Under the Radar
The inside story of a Pentagon deal that will cost taxpayers billions
Late last year, Boeing Co. executives got a real nasty report: The White House's budget director had been overheard at a dinner complaining that the company wanted to charge the Air Force millions of dollars more for its 767s than it had billed Continental Airlines for the same basic plane. With just five days to go until Christmas, Boeing's lobbyists mobilized to explain the price gap to the company's allies on Capitol Hill. As one Boeing executive put it, in an E-mail: "We certainly want our friends"--the friends being House Speaker Dennis Hastert and Sen. Ted Stevens, the chairman of the Senate Appropriations Committee--"to be armed."
Any day now, the Air Force and Boeing plan to put the final touches on a controversial deal for air-refueling tankers based on the 767 that could be worth up to $40 billion to the giant aircraft maker. While the deal has attracted widespread attention--mostly for criticism that taxpayers are being overcharged--the behind-the-scenes details of Boeing's aggressive push haven't been known until now. Hundreds of internal Boeing documents and communications with Air Force officials--reviewed exclusively by U.S. News --provide a rare look at the contractor's relentless 18-month lobbying campaign to win over the Congress, the White House, and the Pentagon.
The documents show how Boeing pushed a plane that even some military officials doubted was right for the job. They reveal how the Air Force relied on Boeing to shape the basic performance requirements for the tanker and let the company devise the financial structure of an unusual lease arrangement. They indicate that, even now, no one can say precisely how many billions it will cost or how much Boeing will earn. The E-mails show that Boeing tried to remove an Air Force lawyer who raised basic questions about the deal. And finally, the documents make clear that Boeing's powerful connections won White House Chief of Staff Andrew Card's endorsement of a plan that, in the end, could double the number of planes to be leased.
According to one E-mail, a Boeing official described the deal as a chance to tap "a new deep-pockets customer." A Boeing spokesperson declined to comment on specific documents but said the company "is strongly committed to this program and believes it is in the best interest of the Air Force and the nation."
SETTING THE TABLE
The Air Force, in early 2001, was not even looking to buy refueling tankers, despite the fact that its fleet was some 40 years old. But after September 11, Boeing officials approached the service--and the Congress--with a plan to lease 100 air-refueling tankers, modified versions of its 767. The Air Force was interested but had to define the specifications for the new craft: how much fuel it could carry, its range, speed, and so on. In an unusual move, the Air Force offered Boeing an early look at the requirements for the tankers and allowed the company to suggest changes. Later, in July 2002, a Pentagon panel chastised the Air Force for tailoring its requirements to the Boeing 767 and concluded that the document "should not be written for a specific aircraft." Air Force acquisitions chief Marvin Sambur told U.S. News that the service was simply looking to save money by using an existing commercial design.
By working so closely with Boeing, the Air Force put the competition at a disadvantage. In February 2002, the Air Force invited Boeing and the European Aeronautic Defense and Space Co. (EADS), the maker of Airbus, to compete for the lease deal. But by March, the Air Force concluded that the Airbus was too big and did not meet its requirements. EADS officials say they were never shown the full requirements.
This set the stage for another bit of intrigue: On July 1, Air Force official Darleen Druyun told Boeing "several times" that the price of the Airbus was $5 million to $17 million less than Boeing's 767. Investigators with the Senate Commerce committee now want to know if the disclosure of Airbus's price to Boeing was improper; the committee has provided documents it obtained from Boeing to the Pentagon's inspector general. EADS says the company considers all price information proprietary. "We furnished it in confidence," says a spokesperson. "We expected it to be protected." Druyun now works for Boeing. She failed to respond to repeated requests for comment, but Boeing says it did not receive proprietary information.
By September 2002, Boeing faced no competition within the defense industry; but it still faced criticism, particularly from Arizona Republican John McCain, the chairman of the Senate Commerce Committee. And McCain was of the opinion that the tanker lease was a bad deal for taxpayers and a sweetheart deal for Boeing. In particular, McCain wanted to know why the military needed the tankers now.
That's one reason the Air Force's Sambur was--as a Boeing executive put it in an E-mail--"desperately looking for the rationale for why the USAF should pursue the tanker 767 deal now." Boeing gave him the answer. A senior Boeing executive named Jim Albaugh sent a two-page memo to Sambur outlining how the existing fleet of Air Force tankers was old and increasingly unreliable. Sambur told U.S. News that Boeing executives misunderstood what he was asking for.
In October, the Air Force turned to Boeing again to explain why the plane was needed. Near the end of a meeting about the lease deal at the White House, Chief of Staff Andrew Card asked Air Force Secretary James Roche: "How many jobs does this create . . .?" The next day, Boeing forwarded the answer to the Air Force. Company lobbyist Andrew Ellis wrote that he hoped the "employment numbers below will provide you enough ammunition for the secretary to respond to the White House." Senator McCain says he is appalled that the Air Force relied so heavily on Boeing. "I've never seen such a continuous violation of every standard and norm," McCain says. "This close relationship with Boeing and the secretary of the Air Force was remarkable."
