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Under Secretary Aldridge Briefing on the Results of the Tanker Lease Agreement

Presenters: Edward C. “Pete” Aldridge, USD (AT&L)
May 23, 2003 1:00 PM EDT

(Briefing on the results of the tanker lease agreement.  Participating was Edward C. “Pete” Aldridge, under secretary of defense for acquisition, technology and logistics.)

 

     Aldridge:  Good afternoon.  Did everybody notice the smile on my face today?  (Laughter.)  I don't have to do this anymore. (Laughs.)

 

     Q:  You'll be back.

 

     Aldridge:  You think so?

 

     Well, let's see.  What I'm here today to do is to announce that the Department of Defense's decision to -- of a plan to recapitalize their airborne tanker fleet.  As you know, the KC-135s are over 40 years old and are experiencing corrosion and structural problems.

 

     The Leasing Review Panel, which is chaired by myself and Undersecretary Zakheim [Comptroller], looked at the pros and cons of leasing KC-767s or the direct purchase of the 767s to begin the recapitalization of the fleet, and recommended to the secretary that we'd proceed with the lease arrangement.  This minimizes the near-term cost of the Department of Defense and delivers the aircraft sooner.  If we were to purchase the aircraft and deliver them on the same schedule as the lease, it would require billions of dollars more in our Future Years Defense Plan [FYDP].  And reallocating that amount of money for other programs would result in a loss of military capability.

 

     Therefore, the secretary has directed that we proceed with the final negotiations on the lease under the following conditions:

 

     The unit cost of the aircraft, fully modified to acceptable standards and capabilities, shall not exceed $131 million per unit.

 

     The lease will be based on a firm, fixed-price contract, with a return on sales not to exceed 15 percent for the green aircraft [brand new] or for the modifications and additional equipment to convert it to a tanker configuration.

 

     It is the intent of the Department of Defense to begin the recapitalization of the tanker fleet that would go beyond the first 100 767s.  And the Air Force has been asked to develop a long-range plan for such tanker recapitalization.

 

     The plan has been forwarded to OMB, and will be briefed to the Congress in the very near future.

 

     Now, let me just explain what this means.  The $131 million per unit is a firm, fixed-price contract per unit.  If Boeing would overrun the contract, they would eat into that profit -- whatever profit margin they had, so that we would never exceed the cost of the taxpayer of $131 million.

 

     If, for some reason, Boeing would underrun the contract, both pieces of the deal, both the green airplane built in Seattle, and the modifications, which will be ongoing in Wichita, Kansas -- we would audit those costs and anything below the -- above the 15 percent fee on the contract would be reimbursed to the government.  So, if some of the cost estimates -- optimistic cost estimates that you've probably heard about come to pass, we will, in fact, get the airplane at a cheaper price.

 

     We also have a most-favored-customer clause that says if Boeing would ever sell this airplane sometime in the future at a price cheaper than the government would pay, we also would get reimbursed.

 

     So from a point of view of maximizing taxpayer interest, making sure we've capped the cost to the government, we will never pay more than $131 million for this airplane, and could, if things become optimistic, pay somewhat less.  And that's the plan.  It is auditable by agreement with Boeing on both the green aircraft as well as the modifications, so we will actually know what the costs are.

 

     With that, we're off and running on recapitalizing the tanker fleet.  Yes?

 

     Q:  (Inaudible.) -- Mr. Secretary, could I ask you a couple of questions about your -- the acquisition decision memorandum on the V- 22 that you've signed?

 

     Aldridge:  (Laughs.)  Okay.

 

     Q:  Shifting topics real quick.  The text of it seems to be a little more dramatic than the information that your office has released so far.  You say in here that the flight testing has demonstrated that the V-22 has combat maneuverability superior to helicopters, that it's demonstrated dynamic shipboard compatibility. And there's some language at the end of it that I think I understand suggests that the services should consider buying V-22s instead of helicopters in the future.  Maybe I'm misreading the language.

 

     Aldridge:  You are.  You're misreading it.

 

     Q:  Okay.  But would you just explain what you mean by combat maneuverability superior to helicopters?  And would you talk to us a little bit about why your attitude toward the V-22 has changed?

 

     Aldridge:  When -- back in December, when I wrote the first ADM, I wrote down the three conditions under which we would proceed with the program.  Certainly one of those was a very comprehensive and event-driven flight-test program.  The Marine Corps put the airplane into such a flight-test program.  They have demonstrated very high rate of descent at slow forward speeds.  They know the envelope in which the vortex ring state condition exists.  They have flown it around those envelopes.  They have demonstrated they know the flight margins as a result.  They have provided a warning system in the airplane to warn the pilot when he gets close to that vortex ring state condition.  Basically they've done everything in the high-rate- of-descent/forward velocity regime that I've asked them to do to prove out the airplane.

