GEN. ROGGERO: Good afternoon, ladies and gentlemen. I'm Brigadier General Fred Roggero, director of Air Force Public Affairs. And this will be a single-issue press briefing regarding the Air Force's suspension of three Boeing integrated defense systems business units.
Acting Secretary of the Air Force, Mr. Peter B. Teets, will make a brief statement, and we'll then take your questions. This session is on the record. Any questions on any other issues can be directed to the Air Force Press Desk.
Ladies and gentlemen, Secretary Teets.
SEC. TEETS: Thanks, Fred. Well, good afternoon, ladies and gentlemen, and thank you for coming today. I know it's a little late on a Friday afternoon, but delighted that you're here.
In July of 2003, the Air Force suspended three Boeing integrated defense systems business units for unlawful possession of a competitor's proprietary information during the 1998 Evolved Expendable Launch Vehicle source selection.
The Evolved Expendable Launch Vehicle, or EELV, is the family of rockets that make up our primary platform for launching satellites into space. The suspensions were issued against the Boeing Company's Launch Systems, Boeing Launch Services and Delta Program business units.
These suspensions, the longest suspensions of a major defense contractor, effectively banned Boeing from competing for government launch contracts. In addition, the Air Force reallocated launches under an EELV launch contract which was awarded in October 1998, and is known as Buy 1. Under this reallocation, the total number of Boeing launches was reduced from 20 to 12, and those launches were awarded to Lockheed Martin.
The Air Force also awarded three additional launches under the EELV Buy 2 procurement to Lockheed Martin.
To protect the government's interest, an interim agreement between the Air Force and Boeing has been signed. In it, the Air Force may rebuke (sic) -- may revoke the agreement and reinstate suspensions in the event Boeing is indicted or convicted or if new evidence is discovered. In addition, Boeing has reimbursed $1.9 million to the Air Force for its costs of reviewing this matter, and is required to submit to outside verification of its remedial measures and its compliance with the interim agreement through a special compliance officer, who will report to the Air Force. The special compliance officer will be Mr. George Babbitt, the former commander of Air Force Materiel Command.
Boeing has also agreed that all of its costs related to the EELV misconduct and the improvements to its ethics program are unallowable, including its costs of defending the Lockheed Martin civil litigation.
We took these actions because the cornerstone of the Air Force's acquisition philosophy is integrity in all phases of the procurement process by both the government and our industry colleagues. This has been the longest suspension of a major defense contractor, and it demonstrates how seriously we take the issue of procurement integrity.
Today, I am announcing that we have lifted the suspension of these three Boeing business units and have made them a full partner again on our national security space team.
Over the past 20 months, Boeing has taken serious corrective actions to once again be counted as a contractor eligible to compete for government launch contracts. Boeing's management, from the CEO down, took responsibility for the company's ethical breaches, and has worked very hard to correct the problems and prevent such violations from occurring in the future. Corrective actions that Boeing has taken include: submitting to four independent reviews of its ethics and business processes, two of which were led by former Senator Rudman, and agreeing to implement recommendations of those reviews; executing a comprehensive agreement with the Air Force; submitting to outside verification of its remedial measures, and perhaps most important, making everyone in the Boeing company aware that they must adhere to the highest integrity standards.
I cannot stress enough how important integrity is to the procurement process, and I believe Boeing has taken the appropriate corrective actions to be counted as a member of our national security government contractor team again. We hope that everyone who does business with the Air Force takes note of this case and is reminded that we take ethical breaches very seriously and will not hesitate to impose sanctions, when necessary, to protect the procurement process, regardless of the size of the contractor involved.
Today national security space programs are vital to the nation's leadership and are critical to our ability to wage war and provide for the country's security. I have stated many times that I believe it is imperative that we have two proven launch systems, so we have assured access to space. Because of that, I am very pleased to have Boeing back as a viable launch provider, along with Lockheed Martin.
Now I would be happy to take questions from you at this juncture. I do want to introduce a couple people over here on the side that perhaps can be helpful too in answering detailed questions. One is Steve Shaw, who is the Air Force suspension and debarment official in the General Counsel's Office. The other is Craig Cooning, Major General Craig Cooning, who is the director of Space Acquisition in the Office of the Undersecretary of the Air Force.
