The Kansas congressional delegation is angry that Boeing has decided to close its aircraft plant in Wichita, and it should be. Throughout a decade-long struggle to secure the Air Force’s next-generation tanker contract, the delegation vigorously supported Boeing’s bid because the company said it intended to do much of the modification work at the Wichita facility. Boeing finally won the contract by bidding very aggressively, but now it says the Wichita site is too expensive and it will do tanker modifications at its commercial transport complex in Washington state. So of course the Kansas delegation feels betrayed.
Although this story fits all too easily into the narrative that Boeing is a heartless industrial behemoth driven solely by profits — the Bain & Company of the aircraft business — the truth is a bit more complex. It doesn’t make sense for a big defense contractor to alienate its political base unless there are vital concerns at stake, and the reality is that the Wichita plant’s revenue stream has been slowly drying up for some time. With key programs coming to an end, the tanker effort would have had to carry much of the under-utilized facility’s overhead, making it unnecessarily expensive.
It’s not that Boeing is trying to escape organized labor. Its Seattle-area workforce is famously militant. But the company has to find efficiencies everywhere it can to make a profit on the tanker program, and therein lies an overlooked fact about Pentagon purchasing practices. The acquisition strategy that the Obama Administration put together to finally break the impasse over purchase of a new tanker was what people in the defense business call a “price shootout.” In other words, price was the key determinant of who won, because both bidders met all the other criteria for selection.
Unfortunately for Boeing and the workers of Kansas, the other bidder was Airbus, a European company that the World Trade Organization has found to be chronically in violation of treaties regarding export subsidies. Subsidies were the main reason why the European company thought it could beat Boeing in its home market to win the tanker program. And they were the reason why Boeing management was convinced it had to bid very aggressively if it was to have any hope of besting its rival. Senior executives were so nervous about the bid that they discussed it with Boeing’s board of directors before going forward.
The bottom line is that Boeing assumed considerable risk to secure the tanker contract and keep Airbus out of its home market. Pentagon acquisition officials were able to brag that they had secured a new generation of aerial-refueling tankers for less money than anyone thought possible. But here’s the downside: Boeing ended up having to cut costs everywhere it could to avoid losing money on the tanker program, including Wichita. Keeping an under-utilized, high-cost facility in the production mix would have eroded the program’s already razor-thin profit margin. With Boeing’s resources over-stretched trying to match Airbus’s heavily subsidized development efforts on the commercial side, Wichita had to go. If I was one of the workers in Wichita, I’d feel betrayed too. But having watched the way the tanker competition played out in the nation’s capital, it’s obvious to me why Boeing couldn’t afford to be sentimental.
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