 

     The second part of the concerns was, does it have sufficient maneuverability when it gets into the landing zone such that it can -- if it runs into danger, it has enough control authority and maneuverability to get out of the way quickly?

 

     The one thing the airplanes demonstrated, which helicopters cannot, is it has another degree of control, and that degree of control is the pitch on the nacelles.  And one capability that this airplane has that helicopters don't have is they can push the pitch of those nacelles down quickly and turn itself, much like into an airplane and maneuver out of the way.  And what it's demonstrated in these maneuverability, one, it does have the G capabilities that's been demonstrated of helicopters; they can actually pull Gs.  They've demonstrated that.  And that one degree of control, it can accelerate out of the landing zone much faster than any helicopter can.  That, to me, has demonstrated a certain amount of operational suitability that we had not appreciated in this airplane back when it started the flight test program.

 

     Q:  So --

 

     Aldridge:  And let me continue on.  It's also demonstrated low speed, cross-wind handling characteristics.  They've flown it on ships.  They've demonstrated that it can operate on the ship with safety.  They've done some changes to the control laws, and they're beginning to do austere landing-environment, where the airplanes comes into sand and debris and things of that nature.

 

     It also has one more degree of control that helicopters don't have, which I don't think we appreciated any -- and the Marine Corps, either.  Is when it lands, it can push the dirt in various directions because it has controllability of nacelles.  It can blow the dirt forward, or it can blow it backwards.  And that controllability is something that's unique with the V-22, which tends to offset and mitigate the concerns many had -- I had -- about the high velocity of the downwash.  It is higher velocity than most helicopters, and it could create more debris problems.  But I think this has demonstrated that we have some degree of controllability that's slightly different.

 

     Q:  Just one quick follow to that.  Last fall you visited the V-22 program at Paux River, and afterwards, there was a member of Congress who said that he thought you had become a convert.  We asked you about --

 

     Aldridge:  He overspoke --

 

     Q:  Right.

 

     Aldridge:  -- because I had not seen the complete -- the --

 

     Q:  And you said that at the time.

 

     Aldridge:  I said it at the time.  And when I went down and I had the people come up here, they laid out the flight test program and what they were going to do, and I asked if we could move some things around in the flight test program that would demonstrate some other conditions, so that if the airplane looked like it was going to proceed, we had enough time to begin working into the budget so we can begin the production ramp-up sooner, and that was for the summer.

 

     Q:  My question is, it sounds like today that you are a convert.  Is that going too far?

 

     Aldridge:  That's going too far.  I think the flight test program has demonstrated so far some conditions -- I could not ask the flight test program to do any more than what it has shown, has done. It has done everything I've asked it to do and has demonstrated that it is safe and reliable at those conditions that I ask it to do.

 

     And now that may sound like I'm a convert, but it says that they have demonstrated what I asked them to demonstrate before we would proceed on that program.  And they've demonstrated it sufficiently well that we can proceed now on a more success-oriented program than an unsuccessful oriented program.

 

     And yet we have a lot more to do in terms of budgeting and looking at the ramp-up, and we got to do an operational evaluation test.  There's lots of things yet to do.  But I believe they have demonstrated it to the point we can turn it to success-oriented and get on with looking at where we're going for the future, rather than having this big uncertain question mark standing in front of the program, which is affecting the suppliers, because they can't plan for their production and so forth.

 

     So let's go right here.

 

     Q:  The deal you've announced -- the tentative deal with Boeing sounds like substantially improved terms for the government than the one that the Air Force had negotiated with Boeing.  How did you get to that point?  And what do you make of Boeing's repeated assurances early on that this was the best deal for taxpayers, even at the $146.5 million a plane that the Air Force had negotiated?  Were they trying to gouge the taxpayers?

 

     Aldridge:  No.  No.  I've used that term before, and I'm not sure it was appropriate.

 

     Q:  (Off mike.) -- explaining what they were seeking to prevent, as recently as last week --

 

     Aldridge:  No, I think -- what they negotiated was based upon a model of what the tanker would look like under conditions that they were anticipating.  And it was -- when we looked at the assumptions, there were certain things in there that we thought we could get by with.

 

     For example, we didn't need as many tanks in the airplane -- fuel tanks in the airplane as had been first proposed, so we dropped the price down.

 

     We indicated an intent of the government to begin the recapitalization of the tanker fleet, so it would go beyond a hundred, which gave Boeing a little more confidence that they didn't have to worry about the production stopping.  So some of the risks began to drop.

 

     So as we looked at each of those things, some money came out of the program as we changed configuration, as we've changed slightly the program, and we did put certain caps on expenses and so forth.  So the price kept coming down, to the point we got to the 131 (million).

 

     Q:  Just to clarify, how many aircraft, then, beyond the 100 do you think might result?

