Updated 25 Jul 2003

Presenter: Under Secretary of the Air Force Peter B. Teets

Thursday, July 24, 2003

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Press Conference on the Evolved Expendable Launch Vehicle Program

(Press Conference on the Evolved Expendable Launch Vehicle Program)

Staff: Good afternoon, ladies and gentlemen. We're here today to have a report on the Evolved Expendable Launch Vehicle. We have the undersecretary of the Air Force, Peter B. Teets, who will make an opening statement and then take your questions. We are on the record today. And I would just ask that you limit your questions to the subject at hand, which is the Evolved Expendable Launch Vehicle. Following the Q&A, we will have some fact sheets and some B roll, for those of you in the electronic media, and that will help with some of the details on what we're going to talk about today.

So, ladies and gentlemen, the undersecretary of the Air Force, Peter B. Teets.

Teets: Thanks, Bill. Thank you much, Bill.

Good afternoon, ladies and gentlemen. Thank you for being here.

In February of this year, the Air Force began an inquiry into the allegations of wrongdoing by the Boeing Company during the 1998 Evolved Expendable Launch Vehicle source selection. The allegations concerned unlawful possession of competitors' proprietary information.

The Evolved Expendable Launch Vehicle, or EELV, is an Air Force space lift modernization program intended to improve space-launch capability and standardization.

We had a group of very knowledgeable people from both our Air Force General Counsel's Office and the Space and Missile Systems Center conduct an investigation that included the review of literally thousands of documents. These people performed a very thorough review and analysis and have presented me with information that Boeing has committed serious and substantial violations of federal law. We found the following:

First, the extent of Lockheed Martin proprietary material in Boeing possession at the time of EELV Buy 1 source selection was extraordinary -- approximately 25,000 pages. Second, the quality of information was sufficient to provide great insight into Lockheed Martin's proprietary cost and pricing. Third, Boeing was not forthcoming with the Air Force about the amount of Lockheed Martin data in its possession, and it took a period of approximately four years for them to provide us with all of it.

As a result, the Air Force has today suspended three Boeing Integrated Defense Systems business units and three former Boeing employees from eligibility for new government contracts. The suspensions were issued against the Boeing Company's Launch Systems, Boeing Launch Services, and Delta Program business units as they existed in the Boeing organizational structure as of July 21st, 2003. This suspension will apply to these business units regardless of where they fall in any Boeing reorganization.

The individuals suspended are William David Erskine, a former ground operations lead on Boeing's EELV program, Kenneth Branch, former senior engineer-scientist on Boeing's EELV program, and Larry Dean Satchell, a former member of Boeing's EELV proposal team.

In addition, the Air Force is in the process of notifying Boeing of our intent to reallocate launches under its existing EELV launch contract, which was awarded in October 1998 and is known as Buy 1. Under this reallocation, the total number of Boeing Buy 1 Delta IV launches will be reduced from 19 to 12. The total number of Lockheed Martin Buy 1 Atlas V launches will be increased from seven to 14.

Boeing has a clause in its current contract that gives Delta IV the only West Coast launch capability. We are ending Boeing's West Coast launch exclusivity, and we will permit Lockheed Martin to develop a West Coast launch capability at Vandenberg Air Force Base. This will provide a second launch service capability on the West Coast for assured access to space.

I also would like to announce the results of our EELV Buy 2 decision. The Air Force disqualified Boeing from the award of three Buy 2 launches and plans to award Lockheed Martin those three Buy 2 launches from Vandenberg.

In wrapping up, I would like to say that our Air Force team has worked diligently on this matter to formulate measures commensurate with the severity of the violations. Boeing is responsible and must be held accountable for the actions of its employees. However, it is my sincere hope that the Boeing Company moves quickly to take meaningful corrective actions so that this suspension can be lifted and they may be allowed to compete in future launch competitions.

The cornerstone of Air Force's acquisition philosophy is integrity in all phases of the procurement process by both the government and our industry colleagues. We cannot tolerate anything less than complete honesty in our procurement process, and we believe this suspension and launch reallocation is necessary. Everyone who does business with the Air Force should take note that we expect nothing less than the highest integrity standards.