PAYING FOR THE PLANE
The tanker deal isn't like most projects, in which the military buys what it needs. It is structured as a lease because the Pentagon didn't have enough money to buy both new tankers and expensive new fighter planes. Boeing, for its part, didn't want to lease the planes directly to the Air Force--that would have put too much debt on its books. So the company and the Air Force plan to set up a "special purpose entity" to serve as middleman in the transaction. It will collect money from outside investors, use the funds to buy the planes, and then rent the tankers to the Air Force. The result: Boeing gets to book the sale it wants and the Air Force gets its lease.
Such complicated financing was alien to Air Force officials. Boeing's documents make clear that in crafting the financing plan, the Air Force played student to its contractor. "The USAF clearly does not understand financing and has asked for our help to educate them (in layman's terms)," wrote Robert Gordon, the vice president of Boeing Capital Corp., in an E-mail message in December 2001. Indeed, Gordon noted, an Air Force general "made a special comment to thank Boeing for all its work over the past months to try and help this leasing proposal make sense" to the government.
Investigators with the Commerce Committee, however, are not as awestruck. They are examining the financial vehicle that's the linchpin of the deal. "It's an Enron-like entity," says McCain. For one thing, U.S. News finds, there is a built-in conflict of interest in the arrangement because, documents indicate, it gives Boeing oversight of its own deal.
Boeing and the Air Force have sold the deal to Congress as a way to save money, but lease terms mean it's impossible to say today how much the government will pay tomorrow. Actual lease payments will be set as planes are delivered, and if interest rates rise more than expected, the government's costs will go up. Boeing's price will also be adjusted up for inflation; Boeing says that's standard procedure. One clause requires the Air Force to pay more if its new tankers spend too much time in the air; the Air Force says the service has negotiated far more flight hours than it will use. Still, Boeing and the Air Force can't shake the criticism that taxpayers are the losers. Last week, the Congressional Budget Office weighed in, saying that leasing the 100 planes will cost as much as $5.6 billion more than if they had been purchased. Boeing rejects the findings as flawed.
CLOSING THE DEAL
By the end of 2002, questions about price persisted. Air Force Secretary Roche told Boeing that Pentagon critics thought the company was overcharging. Boeing, he said, needed to do more to seal the deal with the White House and the secretary of defense's office.
The company got the message. Beginning on January 23, Boeing began a blitz. The E-mails show that Boeing put "a union strategy in play" aimed at getting labor to pressure Congress and "activated key suppliers" to work their government contacts. Former members of the Joint Chiefs of Staff, including associates of Defense Secretary Donald Rumsfeld, were enlisted as consultants.
Despite it all, the deal nearly died in April. All the lobbying hadn't answered a key question raised by a report from the Institute for Defense Analyses, a federally funded research center. It concluded that the planes should cost between $114 million and $125 million--not the $147 million Boeing was then asking. "We should afford Boeing this last opportunity, and then call it a day for the lease," wrote Mike Wynne, a top acquisition official in the Pentagon.
The critical moment was at hand. The Air Force--and Boeing--fought back. Boeing went to the White House to find out what price the president would accept. An official at the White House's budget office, Robin Cleveland, met with Boeing lobbyist Ellis and, according to Ellis's account, "She said Andy Card needs a `new' figure on tanker price . . . to take to the president in order to close this deal." And, according to Ellis, she reminded the Boeing executive that the first 100 planes could be followed by hundreds more.
Over the next week, Boeing came back with new numbers that reduced the cost for each plane to $131 million. The White House signed off. Ellis asked Cleveland if the deal was, in fact, for 200 planes, not just 100. "She said YES, that was Andy Card's view of the deal," Ellis wrote. ". . . We may actually be looking at a $35+B [billion] deal with some additional political work." The Air Force's Sambur says Boeing received no promises for more planes. McCain says he thinks there was a tacit agreement: Cut the price, and we'll make it worth your while.
After the White House signed off, Boeing and the Air Force haggled over the fine print. An Air Force lawyer, Ty Hughes, raised questions about the fairness of the deal. He said a 15 percent cap on Boeing profits wouldn't work unless the government could audit the company regularly. But the current lease deal doesn't let the government see Boeing's numbers until about 2012. Boeing went after Hughes--by offering to drop one of its lawyers if the Air Force dropped Hughes. "I suggest we remove the two lawyers who have been working this," a Boeing official told the Air Force. "I want to have a new set of eyes from both sides, or else I fear we will make no progress." The Air Force refused.
Although not all issues were resolved, the Air Force submitted the lease deal to Congress for approval in July. Three of the four congressional committees that must bless the deal have signed off. Senator McCain has scheduled a hearing for this week but is doubful he can stop the deal. "The fix," he says, "is in."
This story appears in the September 8, 2003 print edition of U.S. News & World Report.