 

     Aldridge:  We need to capitalize the tanker fleet.  The tanker fleet consists of 544 KC-135s.  I don't think we're going to recapitalize every one of those on a one-for-one basis, but it's going to be -- it's going to have to be several hundred tankers.  We're not going to stop at a hundred.  I don't --

 

     Q:  So Boeing gets all those planes, or will you open it up for Airbus or others --

 

     Aldridge:  I've asked the Air Force for a long-range plan for the tanker fleet, and they are to come back by about the 1st of November to the secretary with a plan for how we're going to proceed, what are the numbers, what kind of configuration they want, and so forth.

 

     But it is going to be a commercial version of something, because we're not going to go develop with several billion dollars a brand-new airplane for a tanker.  It'll be off the commercial production line.

 

     Q:  How does Boeing get comfort in the -- beyond 100 if they may not --

 

     Aldridge:  They think they have a leg up.  With they -- that -- the first 100, it's -- you know, they do have a leg up on what the next hundred are going to look like, and they're willing to take a little more risk under those conditions.

 

     Yes?

 

     Q:  The $131 million unit cost is one number, but what is the purchase price that the special-purpose entity that's being set up is going to pay Boeing?  What is that price that they're going to pay Boeing for those planes?

 

     Aldridge:  Let's see.  What the special-purpose -- we pay the entity -- based upon the $131 million unit cost, the entity will put a certain amount of fee -- of their profit on that, because they're actually going to have to make some money.  I don't know what that fee's going to be, but our lease price is going to be based on the 131 million per copy.  And the total cost that we'll pay to lease the special-purpose entity is $16 billion, I believe.

 

     Q:  What about the $7 million in addition that -- in payments that are supposed to go to Boeing for the planes, from the special- purpose entity?

 

     Aldridge:  I'm not sure what you're talking about.  The 7 --

 

     Q:  There's an additional lease -- unspecified lease costs.  I guess it's that, or it's that --

 

     Aldridge:  Oh, that's the cost of -- I believe that's the cost of money.  That's a $7 million lease-unique cost.  That's the cost of money in order for the lease -- for the special-purpose entity to make some profit on the airplane.

 

     Q:  So why not, if the unit costs $138 million per --

 

     Aldridge:  What we tried to say is, if here is an airplane that you're going to buy, it's 131 (million), that we tried to make it apples-to-apples, versus -- because some were saying, "Well, if you bought the airplane, it would be this, but if you lease it, it's going to be more, because the lease cost is costing more."  And so the unit cost for a airplane -- fly-away airplane is 131 (million dollars).  The lease-unique cost is 7 million (dollars) on top of that.

 

     Q:  So what is the total cost going to be of --

 

     Aldridge:  Sixteen billion dollars is what it's going to cost the Department of Defense to lease 100 airplanes.

 

     Q:  Sir?  At the end of this, you have an option of, say, another $4 billion, and buying them, so about $20 billion for -- let's say at the end you decide to buy them -- $20 billion for 100 planes. So, that's $200 million per plane, roughly, after you figure in all the --

 

     Aldridge:  It's $40 million.  Four billion dollars for 100 airplanes, so it's $40 million an airplane.

 

     Q:  (Inaudible.) -- to the $16 billion.

 

     Aldridge:  Right.

 

     Q:  Could you tell us what it would cost to buy outright those planes?  And also, could you explain -- I understand, I think, some of the machinations here, but I don't understand why Boeing can build planes faster under a lease arrangement than they could if you were to buy them outright.

 

     Aldridge:  Let me explain what the difference is.  We have a -- had a plan in the Air Force budget to start recapitalizing the tankers, but we didn't start doing that until FY '06, because it was unaffordable.  The difference is if you deliver these tankers -- we can deliver 67 tankers leased in the five year -- in the Future Year Defense Plan, over the next six years, or we -- by the Air Force plan, we were going to deliver one.  If we move up the purchase, so we're delivering aircraft in a purchase at the same rate we would have if by leasing, we would have had to put about $8 billion more into the FYDP than is currently there.  We're not going to get $8 billion more on the top line, so we would have had to take it out of some other program, and therefore, we thought that was -- that would drop the military capability.  We'd rather lease and get the airplanes sooner than to spend that much money earlier in the FYDP.

 

     Q:  What I'm not understanding is -- so Boeing is putting its capital into building these planes faster as a --

 

     Aldridge:  No.  A special-purpose entity is borrowing money to pay Boeing, and they're borrowing the money at -- essentially, they're taking the $8 billion we would have had to put in our budget and paying Boeing to build them on that rate.  So, Boeing is getting the same production profile with the lease -- as fast as they could build them with that kind of money.

 

     Q:  And could you explain what this special-purpose entity is? I'm sorry, I'm new to this.

 

     Aldridge:  It is -- I don't know who it is, because Boeing hasn't told me who it is, but there has to be an organization that basically is the lender of -- or, borrow the money necessary for Boeing to build the airplane sooner.

 

     Q:  But this $8 billion is out there.  Somebody you don't know is providing it?

