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Book Cooking at Boeing
Early this summer, a top Wall Street stock picker issued a glowing report about Boeing: buy, buy, buy. The unusually rosy assessment for the troubled company had nothing to do with the need to replenish the Pentagon’s arsenal of cruise missiles depleted by the Iraq war or the Bush administration’s drive to implement Star War, both of which will net Boeing billions. No, this analysis, written by Heidi Wood, a vice-president at Morgan Stanley, pointed to "a no risk" risk deal with the federal government to lease 100 Boeing-767 tanker aircraft.
According to Wood’s report, the deal will generate $2.3 billion in profit for Boeing. To put this in perspective, that’s about as much profit as Boeing reaps for the sale of 1,033 of its 737 commercial airliners. From Boeing’s perspective, the great part of the tanker deal is that the company has few obligations, yet the government is locked into the leases, even if it proves that the Pentagon doesn’t need the planes. Boeing is guaranteed a 15 percent profit on each plane it delivers. "There’s substantially less risk than is common in the commercial aircraft market," Wood wrote.
Wood should know what she’s talking about. The Wall Street Journal calls her the top stock analyst in the Aerospace / Defense sector and she also serves as a Bush appointee to the Commission on the Future of the US Aerospace Industry.
Under the deal approved by the Pentagon last month, Boeing will convert 100 B-767s into military refueling tankers. It’s quite a coup, because many Air Force generals have said that the planes aren’t needed, an assessment backed up by a Government Accounting Office investigation.
There are currently 545 KC-135 tankers in the Air Force fleet. More than 400 of them are new, fully upgraded "R" models. The other 134 tankers are older "E" models that some inside the Pentagon and the Congress are anxious to replace with the leased planes from Boeing.
On the surface, the Boeing proponents appear to have an argument: the E tankers are aging. Most of the planes are 35 years old. However, the Air Force primarily assesses the life span of planes based not on age but on flight hours. The engines for the "E" model has a projected life of 36,000 flying hours. A 1995 GAO report revealed that the majority of the "E" tankers have accumulated about 13,000 hours. The report projected that not one of the tanker planes in the fleet would reach its limit until 2040. The new plan is to begin replacing the E tankers with the Boeing planes in 2006.
Even if the Air Force decided it needed to upgrade the engines on the E planes sooner, because of added usage and stress from the wars in Afghanistan and Iraq, it would be much cheaper to simply upgrade the engines instead of entering into a lease arrangement with Boeing. The GAO estimates that the entire fleet of "E" tankers could be upgraded with "R" engines for about $3.6 billion. This is more than seven times cheaper than the $26 billion the Air Force will have to fork out for the Boeing commercial tankers.
Despite the fact that Boeing famously fled Seattle to set up its new headquarters in Chicago, the tanker lease deal was engineered through the tireless work of the Washington State congressional delegation, led by Sen. Patty Murray and Congressman Norm Dicks. Wood, who demonstrates a sophisticated understanding of the political economics of the Beltway, cautions investors that Boeing may need to demonstrate its gratitude to the Washington delegation by agreeing to locate some of its manufacturing plant for the new 7E7 commercial jet in Seattle rather than in a more corporate friendly environs.
"A subtle negative may be the payback required considering political capital BA [Boeing] has expended to land the tanker deal," Wood warned. "Now the company is somewhat beholden to its hard-working Washington constituency. This may limit some of the latitude the company would probably like to have in deciding where to build the 7E7, adding pressure to keep some of the 7E7 work in expensive, union-dominated Seattle."
Of course, the congressional delegation couldn’t have prevailed on its own. Boeing got some vital help greasing this deal from the inside as well in the form of Darleen Druyun, a top Air Force official who called herself the Godmother of the C-17-the troubled air transport plane made by Boeing. According to Pentagon sources, she helped craft the tanker deal, fought off skeptical Pentagon accountants and auditors, worked the appropriations committees and, finally, when it all seemed nicely tied up, retired from the Pentagon and joined Boeing as an executive vice-president, where she now supervises the company’s interests before congress and the Pentagon.
Druyun is not the only Pentagon powerbroker to be recruited into Boeing’s corporate hangar. Recently, Boeing’s board has boasted both former Defense Secretary William Perry and John M. Shalikashvili, at one time the chairman of the Joint Chiefs of Staff. In 2001, Boeing also hired Rudy de Leon, Clinton’s Deputy Secretary of Defense, to run its Washington office. Although De Leon is known as a hawk and a masterful dealmaker, his hiring may have been a rare misstep for Boeing, since congressional Republicans howled that the company should have picked one of their own from the Pentagon’s rolls.
It’s just this kind of zealous devotion to political payback and behind-the-scenes influence peddling that has landed Boeing in a rare spot of trouble. According to a one paragraph item in Reuters from early June, the Inspector General of the Air Force has opened an investigation into Boeing whether or not Boeing should be debarred from bidding on contracts with the federal government. The probe stems from allegations that Boeing executives received proprietary information from Lockheed concerning bids on Pentagon contracts.