I'd now be very pleased to take your questions. Jeremy?

Q: Mr. Teets, can you talk about how this new West Coast pad will be paid for? Is the Air Force going to help Lockheed Martin?

Teets: We intend to contract for the upgrade to Space Launch Complex 3 at Vandenberg in the same way that we contracted to build pad 41 on the East Coast, namely Lockheed Martin will finance it, and we will, through either their own source or through a limited liability corporation, we will lease services from that pad.

Yes, please. Tony?

Q: Would you conclude that Boeing violated the Procurement Integrity Act?

Teets: We did, indeed.

Q: And how long -- talk a little bit more about the suspension, the potential duration of the suspensions and how that differs from debarment.

Teets: The three operating units that I mentioned are suspended, and the period of time of that suspension is indefinite. They will be suspended from receiving any new government contracts until such time as the suspension and debarment official of the Air Force determines that corrective actions are in place and that they are once again responsibly operating business units.

Q: And a follow-up. With a Justice Department inquiry -- criminal investigation in parallel, would you also -- would this also be in place while the criminal investigation is going on?

Teets: The suspension is in place now, and the criminal investigation is ongoing now. I would think that if Boeing has a strong response to this suspension, if they immediately start to put in place corrective actions, training of employees, employee hotline, and drive the integrity up down through the organization of these units, I would think that their suspension could be lifted well in advance of Buy 3 EELV competition.

Q: Translated to the English language?

Teets: In other words, 60 days, 90 days.

Q: What's Buy 3? What's at stake there?

Teets: Buy 3 is the next procurement in the EELV series, and it will take place late this year, probably something in the order of 15 to 20 launches.

Q: The missile -- (off mike).

Teets: Yes, please?

Q: How will you determine that Boeing actually has reformed and adopted a new set of ethics? I mean, is there some test they have to meet for the Air Force?

Teets: There's not an explicit test. But we will judge their performance and we will be watching carefully the actions that they take. I believe that -- as a matter of fact, from a conversation that I had yesterday with Mr. Condit, I believe they have an idea in mind that they'll have a stand-down of the entire Integrated Defense Systems operation sometime next week for four hours' worth of explicit training in the need to operate with the highest integrity standards.

Yes, please?

Q: I was wondering if you could talk to the launcher issue, because, I mean, these things take a while to build. The '98 buys -- those -- that hardware is probably already -- there's a long lead on money already on contract. How will that switch exactly work? And the three in the Buy 2 -- how will Lockheed be able to get there in time? Because those are '05 launches, I believe.

Teets: Yes, those are '05 launches. And we have the details of the pad modifications and the activity at Vandenberg in front of us. I would only say that in this matter, integrity is at the top of the list. And we must take this action. Boeing must be held accountable for its past conduct. And it conceivably could create a situation where we will be delayed for some short amount of time. We will be working out those details with Lockheed Martin over the course of the next few weeks.

Q: Can you address the Buy 1 issue?

Teets: Pardon me?

Q: Could you just address the Buy 1, how you're going to just swap hardware? I mean, you know, Boeing is already building hardware.

Teets: Well, I can't tell you exactly what Boeing's building, but I can tell you this. Of the 19 vehicles that were initially awarded to Boeing, only seven had been ordered from Boeing. And generally speaking, the reason that we buy these vehicles or we order these vehicles two years in advance of launch is so that they can then build it. And their build cycle, generally speaking, is compatible with that two-year window.

Yes, Amy?

Q: Can you give us a quantity, ballpark, on the financial impact to Boeing when you pulled the launches out of the Boeing contract, add them on to Lockheed's contract, as well as the financial impact to Lockheed of the work to create the pads?

Teets: Well, it's hard to be exact and precise with a number, because the prices for launch systems vary according to the particular vehicle involved and how much weight is being taken into what orbit. There are also -- in addition to the vehicle prices themselves, there are also ancillary activity for payload integration and for launch services and pad maintenance and things of that nature.

But I, in all candor, would tell you that I have tried to measure in my own mind, roughly, what the business impact would be, and I think it's on the order of $1 billion worth of business, which will be taken from Boeing and given to its competitor.

Yes, sir?

Q: Can you talk about why the debarment punishment was not -- was considered perhaps too strong in this case?