 

     Aldridge:  Yeah, and use that eight billion (dollars) very loosely, because it depends on a lot of assumptions as to what the inflation rate is and a lot of things like that.  But that --

 

     Yeah, right here -- right here.

 

     Q:  Thank you.  If the plane comes in at exactly $131 million, would that be a 15 percent profit margin?  And does that, therefore, mean that the --

 

     Aldridge:  I don't know what the profit margin on that will be, but it will be less than 15 percent.  Because if it's more than 15 percent, that delta is given back to the government.

 

     Q:  How do you know that?

 

     Aldridge:  It's auditable.  There's two audit conditions. There's the Deloitte & Touche, which is the Boeing independent auditor, and we will abide by the audit rules, and the Defense Contract Audit Agency has the ability to audit the modification work at Wichita, Kansas.

 

     Yeah?

 

     Q:  Sir, on the V-22, can you talk about why the memo raises the possibility of increasing the production rates but ultimately leaves that decision until later?

 

     Aldridge:  We don't have to make the decision until later because we've already gone through the FY '04, so it's in the FY '05 budget that the decision needs to be made.  That can be done this summer as we go through the normal budget review.

 

     We would have been -- have been spending four years at the minimum sustaining rate, which is roughly 11 aircraft per year. That's a very efficient rate.  FY '05 was another year at the minimum sustaining rate.  If the airplane is -- should be based upon more of a success-oriented plan than a negative plan, then we should start ramping up the production, and the first year we should be able to do that is FY '05.  To be specific, are there reasons now why it's premature to make that decision, things that you think need to be done between now and then before the decision can be made?

 

     Aldridge:  Yes.  We have to decide what is the best ramp-up. I don't know whether we want to put five airplanes in the -- (Inaudible.).  I don't know what's affordable in terms of having to balance with the FY '05 budget.  That process occurs this summer as part of our normal budget build-up process, and we trade-off how many we're going to buy versus the ramp-up.  And we just don't have to make that decision right now.

 

     Yeah, right here.

 

     Q:  Sir, can you talk about when the Air Force will get the first airplane, and what the delivery schedule will be?  And then, as a follow-up, have you decided who's going to get what planes, which bases?

 

     Aldridge:  No.  No.  That's way premature at this point in time.  The first airplane delivery is FY '06, I believe.  (To staff.) Is that right?  (Returning.)  Yeah, okay.

 

     Q:  And then -- and could you answer the rest of it?

 

     Aldridge:  It builds up from -- the first airplane in '06, and it builds up to 20 per year.  That's the production rate, and that will be the delivery rate.

 

     Yeah, right here.

 

     Q:  Mr. Secretary, are any of the airplanes you're getting under this lease already built or in production; airplanes that were ordered but the order was cancelled?  Or are they going to be brand new, fresh starts?

 

     Aldridge:  I understand they will be brand new, fresh starts, because Boeing already has two tanker contracts now; one with the Italians and one with the Japanese.  They're buying four aircraft each.  And the 767 line is ongoing, but I don't believe they had planned to have any in the production pipeline for this program.  I'd be -- yeah?

 

     Q:  The other question I had was does this price include this electronic equipment that would be on the tankers to make them kind of a communications relay, as the Air Force wants to do with these?

 

     Aldridge:  No, these will not -- you're talking about the smart tanker.  And it will have a probe and drogue, so it will have an ability to refuel Navy aircraft, Marine aircraft, was well as Air Force.  It also will be refuelable itself, which is somewhat unique. KC-135s are not refuelable themselves.  So that it gives it a lot more flexibility to have.  But it's not --

 

     Q:  Not the roll-on communications relay?

 

     Aldridge:  No.  No, it will not.

 

     Q:  That will be separate?

 

     Aldridge:  That's a separate issue.

 

     Yeah, right here.

 

     Q:  The Virginia-class submarine program is also up for consideration by your office for multiyear procurements.  Have you made a recent decision on that program?

 

     Aldridge:  No.  I talked to John Young yesterday.  That's still in negotiation.  I have not heard what the progress has been as of today.

 

     Yeah, right here.

 

     Q:  Yes, sir, on the Osprey, are you satisfied on two points:

 

     First, you mentioned a high rate of descent and you mentioned shipboard stability and things like that.  They've also had a problem, however, obviously, with hydraulic lines, first the chaffing to cause rupturing, and then the leaking, and they had below-gauge metal on that; that was replaced.  Are you satisfied that they have addressed and resolved the hydraulic line problem?

 

     And also, are you satisfied that the Osprey is able to do realistic combat maneuvers, such as "swoop and scoop" rescue of a downed flier, or something like that?

 

     Aldridge:  Let's address the first one.  They've gone through a redesign of the nacelles in the flight test program, and they've got a very extensive inspection process that occurs to make sure of the push and pull.  They have not observed any kind of problems that we had in the past with chaffing or wear and tear on the lines or on the electronic lines, as well.

