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STATEMENT BY
DR. MARVIN SAMBUR
ASSISTANT SECRETARY
OF THE AIR FORCE (ACQUISITION)

BEFORE THE
HOUSE ARMED SERVICES COMMITTEE
UNITED STATES HOUSE OF REPRESENTATIVES

SUBSTANCE AND POLICY IMPLICATIONS OF THE AIR FORCE TANKER LEASE PROPOSAL

JULY 23, 2003   

 

Chairman Hunter, Congressman Skelton and Members of the Committee:

Thank you for the opportunity to appear before you today.  I am proud to come before you to discuss the Air Force tanker lease proposal and the status of the KC-135 fleet.  My testimony will discuss the tanker lease report to Congress that was submitted to each of the Defense committees.

As the Director of Plans and Programs at Air Mobility Command previously testified to the Projection Forces Subcommittee on June 24, 2003, we must begin recapitalizing our aging KC-135 fleet now.  While our requirements for tankers are increasing due to the Global War on Terror, Operation Enduring Freedom, and Operation Iraqi Freedom, the availability of our KC-135s is decreasing.  The degradation of our current tanker fleet is accelerating beyond our original projections.  Using the FY02 legislation to evaluate leasing tanker aircraft, our report shows that we can lease and deliver KC-767 tankers 5 years sooner than a normal procurement program.  While this lease will cost slightly more from a net present value analysis than a normal procurement program, the benefits greatly offset the financial disadvantages.  In order to purchase these aircraft on the same schedule, we would need $5B MORE funding in the Air Force account through FY06 and more than $11B more across the FYDP.  This is money that the Air Force doesn't have and is not programmed for -- and would result in significant impacts and delays to our other modernization programs.  The KC-135 fleet has served the Air Force well for over 40 years, and it is time to begin the recapitalization.  Given current DoD and USAF budget projections and constraints, recapitalization of the KC-135 fleet (544 aircraft) will take between 30 and 40 years.

The Need for Tankers

The mission of the Air Force is to defend the nation through the control and exploitation of air and space.  To accomplish this mission, the Air Force must provide its warfighters with capable and reliable systems. 

Air refueling tankers enable our entire force to protect our homeland, conduct combat operations, and provide humanitarian relief around the world.  They enable other Air Force, Navy, Marine Corps and allied aircraft to fly farther, stay airborne longer, and carry more weapons, equipment, and supplies.   As we just experienced in Operation Enduring Freedom and Operation Iraqi Freedom, the Air Force tanker was a critical force enabler and force multiplier that allowed our coalition force to operate with impunity over a distant battlefield.  Without a robust and reliable air refueling fleet, no existing war plan, humanitarian mission, or extended special air mission can be flown without the permission and concurrence of other sovereign nations for landing rights to refuel.  Air refueling tankers ensure our nation has the global reach to respond quickly and decisively anywhere in the world.  In short, our National Security Strategy is unexecutable without air refueling tankers. 

Why Replace our Tankers?

Tanker dependence in recent wars and the advanced age of the nation's air refueling aircraft fleet drive the Air Force's urgency to recapitalize as soon as possible.  Today, a single 43-year old aircraft type, the KC-135, supports ninety percent of our combat air refueling capability.  Beginning manufacture under the Eisenhower administration, 732 KC-135s entered military service between 1957 and 1965.  The remaining 544 KC-135s on duty today have the oldest average fleet age of any Air Force combat aircraft.  The ongoing war on terrorism heightens our aging aircraft concerns.  Subsequent to September 11, 2001, growing commitments to actions around the globe and a more aggressive homeland defense posture further drove up reliance and demands on our aging tanker fleet.  The heightened tempo of operations is likely to continue for the foreseeable future.  The military successes in Afghanistan and Iraq were critically dependent on air refueling to extend the range of our airlifters, sensor aircraft, and Navy, Marine Corps, and Air Force bomber and strike aircraft.  These conflicts, along with the on-going war on terrorism and heightened homeland security, have increased air refueling requirements while at the same time they have decreased asset availability.  These actions are stressing our oldest and least capable tankers. 

The cost of continuing to operate the existing KC-135 air-refueling force will continue to escalate dramatically.  Corrosion, major structural repairs, and an increased rate of inspection are major drivers for increased cost and time spent in depot.  This also directly decreases operational aircraft availability.  Operational availability is expected to continue to decrease throughout the remainder of the KC-135's lifespan.  Snowballing signs of aging are evident today.  Under these conditions of accelerating costs and steadily declining availability and performance, combined with the increasing operational demands, actions to replace the KC-135 must begin now. 