With that, please --
Q Pete, I wonder -- just for the great unwashed out there, I wonder what could this mean for Boeing in terms of contracts, especially over the short term. And will this getting back two launch contractors help you more quickly launch key spy satellites that you need?
SEC. TEETS: We have a need to step back now a couple of paces and start to engage Boeing in a meaningful discussion of a strategy for how we will proceed on Buy 3. We've had some preliminary discussions with Lockheed Martin. We'll broaden that involvement now and start to discuss with Boeing how would we put together the right acquisition strategy for Buy 3.
Buy 3 itself probably won't be awarded until next year. I'll say 2006. And we'll start to acquire launches on Buy 3 at that time. So we've got a few months to get a strategy together, to get an RFP out, to start to see proposals back in and do some evaluation to sort our way on the way forward.
Now in the near term, I do believe that there are some infrastructure sustainment costs that will be awarded to Boeing, so that we can help them bridge this gap as they go forward, just as we have helped provide infrastructure sustainment costs to Lockheed Martin.
Q How much are we talking about?
SEC. TEETS: What are we talking about? Eighty --
MR. : Well, it's over '04 and '05, about 130, 140 million (dollars) --
SEC. TEETS: Over '04 and '05, $130 (million) or $140 million, in that ballpark.
Q And you can't give us a ballpark figure on the Buy 3, on what it might mean in terms of money for both firms?
SEC. TEETS: Well, we can a little bit later. And what -- the reason I'm hedging on that a little bit is, we need to go through a process now of engaging Boeing in some discussions on exactly how the sustainment costs will merge in with the individual unit buys that we're going to make and formulate a strategy. But there will be a significant number of launches acquired.
Q And the spy satellites? Will this help you to more quickly launch these satellites, now that you've gotten Boeing back on board?
SEC. TEETS: Well, they will certainly allow us to continue to launch National Reconnaissance Office satellites. And yes, the NRO is a large user of EELVs.
Q Sir, you said that this interim agreement is somewhat contingent on the criminal case. Could you --
SEC. TEETS: No, I'm saying that if the criminal case -- as you know, there's an open Department of Justice investigation and activity going surrounding Boeing Company. If that ongoing activity results in suspension of individuals within Boeing or results in new evidence being discovered, we will be certainly able to reinstate the suspension of Boeing. And that's the only point I was trying to make there. If those DOJ investigations reveal something new that we haven't seen before, it could result in further action.
Q You mentioned that you thought that the Buy 3 launches could be on contract as soon as '06, which would probably mean they wouldn't start launching till '08.
SEC. TEETS: Right.
Q Are there any launches between now and then that would need to be either sole-source or somehow competed separate from Buy 3 or separate from Buy 2?
SEC. TEETS: No. We're good to go for '06 and '07.
Q On the point you raised earlier on the Department of Justice issue, the federal prosecutor seemed to express when Michael Sears was sentenced that he did not have a lot of faith that things in Boeing were as good as kind of what the Air Force has expressed. It seems like there's a tension between the prosecutor's position and certainly Boeing's, and Air Force seems to be saying no, that the internal processes have taken place in Boeing and things are all right. Where is the disconnect here? Why does the prosecutor seem to have so much less faith that things are fine in Boeing than the Air Force?
SEC. TEETS: Well, I'll just say that I don't know all of the details associated with the Department of Justice investigation. I do know that we've had, through our general counsel's office, some discussions with the Department of Justice, and our belief is that there's not likely to be further revelations of any inappropriate behavior on the part of Boeing people for months ahead. That is to say, their investigation is ongoing and it's likely to be ongoing for a good number of months. And so if those investigations do indeed result in the discovery of some new evidence or inappropriate behavior, we will act accordingly.
Q The figure of -- you said $1.9 million?
SEC. TEETS: I did.
Q And what was that figure for?
SEC. TEETS: That's to pay the costs that we have incurred to create the administrative agreement and go through the whole suspension process.
Q On the cost issue, the cost to the EELV program from this whole procurement integrity problem was about $230 million. The Air Force has, I think, acknowledged that. But why has Boeing not been zinged a larger amount? The LA Times today threw out a figure of, like, $170 million. I mean, what's the deal? Why only 1.9 when you've got a $220 million increase to the program?