 

     They did have a problem with the supplier, who was not providing a quality product.  It was discovered, and they replaced all the -- they fired the contractor, by the way -- replaced the lines with those which do have -- they didn't have a failure in the lines, it's just that they were not being manufactured to standard.  They've been replaced.  In fact, the redesign is such they could replace those hydraulic lines much faster with a new configuration than they could with the old one.  So, I think in that point, that's been well-determined.

 

     They're still to demonstrate some of the characteristics. They're going to have a -- the hoist is not going to be out the door, which is where the high-vortex areas are; it's going to be out the back.  And in the middle of the airplane, there's very little of this high velocity downwash, because the center -- it's out on the props, rather than in the body, much different than a helicopter.

 

     And so, I believe there's still -- there's some demonstration to be done, but I don't see a show-stopper in any of that type of thing.

 

     Yeah, right here.  Right here.  Yeah?

 

     Q:  I'm wondering when you leave here what role you're going to have in creating a joint body to establish military equipment needs?

 

     Aldridge:  (Chuckles.)  You're putting the smile back on my face again.  (Laughter.)  Go ahead.  What role I'm going to --

 

     Q:  The Wall Street Journal reported on the new joint body, and what role that's going to leave for the individual services?

 

     Aldridge:  Slightly twisted report.  What the secretary's trying to do is to make this building run better joint, to the point where requirements that we need to fulfill -- and I'll change the word "requirement" right now, because the secretary doesn't like it, to “what are the joint needs of the Department of Defense?” and write those down so that the military services, when they develop their programs, they are the supplier of joint needs.

 

     Right now there's too much stovepipe, and when the military services -- they write their requirements and then write the -- and then determine the programs to fulfill them.  What we need to do is think about them going up one more notch and says what is the needs of the Department of Defense in a joint sense, so that when the programs are developed by the services, they are by definition born joint.

 

     And the secretary's asked me to spend some time thinking about this problem and see how we can organize the department to do that job better.  And it's not to take away the military departments' prerogatives, because they have a Title X responsibility to organize, train and equip.  But we want the requirements of which they're doing that job to be developed from a joint integrated sense, rather than their individual services.  And it's -- so it's -- it make the services actually be able to perform the function better, and the military departments better.

 

     Yeah?  Right here.

 

     Q:  So does this mean you're basically looking to combining the OSD [Office of the Secretary of Defense] and the Joint Staff together, or --

 

     Aldridge:  Haven't got a solution yet.  This is hard.  But it says that it's a function that is not performed by an organization that currently exists.  The Joint Staff have a function, OSD has a function, and the military departments have a function.  But I believe -- if we start writing down what these joint needs are, I believe it has to be done by some kind of integrated organization that puts those functions together.  Doesn't mean we're going to replace OSD or the services, but it means we probably have to have a different organizational posture that can write down what the joint needs of the department are.

 

     We have a document now called the Defense Planning Guidance.  It tends to be that kind of a document, although because we write down what we want the services to do, we do not give them enough money to perform all we've asked them to do.  So we have to have a process by which the Defense Planning Guidance and the fiscal guidance are integrated to the point where the services say, "Okay, you've told me what you want me to do, and you're giving me the sufficient resources to do it.  I'm willing to sign up to that in a business plan and accomplish it."  So it is something different than what we have now.

 

     And the answer is -- I don't have an answer, but the secretary's asked me to come back by the 1st of November and give him a solution to this problem.

 

     Way in the back.  Yeah?

 

     Q:  Mr. Secretary, back to the Boeing lease.  What's your sense of the political future or health of that plan?

 

     Aldridge:  We have made numerous phone calls to the Hill with all the -- in a bipartisan way, to search out what concerns people have, what type of -- what they think is the future of this type of plan.  And to my knowledge, there are very few people who are opposed to this.  The reason is we all kind of recognize that one day we're going to have to recapitalize the tanker fleet.  We saw the value of tankers in the recent Iraqi conflict, and even in the Gulf War.  Tankers are an essential part of our ability to do what we want to do in the military.  We cannot continue to fly KC-135s forever.  And the longer you wait to recapitalize, the more you run the risk of one of those -- of a fleet of those aircraft being grounded for some reason.  The KC- 135Es, in particular, are getting old, and they are -- they have the most problem.  We've done the R models, which look a little bit better.  But sometime -- so we got to start.  Here is an opportunity to start with a minimum amount of up-front DOD dollars, and we can get the aircrafts delivered much faster.  So I think it's going to be positive.

 

     Yeah, right here.

 

     Q:  On that very point, on the need for the tankers and their age, you say they're 40 years old and they're getting corroded.  But Senator McCain and others argue that their age is one thing, but the actual flying they've done is another, and that, on average, they have about two-thirds of their life left on them, and their mission-capable rates are the highest in the Air Force.  The question being, you know, we eventually need to replace the tankers, but what is the reason that we need to replace them in these kind of numbers this soon, and why not just re-engine the KC-135Es?