At an average age of over 43 years, the KC-135 fleet is the oldest combat weapon system in the Air Force.  As this tanker fleet ages, ensuring warfighters have the required number of tankers to perform their wartime mission is a growing challenge.  Through the 1990s, the KC-135 fleet started to show its age.  In 1991, Air Force Materiel Command initiated aging aircraft inspections and repairs to maintain the airworthiness of this geriatric fleet.  By 2000, 32% of the KC-135 fleet (29% of the entire Air Force refueling capability) was unavailable due to depot level maintenance as the number and complexity of repairs drastically increased.  This reduced the refueling capability of our warfighters and caused a backlog at the depot facilities, as the average number of days in depot-level maintenance peaked at over 400 days. 

The Air Force realized that, historically, annual depot price per aircraft grew by 18% compounded annually for the last 14 years, and the fleet availability decreased by 1% per year.  The combination of increasing costs and decreasing availability in the future compels the Air Force to act now to balance cost, capability, risk, and recapitalization of the KC-135 fleet.

The Air Force is committed to keeping this critical mission capability through investments in the KC-135 aircraft.  But because of observed, exponentially growing costs and the associated unpredictable nature of corrosion, there is a significant risk of having a single seriously aging airframe responsible for 90% of our air refueling capability.  Independent teams that visited the KC-135 depot maintenance line at Tinker Air Force Base unanimously recognized the risk that this 43-year-old aircraft could encounter a fleet-grounding event, crippling our combat forces from the unpredictable nature of corrosion.  Recapitalization can no longer be deferred; thus, potential solutions were examined to keep our nation from having to rely ultimately and almost exclusively upon a 70-to- 80-year-old weapon system. 

Options for Replacing the KC-135

In light of increasing tanker demand since 11 September, we realized the need to recapitalize the tanker fleet was more urgent than ever.  The Air Force analyzed several possible alternate solutions as the first step toward replacement of the KC-135 fleet.  The  Air Force first considered maintaining the current force structure.  The true and exponentially damaging effects of aging quickly became apparent from KC-135 depot work.  The unpredictable nature of age-related corrosion - its timing, location, and extent - increases our concern for the risk of an event that would ground the KC-135 fleet.  Thus, continuing the status quo was rejected since the risk of indefinitely operating a fleet of aging aircraft is unacceptable. 

The Air Force also quickly recognized that re-engining the venerable KC-135Es did not address the aging issues, risks to our combat operations, or increasing costs.  Re-engining would amount to spending billions of dollars to keep the currently degrading capability and still have "old iron" that needs replacing.  Re-engining was not a solution. 

So, the Air Force considered acquisition of commercial derivative platforms in tanker configurations.  This strategy acquires air-refueling tankers derived from commercially available airframes to avoid the high costs of new aircraft research and development.  The use of a commercial-based airframe forges synergy with industry in further developing a commercial market for air refueling aircraft.  The question then became:  How can we get these mission critical assets to the warfighter in the most expeditious way, at a reasonable cost to taxpayers?  The answer --- lease a tanker aircraft that is already commercially available. 

An Operating Lease of Air Refueling Aircraft. 

Pilot leasing authority for up to 100 KC-767s was provided in the FY 2002 Defense Appropriations Act.  This operating lease of commercially derived Boeing 767 air refueling tankers is permitted in Section 8159.  The KC-767A is a tanker version of the long-range commercial aircraft.  This tanker was developed and commercially offered to the international community by the Boeing Company as the Global Tanker Transport Aircraft (GTTA).  Italy was the first customer, ordering four aircraft, and has been followed by Japan.  The KC-767 tanker will be the world's newest and most advanced tanker.  It can offload 20% more fuel than the KC-135E, and unlike the E-model, can itself be refueled in flight.  The 767 Tanker also has the capability to refuel probe- and boom-equipped aircraft on every mission - an enormous benefit for joint operations.  The KC-767 will have roughly the same maximum fuel offload as the KC-135R, but can takeoff at maximum take off gross weight in 4000 ft less runway - hence the KC-767 is able to operate from many more runways.  As delivered, the KC-767 will be configured as a convertible freighter being able to carry all passengers (approx. 200) or all cargo (19 pallets vs. 6 on the KC-135 and 27 on the KC-10).  It will have a digital cockpit, cargo door, auxiliary fuel tanks, remote air refueling boom operators station, centerline hose drum unit, crew rest facilities, larger 120 kilovolt-Ampere generators, advanced air refueling boom, and aeromedical evacuation capability. 

The Air Force quickly began negotiations with Boeing for an operating lease of 100 commercially developed KC-767A air refueling tankers.  As the FY04 President's Budget was being developed, the negotiations for the leasing proposal, permitted by Congressional legislation, were unfinished.  A KC-X procurement program was included in the President's FY04 budget, with the program to begin, because of affordability constraints, in FY06.  This program in the FY04 PB would deliver one tanker to the warfighter in FY09.  The 100^th aircraft would be delivered in FY16. 