SEC. TEETS: The Department of Justice will include considerations for damages to the government in their investigation and their action against Boeing. As far as the Air Force is concerned, our books have been righted by the suspension activity, by the reallocation of launches, by all of the actions that we've taken up to now. And so, depending on -- the Department of Justice investigation is a separate investigation completely, and I can't really tell you what that's going to result in. I don't know.
Q (Off mike) -- a global civil settlement to put in this $200 million? Is that what you're kind of saying?
SEC. TEETS: It could be in a global civil settlement of some kind, yes.
Q It will be remedied somehow; it won't be just hanging out there.
SEC. TEETS: As far as the Air Force is concerned, at this point in time the matter is now closed.
Q And one follow-up. Last year you said a couple times this thing may get lifted, and it didn't happen. What are some of the factors that came to play in the last two or three months that allowed today to happen? Was the Michael Sears conviction and sentencing part of that?
SEC. TEETS: Well, Tony, you will recall that in late September, which is kind of when I made the statement that we were close to being able to lift the suspension on Boeing, new information surfaced in a rather rapid way. When Darleen Druyun was sentenced and her plea agreement was made public, I believe in early October, there were new revelations that came forth that caused the Air Force to need to do some additional investigation. The Air Force has done that additional investigation, and we find that that did not cause us reason to question the ability of Boeing to be a responsible contractor today and to deal with ourselves. That investigation did take some time.
Now, having said that and having gone through the Darlene Druyun situation, very frankly, we wanted to wait until Mike Sears was sentenced and to see whether or not there was any new additional information that we hadn't considered before before we lifted the suspension. And of course, last week he was sentenced, and to my knowledge there was not additional information that came forward at that time.
Q That gave you -- (inaudible) -- to proceed?
SEC. TEETS: Correct. Exactly right.
MR. SHAW: Oh, I was just -- if I could add to that.
SEC. TEETS: No, I'm sorry. Please. Yes, please do, Steve.
MR. SHAW: Because I'm not sure that Tony understand that point. The $1.9 million is the cost of our review internally of this matter and the projected costs of what it's going to be for my office to oversee the Interim Administrative Agreement. There may very well be other damages that the Air Force has suffered by reason of the underlying misconduct in the EELV matter, and that's within the scope of what the Justice Department is doing. So this is not -- the $1.9 million is not a settlement by Boeing of its liability on the EELV, it's only a payment of the Air Force's costs of reviewing the matter.
Q The tip of the booster, basically. (Laughter.)
SEC. TEETS: Jeremy?
Q Is Boeing on the hook for any of the costs of the West Coast launch pad, or is that a matter for the Justice Department to consider?
SEC. TEETS: Again, I suppose that that can be something that the Justice Department looks into. And that is a completely independent investigation. I would tell you that when we decided to move Lockheed Martin Atlas capability to the West Coast, we gained assured access from the West Coast. And from my point of view, what we're trying to do is make certain that we have assured access to space. So that was a plus for the Air Force.
Q If you step back and look at the events of the past couple of years, do you think that the Air Force should advocate, will advocate, or shouldn't advocate for maybe some changes in the revolving-door policies and law?
SEC. TEETS: Well, I do think that the whole issue of procurement integrity is of the utmost importance. I think the rules and the laws that are in place today provide adequate safeguards for proper conduct, but they need to be followed and we need to make certain that people are following them. And we all know that Darlene Druyun violated -- self-admittedly violated some of those laws relating to revolving-door policies. And so I think this sends a certain signal, this case sends a certain signal to the whole industry, and the government as well, that inappropriate behavior and violation of procurement integrity will simply not be tolerated. It's a strong message that's gone out in the case of both Darlene and Mike Sears.
Q If the laws are okay as they stand, then do you think oversight is correct to actually monitor how people do or don't follow them?
SEC. TEETS: Well, I think we'll all improve our oversight activity and sharpen the pencil, so to speak, and I think this is a good wake-up call on that subject.
Q Do you have any sense of how much the contracts that Boeing wasn't allowed to compete for over these last 18 months was worth, and otherwise how much they potentially lost from the suspension?