 

     Aldridge:  Re-engining the 135s do not buy you any lifetime, and that's what -- we need to buy additional life.  We're going to be flying KC-135s for a long time, and we're going to be very dependent upon them.  But we don't have to be dependent upon all of them.  We've got to start the process because we've got 544 of these things.  It's going to take us a long time before we get all the tankers recapitalized.  As we go into the depots and look at what's happening when we put a KC-135 in, it's taking them much longer to go through the process of refurbishing it, and it's costing us a lot more money; it's going up every year.

 

     So the process has to start.  What we think -- our position is we should start it now when we have a commercial airplane, perfectly acceptable, on a production line that's not going to be in production for a whole lot longer.  We can capitalize on that now.  We can get moving on the direction.  It's going to take us a long time -- at 20 a year, it's going to take us a long time before we get to the point of having a sufficient fleet that's going to be completely recapitalized.   And we are continuing to depend on the KC-135s.  But it's time to start it now.

 

     Q:  Is the OMB [Office of Management and Budget] director still opposed to this plan?  There's a new OMB director.  But is OMB still opposed to this?

 

     Aldridge:  I can't answer that question.  We know we have been talking through the leadership in this department, as well as the leadership in the White House, and the last I heard is that the White House and the secretary of Defense have reached agreement that this is the plan we're on.  I don't know the position of the director of OMB.

 

     Q:  I have a V-22 question and a tanker question.  The V-22, are you saying it's turned the corner technologically?  Do you feel Marines would be safe to go up in it?  And also, in that sort, how close are you to cancelling it, and at what point?  And if I can throw that at you.

 

     And then secondly, on the tanker -- on the tanker, you're using firm, fixed-price contracts, but back in the '80s and early '90s, that type of contract produced some notable duds.

 

     Aldridge:   Yeah.

 

     Q:  A lot of contractors bought into the program, knowing the government would bail them out at some point.  What's to prevent Boeing from doing that here?

 

     Aldridge:  Much different.  What you're talking about is fixed-price development contracts.  That's where we didn't have an airplane, and it required a lot of development costs.  And the C-17 was one of those.  A-12, which was terminated, was one of those.  That is a death knell, as far as I'm concerned, for programs.  You should not have a fixed-price development contract, because things -- too many things change.

 

     We have a commercial line going, and we know, generally, how much the airplane costs to build.  Boeing feels very confident in it.  The only uncertainty we have is in the modifications of it.  And Boeing feels like they have -- they have two programs going now, ahead of this one, on the Italian and the Japanese tanker, that they feel a lot of the risk of making this modification has come down.  But that's where most of the risk is.   But they're prepared, because of the commercial nature of this, to proceed with it.

 

     On the V-22.  The first one was do I feel that Marines could be safe in it?

 

     Q:  Have they turned the corner technologically?

 

     Aldridge:  Yes.  Why do I say that?  We now have enough flight test points -- the real concern, and where the accident -- the one accident occurred when the pilot rolled the airplane and he got -- he got into this vortex ring state condition.  We know much better now the boundaries of where we -- of where those are.  We have hundreds of test points where we have put the airplane right at the point of where it can go into this vortex ring state and get a condition called roll- off, where one of the props loses thrust and the airplane rolls.  We have gotten the airplane -- and we know that boundary condition.

 

     The other thing we've done, which was not in the airplane before -- first of all, let me say we know more about this airplane than every before.  There are things that we did not know about this airplane up until this flight test program started.  So, we've got the boundary conditions.

 

     We also now have a thing called a warning sensor, that gives a verbal warning to the pilot when he gets close to that point, and then we also have a visual warning -- an instrument in the airplane that will start turning red when it gets into these high-rate -- high descent rates.  We've limited the airplane to 800 feet per minute below 40 knots -- 40 knots horizontal.  We know we can fly the airplane at twice that number, twice the sink rate, and much slower, and still not enter vortex ring state.

 

     So we've got margin in the airplane, plus now the signals -- the verbal and visual signals at one airplane don't take me there, and we've got some things done in the flight control that allow the controllability of the airplane to be better.  So we understand it a whole lot better than we did before.

 

     So I'm at the point now where I believe we have demonstrated sufficient confidence in the aircraft for safety and reliability that we can continue proceeding forward.

 

     Now we still have to do an operational evaluation test.  There are still a lot of things to do.  But I do see anything that would be a show-stopper in the airplane, that would tell us, "Terminate the program now, because it's not going to make it."

 

     Q:  How close were you to cancelling that at any one point?

 

     Aldridge:  Pretty close.  Pretty close.  It was -- but I had to sit back and say to myself, "Should I terminate it or give it a chance?"  And I preferred to give it one more chance, because if it did work, if it does work, it flies very fast, it flies long-distance, it gives another dimension of combat capability to the military that they do not now have.  It was worth the chance of giving it a chance.

