaces the fleet.
In theory, the KC-Y contract will launch in 2015 and KC-Z will follow five to ten years later. Around then, somewhere in the world, the boy or girl who will grow up to be the last pilot of the ancient KC-135 tanker will be born.
This article fist appeared in the November 2010 issue of The Washingtonian.
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