SEC. TEETS: I can't quantify it for you precisely. I do know that on any ongoing business, it is very, very important to have continuing flow of revenue and a continuing flow of work in the factory. And I know that this has caused some amount of financial difficulty for Boeing, and frankly they've had some layoffs in Decatur, Alabama. It's been -- it has been a difficult economic situation for Boeing. On the other hand, I think it was appropriate and proper for the Air Force to suspend them and to take the actions that we did. It'd be very difficult for me to quantify the exact financial loss that Boeing has suffered.
Q Just to follow up on that, in July 2003, I think you had -- you listed a $1 billion estimate of the cost to Boeing from the reallocation of launches and the suspension.
SEC. TEETS: That was a billion dollars in revenues.
Q Has anything changed then in the last -- that was supposed to be a 60- or 90-day suspension. Since it's been 20 months, has anything changed to that estimate, or is that still in the right ballpark?
SEC. TEETS: It might be up slightly, because there were some Buy 2 launches awarded to Lockheed Martin that otherwise might have been competed by Boeing and perhaps awarded to Boeing under a different scenario. So there are a lot of might-have-been kinds of things there, but it's not dramatically up. If it was a billion dollars before, perhaps there's another 200 million, or something like that.
Q (Inaudible) -- just a couple of nuts-and-bolts questions. How many launches over what time period? And when might you make a down-select, just roughly?
SEC. TEETS: Well, that's exactly what we want to do throughout the balance of this year. And as I say, we will now re-engage Boeing in a meaningful way. We'll look at our manifest. We'll see what the appropriate procurement, acquisition strategy should be. I would hope that before the end of the summer, we'll have that complete. I would hope that we would have a solid acquisition strategy by the end of the summer, and move out accordingly.
Now, what are our needs? Well, there will be RFPs put out that will allow both Boeing and Lockheed Martin to respond, and their response will probably come in late this year or early next year, in that ballpark. And then it'll be for a number of launches that we decide is a smart number to be acquiring, and it'll probably be for a two-, three-year period, something like that. So you -- there might be -- just ball park 18, 20 launches, something like that -- maybe 24 -- but in that ball park.
Q And we're talking early next year would be the earliest you would award --
SEC. TEETS: Correct.
Q Okay, thanks.
SEC. TEETS: Please.
Q It seems like every revelation that has come out or grown out of the Boeing scandal, both with this and the Tanker, has come from somewhere else, either from a congressional investigation, Department of Justice, GAO. Do you feel that enough has been done inside the Air Force in terms of oversight, in terms of being able to find these problems within the service and its contractors, so that you don't have to wait for the Department of Justice to come up with something, or from Congress or from GAO?
SEC. TEETS: Well, I think it's a fair question that you ask, and I -- the answer to that is, yes, I do think that the Air Force has been extremely vigilant over the course of these last couple of years. I will say that as part of this administrative agreement that I mentioned in my conversation, the Air Force will have an official living with Boeing that will be monitoring their ethical behavior, their business conduct practices and so forth. He will be inside Boeing, the cost of which will be borne by Boeing, but he will be reporting to the Air Force. And so we'll have this three-year period to have some pretty intense insight into what are the business practices, what is the ethical program, and is it being maintained and sustained.
I'm confident now that the program that Boeing has put in place, the emphasis that Harry Stonecipher has put on integrity in business practices and ethical behavior, is a strong program. And we'll be monitoring that over the course of the next three years.
Steve, would you like to add to that?
MR. SHAW: Yes, thank you, sir. Actually the EELV allegations were brought to the Air Force, and we brought them to the Justice Department. So that really was an Air Force-initiated investigation. In addition to that, the germane matter, the real details of that, came out of an internal investigation that was done by Boeing, and that I think is a good evidence of how Boeing was addressing these kinds of problems, at that time anyway, which I think was 2002 and 2003. So that was really a Boeing matter to the Air Force and to Justice, and the EELV was an Air Force matter to Justice. So these weren't things that were initiated by the Justice Department.
Q While Mr. Shaw is up there, can he elaborate on one thing. You said that it seemed the Air Force's belief is if there are any more shoes to drop, so to speak, on Boeing official, that such actions would take place a month from now rather than two or three months or something. Can you shed some light on that?