In contrast, under the negotiated lease, the contractor will deliver 60 new tankers to the warfighter by FY09, and deliver all 100 by FY11.  This plan provides for a quicker recapitalization of the tankers.  To match such a recapitalization schedule under a purchase option would require billions of additional dollars to be invested during the FYDP.  Since those funds are already committed to other uses, there would have to be significant restructuring and/or cancellation of ongoing and planned programs.

Business Case Analysis

Obviously, cost is a big driver when choosing an acquisition strategy.  In isolation, a leasing strategy requires additional funds in then-year dollars relative to the cost of a traditional purchase.  Economic considerations, however, are not limited to expected funding flows, which ignore the time-value of money.  To account for the time-value of money and gain insight into the economic implications of leasing as an acquisition strategy, Office of Management and Budget Circular (OMB) A-94 directs a present value comparison between the proposed lease and a hypothetical purchase based on the same delivery/return profile.  The financial analysis for the A-94 test is highly sensitive to the underlying assumptions such as purchase price, expected inflation and appropriate discount rate.  Applying the A-94 test with the assistance of OMB, the Department of Defense determined that the net present value of the multiyear lease option and a traditional purchase option results in an NPV favoring a purchase by $150 million -- about 1%.

The advantages in schedule and reduced impact to currently budgeted programs outweighed the results of the A-94 analysis and drove the leasing decision.  The Air Force and Department of Defense selected leasing as the acquisition strategy primarily based on affordability and minimizing budgetary impact to our plans for getting accelerated capability of the new weapon system to our frontline troops. 

Under the lease option, the Air Force can afford to field this new fleet of tankers at a quicker pace than under a traditional purchase plan.  Jumpstarting replacement of the older, less-capable tankers enables faster modernization of air combat forces.  The lease not only advances the first delivery by three years, it puts the 100 aircraft fleet at the disposal of our frontline commanders for combat operations by FY11, five years ahead of the planned purchase.  If we were to purchase these aircraft in a traditional buy on the same delivery schedule, while maintaining our financial top-line, we would have to take billions of dollars out of other important programs. 

Implementation Plans

Under this Pilot Program, the Air Force intends to lease 100 KC-767A aircraft with Congressional approval of the New Start notification.  The lease program will be sole source, using terms and conditions germane to commercial aircraft leases and commercial business practices in accordance with the Federal Acquisition Regulation and section 8159.  Terms and conditions of the lease arrangement meets all requirements of the FY02 Defense Appropriations Act including OMB Circular A-11 criteria for an operating lease.  Full details of the lease are included in the Report to the Congressional Defense Committees that was fully vetted and coordinated with OSD and OMB.  

This will be a three-party contract between the US Government, Boeing Integrated Defense Systems, and a third-party Trust.   The Trust will issue bonds on the commercial market based on the strength of the lease contract with the US Government (rather than the credit worthiness of Boeing), will buy the aircraft from Boeing, and will lease them to the Government.   The Trust will not make a profit but will provide for the funds necessary to pay bondholders and pay off the debt after the sale of the aircraft.  Any residual funds acquired from the sale of the aircraft subsequent to lease termination will be refunded to the Government as an overpayment.

The contract will include "Most Favored Customer" clauses stating that if Boeing sells comparable aircraft (up to 100) during the term of the contract for a lesser price, the Government will receive an equitable adjustment.  To further guarantee the taxpayers receive a favorable deal, Boeing has agreed to a Return-on-Sales (ROS) cap of 15%, whereby, following an audit of their internal cost structure in 2011, any ROS in excess of 15% in either commercial or military manufacturing centers will be returned to the Government.  Again, this is something unprecedented in military acquisitions.

Conclusion

I want to thank the Committee for allowing the Air Force to share its concerns about the need for a new tanker.  I believe the KC-767A Multi-Year Aircraft Lease Pilot Program offers us the opportunity to jumpstart recapitalization of our aging KC-135 tankers.  Recent events and increased requirements to support homeland defense have spotlighted our reliance on these critical refueling assets.  Tanker dependence in recent wars and the advanced age of the nation's air refueling aircraft fleet drive the Air Force's urgency to begin recapitalization as soon as possible.  The KC-767A supports the requirements for our next generation tanker aircraft.  The negotiated lease proposal would provide for the delivery of 60 aircraft within the FYDP and field the 100^th aircraft by 2011, five years faster than current purchase plans.  This minimizes near-term budgetary impact to other important programs. 

I fully support this leasing alternative to provide the warfighters with new equipment as quickly as possible.  This leasing program supports the Air Force's essential mission requirements that support the defense of America. 

I appreciate the support provided by Congress and look forward to working with this Committee to best satisfy our warfighter needs in the future.  Thank you for the opportunity to provide this statement for the record.