 

     Q:  So is it safe now for Marines to fly in it?

 

     Aldridge:  Marine are flying in it right now.  The commandant went down and flew in it.

 

     Q:  Troops or operational tests --

 

     Aldridge:  It's not ready for operational tests yet.  It's still a  few years downstream.

 

     Yes?

 

     Q:  Two questions, back on the tankers.  I'm wondering if you can talk about training and maintenance and any other associated costs with bringing up the new program.  How will that work?  Will Boeing get that?  Are those numbers included in the ones we're talking about now?

 

     And also, could you talk about the common wide body approach?  I mean, is the 767 something that's being looked at for other replacement programs, like AWACS [Airborne Warning and Control System], JSTARS [Joint Surveillance Target Attack Radar System], Rivet Joint?

 

     Aldridge:  Let me answer the last part of the question.  Yes, yes.  The 767 would be a good candidate for some of the multi-mission command-and-control aircraft configurations.  It's a good configuration for that, and it is being looked at for that, as well as AWACS replacements and things of that nature.  So no decisions have been made on it, so that's where we go.

 

     But what was -- the first part was the --

 

     Q:  Can you talk about training, maintenance --

 

     Aldridge:  Oh, yes.  That's really premature.  What will happen as we get -- as we start phasing out the KC-135s -- of course the pilots and crews of those airplanes will be available to go into the 767.  And -- but it sits -- right now it's real premature to say, you know, where the training's going to be, where they're going to be based and things like that.  It will be contractor supported until -- you know, until we buy the aircraft, then there will be a decision made, are we going to continue contract support or we have it.

 

     Q:  And is that at the price that we're talking about now?

 

     Aldridge:  Yes, yes.  Yes, that's right.

 

     Q:  That's the $16 billion figure?

 

     Aldridge:  Yes.

 

     Q:  Can you go back to this lease unit cost that you talked about.  Two things.  Boeing called this special purpose entity a non- profit to reporters in their May 1st briefing.  So that's just one thing.

 

     And the other thing was that the lease payments that the Air Force is going to pay this special purpose entity is based on an interest rate that the special purpose entity set.  So, if they're paying Boeing $138 million per plane, how is the Air Force -- and if they're supposed to make a profit, as you said, how is the Air Force going to be paying $131 million per plane?

 

     Aldridge:  Let's see.  Well, we are -- the lease costs include the cost of the aircraft plus the cost of money.  And I don't know why Boeing would say it's a non-profit, special purpose entity. It's there to earn an interest on its money.  But anyway, I'll let them -- let them -- ask that to them, not to me.

 

     And the money that's going to Boeing would be the cost of the airplane plus their fee.  And the lease-unique cost would be that which is going to the special purpose entity.  Boeing would be just building the airplanes.  They're not borrowing the money; they're just building the airplanes, they're building it at a profit.  So I would say that we pay -- the way you describe it is we pay $137 million to the special purpose entity, and they are paying Boeing $131 million, on average.

 

     Q:  You said that the Air Force is paying $131 million, and the special purpose entity has $7 million in addition that they're paying for the $131 million.  So, $138 mission is what the special purpose entity is paying Boeing for these planes.

 

     Aldridge:  No.  The Boeing's planes are $131 million on average now, okay?  If you put lease-unique cost in it, which we are -- the lease is with the special purpose entity, not with Boeing, okay?

 

     Q:  So it's more than 131.

 

     Aldridge:  You put the $7 million -- $138 is what we're paying.  But what we tried to do is -- in doing the cost exercise, we tried to keep the airplanes on an airplane-to-airplane basis, and not whether or not we added lease money to it or didn't.  We're trying to say, okay, we could buy this airplane for 131; we could.  So what was the unit cost of the airplane if we buy it?  What's the unit cost of the airplane -- and try to measure, again, against another estimate, which is what Boeing had -- I mean, what IDA [Institute for Defense Analyses] had, to see if -- it was an apples-to-apples comparison.  And so we just said $131 million is what we would buy the airplane for, without whether or not it was a lease.

 

     Q:  Sir?

 

     Aldridge:  So, I don't know.

 

     Yeah?

 

     Q:  On the V-22, how did things get so far?  You were close to cancelling this aircraft, and then it took a year and a half or two years of significant redevelopment work and lots more testing.  How did it even -- what's wrong with the system that this aircraft got so close to a thumbs-up or a thumbs-down and had so many systemic problems?

 

     Aldridge:  It's hard.  I wasn't here at the time when the plane was developed.  I know Secretary Cheney at one time cancelled the program himself.  But -- so I can't say.  But when I looked at the airplane, it was clear we did not have a clue as to what -- how this airplane flew.  There was a lot of aerodynamics and engineering -- systems engineering that did not go into the airplane.  The cells were inadequately designed.  They did not have sufficient attention paid to the hydraulic line location, chaffing, vibration events, things of that nature.  It was clear that we did not understand the aerodynamic phenomena that existed both with the vortex ring state, with slow- speed crosswind interactions with these high-downwash propellers.  In fact, the independent study said that the engineering was grossly underestimated, and I think I used that term myself for this airplane.