Teets: Generally speaking, a suspension is put in place pending possible debarment. That is to say if Boeing were to not take corrective actions, if Boeing were to not respond strongly to this matter, then we would take into consideration the potential for debarment.

Yes, please?

Q: Is the Delta II included in the launches?

Teets: Yes. Delta II is part of the three companies that are now suspended. And so, the suspension will preclude any additional awards, government contracts, to any of these three units. There is an exception, that in the case of compelling need in the national interest, awards can be justified and then made. But it's a formal process of having to certify compelling national need before an award could be made.

Q: And one follow-up. You've been in the Defense industry a long time. Has there ever been a case like this of document swiping?

Teets: I would say that -- not on this scale is the right answer. I have never heard of a case of this scale.

Yes, please?

Q: Besides the individuals that you named, are there more senior Boeing executives who are aware of and some degree responsible for this? And do you believe that this is any way a corporate-wide problem, as opposed to an isolated incident?

Teets: Not from the results of our Air Force investigation. We have found that the problem existed within these three Boeing units and that it was contained therein.

On the other hand, I do need to give all due recognition to the fact that there is a Department of Justice criminal investigation, for criminal activity, going on right now, and that could reveal, under oath or under deposition, facts that we didn't have available to us.

So, the answer is, our investigation resulted in a finding that this activity was confined to those three business units that we have suspended.

Yes, please?

Q: Mr. Secretary, can you kind of qualify the actions you're taking? Are their scope and magnitude more than the Defense Department has ever taken against another contractor?

Teets: I'm sorry, I can't tell you that. I don't know.

(To staff) I'd look for help over here. I don't know if there are larger --

Staff: (Off mike.)

Q: In the history of the DOD, have there been larger penalties imposed against contractors? I just want to get a feel for the magnitude --

Teets: Please allow me to introduce Mary Walker, general counsel of the Air Force.

And, Mary, I don't know if you have any knowledge --

Mary Walker (Air Force general counsel): I don't have a figure on historic penalties. As you said, there have been other actions not on this scope. I'm not aware -- (off mike). We don't have that information, but we might be able to get it for you.

Teets: Yes, please?

Q: Are you concerned at all that this might push Boeing out of the space business, so to speak, and leave Lockheed Martin as the only supplier of launch vehicles?

Teets: Yes, I am concerned about that. One of my highest priorities is to make certain that we have assured access to space for these vitally important spacecraft that we are launching on a regular basis. And I would say that while it's a concern, I am determined that it is appropriate for us to have two healthy families of launch vehicles. I would like very much to see a successful business going forward in government contracting for both Boeing and Lockheed Martin with their Delta and Atlas families of vehicles. I'd like to see healthy competition.

This remedy that we have described to you today does in fact give us competition on the West Coast that we haven't had up until now. And I'd like to see continuing competition on both coasts, and recognize the fact that with the fallout in the commercial marketplace and the commercial launch services business, prices will rise.

Yes?

Q: What is the impact of this action on the budget initiative you guys put forward in the recent budget in terms of supporting both contractors?

Teets: We will -- again, I would just reiterate, the suspension means we will not be awarding new contracts to those three Boeing units that are suspended, unless there is compelling national need demonstrated. And under that condition, it is possible to award a contract even though they are suspended. And so, we will be looking at that going forward to see if there's a need, compelling national need, to perhaps award a single launch contract for Vandenberg launches, perhaps, for a 2005 launch.

Q: I'm thinking the engineering studies, the -- you know, the support money that you guys have set aside this year to keep -- to help -- (inaudible).

Teets: I understand. And what we will be doing is looking at the appropriate use of those funds, given these new circumstances that we find ourselves in.

Yes, please?

Q: When and how did you inform Boeing of the decision? Can you also tell me what you told them and what assurances, if any, they have given you?

Teets: Boeing was formally informed of this action today. And I would say on a less formal basis -- I mentioned earlier I had spoken with Phil Condit yesterday. And while I didn't describe the exact nature of the decision, I did tell him that we had found that they had some serious violations, and that there would be a strong remedy taken to correct that action. And my very candid assessment is he understood the message, and I think will respond accordingly. I'm very, very anxious that Boeing treat this problem seriously and take it seriously and make certain that integrity is built into all of this operation.