MR. SHAW: Well, we don't have any indication that any other shoes are going to drop ever. But the -- I think the reference to the timeline was that our understanding is that Boeing is discussing the matter with the Justice Department on a global scale, and the anticipation is that nothing will be resolved from that, if at all, within the next several months. And that in a sense those are -- they're -- technically investigations are continuing, but they're really more a dialogue with Boeing, and we don't anticipate investigation in the sense of new witnesses and new documents appearing.
Q Part of your thinking was this could drag -- if Justice had been in discussions -- could drag on for months while you're waiting for Buy-3 to be dealt with. And --
MR. SHAW: That's right, and that's the reason this is called an interim administrative agreement. It's very unusual to have an agreement called that. And it's called that deliberately, for the reason that if these other things happen, if there is an indictment, if there's a conviction, we can choose to terminate the agreement at our option and re-suspend, or if there's new evidence.
Q Thank you.
SEC. TEETS: Please, Jeremy.
Q Would you mind elaborating on your point about how Boeing's costs on this matter aren't allowable? Can you talk a little bit about what that means?
SEC. TEETS: Sure. In any contractor's billing activity, allowable costs are accumulated, billed to the government and paid. Unallowable costs cannot be billed to the government. And so what we're saying is these costs that I enumerated in my statement as being unallowable and expressly unallowable will not be billed to the government.
Q Thank you.
SEC. TEETS: Thank you.
Q Actually, I've got two questions.
SEC. TEETS: Okay.
Q To follow up on Sonny's (sp) question, if there were more findings that came out of the tanker investigation, would that necessarily have an effect on the EELV situation? And I also have a second one.
SEC. TEETS: Well, it's such a hypothetical question, because you'd -- I'd have to ask you what linkages there might be and so on and so forth. But any inappropriate activity on the part of any of our contractors will lead to a thorough investigation of that activity, and appropriate action will be taken. And our hands certainly are not tied. If something comes out of the tanker investigation that could influence our relationship on EELV, then yeah, it could flow. I mean, it depends on the conditions.
Q (Off mike.) And secondly, folks have been pretty upfront about the fact that the Buy 1 pricing just didn't fall through for the -- it fell through for the contractors and for whatever reason -- business, CAIG changed and whatnot.
SEC. TEETS: Right.
Q By reallocating the Boeing launches to Lockheed, in a sense, the net effect to Lockheed is that they are losing more money, because they have more launches that cost a certain amount of money that they can't recoup the cost on. So can you make a comment about that?
SEC. TEETS: Yes. Lockheed Martin was willing to honor its Buy 1 prices. And that's exactly what the Air Force has moved forward with in these reallocated launches.
On the other hand, as you know, we have started to fund the infrastructure sustainment costs in future years. And as those launches are taking place, we will expect some credits back from both contractors that reflect the infrastructure sustainment effect on those prices.
So what I'm really saying at the bottom line is, I think Lockheed Martin had a reasonable business deal with the Buy 1 launches, and similarly, Boeing was penalized by losing the Buy 1 launches.
I guess I'd be happy to take one more if there is another one, or if not I'm glad we've satisfied your curiosity and I thank you all very much.
Q Is infrastructure and assured-access funding synonymous?
SEC. TEETS: Craig, help me here. I don't know about the terminology.
Ask it again, Jeremy.
Q When you talk about the infrastructure costs that you've picked up for Lockheed and now Boeing will be eligible for, is that synonymous with when you've talked about budget requests for assured access, like '06 being 340 million (dollars)?
GEN. COONING: They're related, but they're not exactly the same. And the key thing -- the assured access for us was a bridge, as we recognized that the commercial marketplace had fallen off. When we go forward on Buy 3, we're going to completely restructure our contract vehicles: one, to compensate for things such as mission assurance, sustaining engineering, supporting a launch pad, so we'll have that national capability with two providers on both coasts. And so, really, the infrastructure costs are a refinement of the assured access.
Q And so, in the future, those may be built in --
GEN. COONING: Yes, yes.
Q -- to the contracts up front rather than having a separate request --
GEN. COONING: Yes, they will be. Definitely.
SEC. TEETS: Thank you all very much. Have a good weekend.
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