The Lockheed affair is not Boeing’s only transgression. The Project on Government Oversight, a DC-based Pentagon watchdog group, reported last year that since 1990 Boeing has committed more than 36 violations and has been forced to pay more than $350 million in fines, penalties, restitution and settlement. Among the more recent allegations:
Boeing placed defective gears in Chinook helicopters;
Company officials offered bribes to officials of the Bahamas government as a means of securing a contract;
Produced a defective safety system for the Apache helicopter;
Misrepresented the progress of clean-up at Rocky Flats nuclear weapons site; Charges from the State Department that Boeing violated the Arms Export Control Act and International Traffic in Arms Regulations-more than 100 instances are cited;
Accused of civil rights violations in hiring and salary practices toward blacks and women;
Routinely mistated labor costs and exaggerated overhead costs.
These are serious charges of criminal and civil malfeasance, some of which Boeing didn’t even dispute. Yet, despite the rap sheet, Boeing has never been suspended or debarred from bidding on contracts since 1990. Federal contract guidelines require that contractors to the government sanction violators and only award contracts to "responsible" contractors with a record of "integrity and business ethics".
Of course, Boeing is hardly alone in getting a pass from these high-minded rules. In the past decade, out of the top 50 defense contractors the Pentagon has only suspended the contract privileges of only one major company, General Electric Avionics Division, and that lasted for only five days.
Even so, some in Congress aghast at the mere possibility of a crackdown on cheating contractors make haste to loosen the rules even further. At the behest of Boeing and other big contractors, Rep, Tom Davis, the Virginia Republican who chairs the House Government Reform Committee, has just introduced legislation that will unravel many of the key provisions governing the regulation of Pentagon contracts.
One of the changes proposed by Davis is for the Pentagon to shift to so-called Time and Material and Labor Hour contracts, where the weapons firms would get paid for how much time they spent working on a project rather than by such standards as to whether they completed it on time or according to code. This amounts to a blank check without any incentive ever finish the job. Davis even includes a provision that would prohibit government auditors from examining the contractor’s billing records.
The congressman, who once won a Harvard rock trivia contest by correctly identifying the Blues Magoos as the group that performed the 1966 hit "(We Ain’t Got) Nothin’ Yet, also wants to expand the use of Share-in-Savings Contracts, a kind of Enron-style financial speculation that allows contractors to be lavishly reimbursed for investments in infrastructure upgrades, such as computer systems. The companies are allowed to charge the government for "efficiency savings" over the lifetime of the contract. But even the Bush administration is skeptical of such claims. In hearings before Congressman Davis’s committee last year, Angela Styles, the chief procurement analyst for the White House, testified that her office had examined dozens of the contracts and "we have seen no real savings."
The program is so ripe for fraud that one expert in defense contracts compared it to the savings-and-loan scandal. "Share-in-Savings contracts could propagate problems similar to those that accompanied deregulation of the government-insured savings-and-loans institutions or procurement of defense spare parts in the 1980s by sole-source contracts," says Charles Tiefer, a professor at the University of Baltimore School of Law.
The biggest prize for the defense contractors is Davis’s plan to scrap key provisions in two hated laws: the Truth in Negotiations Act and the Cost Accounting Standards Act. Back in the late 1960s, Senator William Proxmire teamed with Admiral Hyman Rickover to standardize accounting procedures for defense contractors during the spending frenzy of the Vietnam War. They also set up a board to oversee the enforcement of the standards and deflate the complex accounting tricks of the defense contractors which were costing the government more than $6 billion a year.
The Truth in Negotiations Act forced weapons manufacturers to come clean with the true basis of their pricing and cost data. Under current guidelines, defense contractors must comply with TINA for any contract over $550,000. Davis’s measure would effectively gut the bill by making the reporting requirements apply only to contracts involving more than $200 million.
After the defense industry consolidation frenzy of the 1990s, many Pentagon contract offerings now receive only one bid. To allow the defense companies to set their own accounting and pricing rules in this sole-source environment is to invite the kind of runaway fraud last seen in the procurement scandals of the 1970s and 1980s. It’s one way to jumpstart the economy. No wonder Wall Street’s bullish on Boeing.
[Postscript: This article was written in June. On July 25, the Pentagon announced that it was prepared to impose sanctions on some of Boeing's subsidiaries for contract fraud. This is the first tiime in more than a decade that the Pentagon has taken action against one of its prime contractors. The terms of the sanction have not yet been announced. But don't expect the sentence to be too harsh. The last time the Pentagon barred a big contractor from bidding on new contracts the ban only lasted five days. --JSC]
JEFFREY ST. CLAIR is author of Been Brown So Long It Looked Like Green to Me: the Politics of Nature (Common Courage Press) and coeditor, with Alexander Cockburn, of The Politics of Anti-Semitism (AK Press). Both books will be published in October.