Jeremy?

Q: Back to the West Coast pad for a second, do you have a sense of how much that's going to cost Lockheed Martin to build?

And also, on the Buy 2 launches, is Boeing still going to launch that first NRO satellite?

Teets: Well, first question, do I know how much it's going to cost for the pad mods on SLC 3? Not precisely. I have a belief that it's in the vicinity of $200 million worth of pad modifications to upgrade the pad from the current Atlas IIAS capability into an Atlas V capability.

Q: Lockheed will pick that up?

Teets: Again, what we would intend to do is start to, now, deal with Lockheed Martin to find out the best possible way to get the pad built. And I suspect that it is going to be similar to the way pad 41 was built, which was with Lockheed -- the company arranging private financing, and then having the government lease it back for launch services.

You had a second part of the question.

Q: Right. About the first of the --

Teets: Yeah. We have awarded three Buy 2 launches to Atlas at Vandenberg. There is one remaining launch to be awarded, and we will give due diligence and consideration to that in coming weeks.

Q: Is that the first of the launches, the one that you spoke about a couple weeks ago, that they have to award very soon?

Teets: Indeed.

Q: That's the first of them.

Teets: Indeed.

Yes. Amy, did you --

Q: Yeah, I've got a threefold question, if you can bear with me.

First of all, I seem to recall that earlier the program had some sort of a low cost to the government clause in the contract for both contractors, that the government would receive the lowest cost relative to commercial launches. The commercial market has fallen through. What's happened with that? Is the government no longer obligated to receive the lowest cost now?

Teets: That particular clause has been waived by SMC contracting officials, or "suspended" I guess is a better word than "waived". The clause still exists in the contract, but it is not currently being enforced due to the extreme depression in the commercial marketplace.

Q: Okay. And then when the entire scheme was sort of restructured and Boeing received the heavy test, and Lockheed received sort of a waiver from doing the West Coast pad, that was sort of an equitable trade at the time. Is Lockheed's heavy vehicle going to be tested in any way, anything like that? Is there concern there about their heavy vehicle?

Teets: Yes. Again, this is a matter that -- now that we have resolved our way forward here, it'll be possible for SMC to engage Lockheed Martin in a meaningful way to discuss alternatives and all. But I can tell you, conceptually, we would like Lockheed Martin to build a heavy lift launch vehicle. And perhaps one of these seven missions could be used as a demo of that vehicle.

Q: Okay. And then --

Teets: And we'll be investigating -- we'll be looking into that with Lockheed Martin in the next few weeks.

Q: To build up to what Jenny was actually asking you, you mentioned a compelling need for national security, and this first launch looks like it could be an example there. Is that kind of the -- the first launch that you mentioned that needs to be taken care of in '05, is that sort of -- your nearest attention in terms of compelling need for national security when you --

Teets: It's a possibility. And we will be looking at that, yes.

Please.

Q: With your response from Boeing and what you're expecting from them, do you -- are you expecting any specific personnel changes that they need to make to satisfy your suspensions?

Teets: No, we have not asked for any specific personnel changes. I am anxious to see their strong response to this suspension, and it could involve some changing of personnel. But more importantly, I think it is the notion of driving down the idea that while it's fine to compete, it's not fine to compete at any cost, and it's not fine to violate federal laws during a competition. And under no circumstance would I expect Boeing to do anything but teach their employees, train their employees, and put in place safety mechanisms to make certain that any kind of behavior of that kind is reported rapidly.

Yes, please?

Q: You said in the opening statement one of the violations by Boeing was they were not forthcoming and it took them four years to come forward with information. Can you explain exactly what was expected them -- that they do and they didn't do?

Teets: Yes, I could. This whole problem, I believe, first surfaced back in June of 1999, when Boeing informed Lockheed Martin and the Air Force that they had a small amount of--they had found--a small amount of proprietary information in one of their, with one of their employees. And it was not a particularly significant piece of data. And I think they sent a few pages of that data over to Lockheed Martin, and Lockheed Martin ultimately, I think, agreed that it wasn't very important. And minor items like this have happened in the past, where inadvertently somebody has some proprietary information of another person, and companies operating with high integrity will recognize that that sometimes can happen, strong action is taken, retraining is done, and so on and so forth.

