The Pentagon announced a $16 billion deal to lease aerial refueling planes from Boeing Co. yesterday, a controversial arrangement that will go far to prop up the aircraft maker's sagging assembly lines but which critics fear will set a new standard for government-backed corporate bailouts. A $4 billion purchase option would, if exercised, make it a $20 billion deal.
The arrangement calls for Boeing to build 100 airplanes in the same Everett, Wash., plant that builds Boeing 767 passenger jets, and then to transfer the aircraft to Wichita, Kan., for conversion into newly designed KC-767 refueling tankers. The Pentagon will lease the tankers for roughly $16 billion over six years and can buy them at the end of the lease for $4 billion. The cost to build each airplane, according to the terms of the deal, cannot exceed $131 million.
The leasing deal, which is still subject to congressional review, could pay off for Middle River Aircraft Systems in Essex, which makes thrust-reversers for one of the two engines being considered for the twin-engine plane. If Boeing selects General Electric Co. engines - which are common on 767 passenger jets - then Middle River can expect as much as $160 million in new contracts over the next 10 years, company officials said, and perhaps hundreds of millions more if the plane succeeds on the foreign market.
Pentagon officials hailed the plan as an innovative scheme that satisfies the needs of both the military and the nation's foundering aircraft industry. The U.S. Air Force is desperate to replace its refueling aircraft, which average 43 years old, and Boeing is at risk of shuttering its 767 assembly line, whose production has withered to a pace of roughly one airplane a month.
But the deal took nearly two years to negotiate, mostly because of critics on Capitol Hill who questioned why the American government would agree to pay billions of dollars in leasing costs for equipment that it would typically purchase outright. One of the plan's most prominent critics, Arizona Republican Sen. John McCain, once called Boeing's deal "the envy of corporate lobbyists from one end of K Street to the other."
"They call it a $20 billion deal, then they say each airplane costs $131 million," said Paul H. Nisbet, an aerospace analyst for JSA Research in Newport, R.I. "Sounds to me like there's about $7 billion missing somewhere."
Middle River Aircraft Systems employs about 750 at its plant on Eastern Boulevard, and has been scrambling for military contracts to compensate for declines in the commercial aircraft industry. Thrust-reversers for wide-body jets - the brakes, essentially - are one of its primary products, and company officials have been lobbying for a piece of the KC-767 for more than a year.
Workers in Middle River build about 105 thrust-reversers for General Electric's popular CF-6 engine every year, either for new airplanes or as replacement parts and spares. Company officials said an order as large as the Boeing tanker deal - two engines per plane and a supply of spare parts - would sustain one of their main production lines for a decade or more, keeping more than 100 workers employed.
But the primary beneficiary of the deal would be Chicago-based Boeing, whose production lines will get a second life building airplanes that are expected to be in large demand throughout the world. The United Kingdom is soliciting bids for aerial tankers that could be worth $18 billion, and Boeing has already signed smaller deals with Japan and Italy.
Pentagon officials said yesterday that the 100-plane lease is just a first step toward replacing the country's aging fleet of KC-135 tankers, and that they expect to eventually buy "several hundred" new aircraft.
"Boeing needed this in the worst way," said Nisbet. "And I think it's just the beginning. They could be looking at $100 billion in tanker contracts before too long."
Air Force tankers are used to refuel combat aircraft on missions that require them to stay aloft longer than their own fuel tanks permit. They are particularly useful when American fighters are operating from ships or airports far from their intended targets. They have been used extensively in Afghanistan and Iraq.
The KC-767 tanker will be able to carry 20 percent more fuel than its predecessors and will be equipped with two different refueling systems so it can service Air Force, Navy and Marine Corps aircraft on the same mission. The plane is also designed so that it, too, can be refueled in flight. None of the 544 aerial tankers in the Air Force inventory have that capability.
The Pentagon expects the first of the new aircraft to be delivered in 2006, and for production to continue at a rate of about 20 a year.