The fact that price was the key determinant in the decision to award Boeing the air force refueling tanker contract led Boeing to close its underutilized, and therefore expensive, Wichita plant.
This is the conclusion of Loren B. Thompson, Ph.D., who is chief operating officer of the Arlington, Va.-based nonprofit Lexington Institute and chief executive officer of Source Associates. His article Viewpoint: Why Boeing’s Not in Kansas Anymore appears in Industry Week.
Thompson writes: “The acquisition strategy that the Obama administration put together to finally break the impasse over purchase of a new tanker was what people in the defense business call a ‘price shootout.’ In other words, price was the key determinant of who won, because both bidders met all the other criteria for selection.”
Thompson writes that because Airbus, Boeing’s competitor, is heavily subsidized, Boeing had to bid aggressively if it was to have a chance to win the contract.
The result, Thomson concludes: “Pentagon acquisition officials were able to brag that they had secured a new generation of aerial-refueling tankers for less money than anyone thought possible. But here’s the downside: Boeing ended up having to cut costs everywhere it could to avoid losing money on the tanker program, including Wichita. Keeping an underutilized, high-cost facility in the production mix would have eroded the program’s already razor-thin profit margin. With Boeing’s resources overstretched trying to match Airbus’s heavily subsidized development efforts on the commercial side, Wichita had to go.”
It may not be much consolation to Wichita and the Boeing employees who are losing their jobs there, but a cheaper tanker is preferred over an expensive tanker. We need to cut government spending whenever and wherever we can, and obtaining military weapons systems as inexpensively as possible is important.
In 2008, when the tanker contract was awarded to Airbus (Boeing successfully appealed this decision), the Wall Street Journal accurately diagnosed the politics: “What’s really going on is a familiar scrum for federal cash, with politicians from Washington and Kansas using nationalism as cover for their pork-barreling.”
The Journal correctly stated what should be the goal of the contract: “The Pentagon’s job is to defend the country, which means letting contracts that best serve American soldiers and taxpayers, not certain companies.”
We also need to note that Boeing has been heavily subsidized by government in Wichita, too. My article Boeing departure presents challenge for Wichita and Kansas presents some figures, including $658 million in property tax forgiveness over a period of 28 years.