In this case, it was a good, long number of months before any additional proprietary information was even acknowledged. And I think it was the wrongful discharge suit that was going on in Florida that ultimately resulted in additional proprietary information being made known to Lockheed Martin.

I think the Air Force didn't receive all of the proprietary information that was in Boeing's possession until April of this year.

Amy?

Q: Were you working at Lockheed at the time that this was going on?

Teets: I retired from Lockheed Martin late in October- November time frame of 1999.

Q: So this was just starting to kind of break open.

Teets: Yeah. Yeah. When I was at Lockheed Martin, I really had no knowledge of this.

Q: Okay.

Teets: Tony?

Q: A quick one on the timing of launches that are being shifted from Boeing to Lockheed. When are those missions notionally scheduled for?

Teets: There's one in late '05, two in '06, two in '07, one in '08 and one in '09.

Q And putting your old corporate hat back on, what will this mean in terms of any short-term revenue hit over the next three or four years for Boeing, just for that sector?

Teets: Well, when you say three or four years, all seven of these launches will be ordered from Lockheed Martin two years in advance of launch, and I've just given you the launch dates, so you can see what the incremental payments have to be.

Q: So these are down the line, later in the --

Teets: Well, the first one will be this year. When we buy the one in '05, it takes money in '03 to do it. And next year there will be two more, and so on.

Yes?

Q: In your conversations with Boeing, did you get any sort of sense that , since they just made the announcement that they're not going to use Delta IV anymore in the commercial marketplace -- that they would consider, if the punishment is severe enough, not pursuing Delta IV anymore, or did you get a sense that they are fairly committed to the program?

Teets: We did not have any discussions about their departing the business of launching government satellites. My belief is that this is a two-way street. If the government makes the launch business going forward, in dealing with the government, profitable for the companies that are involved, they'll stay in the business. And if we don't find a way to make it an attractive business going forward, they'll get out of the business. And that goes for both Boeing and Lockheed Martin. None of these companies can stand to just take losses year after year after year and have us expect them to go forward. Successful businesses build quality products, and we want both of these family of launch vehicles to be successful businesses.

Teets: Amy?

Staff: Last question.

Q: Does this require reprogramming, since your first launch there is in late '05, of '03 funds, or would you internally do that without congressional -- can you do that without congressional approval? And the same thing in the '04.

Teets: Well now, note, Amy, that we had planned this launch in '05, so we have the funds to procure launch service in '03.

Q: Okay, so you --

Teets: It's actually with '04 dollars because it's an October/November launch. But still.

One last question, please.

Do you have a question, ma'am?

Q: Oh, me?

Teets: Yes.

Q: No.

Teets: Okay.

One last one?

Q: I'll ask one.

Teets: Okay.

Q: You mentioned earlier the price would go up. Can you say by how much?

Teets: No, I really can't. What I'm really saying here is that -- it's consistent with my last answer. The original set of EELV launch prices were established at a time when both companies were planning on a very strong commercial marketplace, which would allow unit reductions in price. Now the realities have changed. That market is not robust and there's very little success in the commercial marketplace. So the only answer, in order to have a successful business going forward, is to have higher prices.

Q: So it has nothing really to do with this matter of Boeing's misbehavior? I mean the --

Teets: In terms of the price of the launches? No. Ultimately, the price of the launch will be dictated by the size of the marketplace.

Q: Mr. Teets, can I -- one last --

Teets: (Laughs.)

Q: There's an impression that in your meeting with Rumsfeld yesterday he approved, blessed, gave the nod, or whatever, for you to go forward. Can you give some clarity to that? Was it Secretary Rumsfeld's decision to make, or only yours to inform him of and yours to make?

Teets: I did have the opportunity to brief Secretary Rumsfeld yesterday, and as a matter of fact, Secretary Roche as well. And I want both of those fine people to be fully informed of what actions we're taking, and they are fully informed, and they were both very supportive of my decision. But it's mine, not theirs.

Q: Thank you.

Teets: Thank you all.

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