 

     Q:  Sir, not specifically the V-22, but you've been at home here for a couple of years and you know how the system works.  There are going to be other planes, other systems that get developed that go through the same system.  What's wrong?  How did it get so far without having an understanding of that sort of thing?  What needs to change? You're on your way out.  You've got some advice to offer those people that follow you --

 

     Aldridge:  I've tried to put that into effect.  The thing that I think helps this whole process is one called spiral development, meaning you don't try to go for the 100 percent solution first; you properly price the program in the beginning; you really do take an independent look and see what it'd cost; and you do a very good job of a thing called systems engineering, where you've looked at all the aspects of this -- of a highly-technical system.

 

     I've tried to introduce those into every one of the programs we have.  Some programs -- Comanche, same problem.  It tried to do too much, too soon.  We structured it.  It's now gone back to something it can do well.  It can do reconnaissances lightly-armed.  And I believe we've built the confidence we could actually deliver something on time within the cost we've estimated.  And I believe that if you look at all the mistakes that all programs have made, and I think you -- and you go back to the beginnings of the V-22, you will probably find that that is exactly what happened.

 

     Q:  Sir?

 

     (Cross talk.)

 

     Aldridge:  I know.

 

     Staff:  We have time for about one more.

 

     Aldridge:  Okay.

 

     Q:  Sir, is it an operational lease or a capital lease?

 

     Aldridge:  Operating lease.

 

     Q:  Okay.  And how does that -- how does that jibe with OMB's guidelines on operational leases?

 

     Aldridge:  It has to -- they have to agree that it will be an operating lease, and it has to have a commercial value after the lease, which is key.  So it -- we -- it will be a freighter configuration, so we could in fact -- the Air Force would not necessarily have to buy the airplane at the end, but it could be sold to somebody else.  That's part of the deal.  They have to go through the approval process to say that it is an operating lease.

 

     Q:  Mr. Aldridge, does the newfound confidence in the V-22 translate into a production rate much sooner than had been projected? Do you see this as perhaps in the next conflict, the use of V-22s?

 

     Aldridge:  Premature for that.  It's sufficiently -- again, it's on a more of a success-oriented program, as we would do every other program.  But the production rate would not start until fiscal year '05, two years from now.  And I think by then, we will have the confidence that we need to make the decision to increase the ramp-up for production.

 

     Q:  And can you give me a ballpark of how many you think that there might be?

 

     Aldridge:  It'll be -- well, we're at 11 a year now, and at -- we were going to go, I think, at 11 a year through '05, and then jump it to about 20 a year.  That's too fast a jump.  So it's probably something in the 14 to 15 in FY '05, but that has to be dealt with the fiscal realities.  But it's not going to be as -- at 11 to 20.  We can't do that all in one big jump.

 

     Q:  So the purchase of 300 at a time is a long way off, which was at one point --

 

     Aldridge:  Absolutely.  In fact, we --

 

     Q:  Do you have any closing thoughts on the military -- what used to be called or is sometimes still called the military industrial complex?  Eisenhower warned about it in his leaving.  You're leaving today.  You've been --

 

     Aldridge:  Read all of Eisenhower's speech, all of it, and you'll find out that he talks about the need for the -- a new need for the industrial might of this country, and that's why I've been pushing the health of the industrial base.  We can't build -- deliver the finest equipment to our military forces without having a healthy industrial base, and one which is profitable and is innovative, and that's what we're trying to do.  Profit is not a bad word.  It's -- I use the terms -- I let go with this: Profitability is the engine of innovation.

 

     Q:  But Senator McCain says that this a cockamamie thing, the lease plan, as he saw it, and that it's a corporate handout to a company that has been hard hit by this slump in --

 

     Aldridge:  I disagree with Senator McCain.  He's a great guy. But we've got to start the recapitalization of the tanker fleet. We've got to have a new tanker.  Here's an opportunity for us to do it now with an exceptional airplane, off a commercial production line which might go away.  If we don't have a 767 in production, what do you turn to?  Do you go to Airbus?  I don't think so.  (Laughter.)  So -- so it just -- he's got it wrong, I'm sorry.  And we need to get on with it.  And this is a beautiful opportunity for us to get it at a very good price, firm-fixed price; we got a cap on what the taxpayer is going to pay.  We could get it cheaper if we do good.  And it's auditable.  I mean, what more can you do with a program?

 

     Thank you.

 

     Q:  Do you think the price is also wrong?  The 119.5 price is also wrong --

 

     Aldridge:  Yep.  It was wrong because they made the assumption it was a cost-plus contract, not fixed price.  Fixed price you got to -- (Off mike.).

 

     Q:  Thank you.

 

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