Pricing the KC-X: $163m estimate for Boeing, $169m for EADS
One of our readers, with the screen name OV-099, provided a comment on our Dewey Defeats Truman post calculating the possible prices on the KC-45 and the KC-767.
OV-099 has been a long-time poster and when the occasion arises, does in-depth analyses on financial terms. We’ve cross-checked his work with others and found his numbers-crunching to be pretty spot-on.
With that in mind, we asked OV-099 to take a final look at his original posting with the thought of elevating it to a primary post. He has slightly revised his numbers. What follows is his analysis of how much EADS and Boeing priced their KC-45 and KC-767 in the bids to the USAF. His analysis is below the jump.
Update, 1-:30 am: OV-099 has further refined his analysis; the update is below.
How are we going to estimate Boeing’s and EADS’ bid price?
We have a few metrics to work with.
1) Northrop Grumman’s final offer price for the 2008 KC-X competition was $184 million in 2008 dollar value; or 188.2 in 2011 dollar value.
2) In the 2008 competition the IFARA Fleet Effectiveness Value for the KC-767AT and KC-30 was 1.79 and 1.9 respectively**.
3) Loren Thompson’s claim that the KC-30 scored ”well ahead” of the KC-767 in the IFARA assessment.
First, let’s calculate the fuel burn differential of the two aircraft.
Boeing has been claiming that the KC-30 burns 25 percent more fuel than the KC-767. If we use that 25 percent figure, the fuel burn differential should be around 2850 lbs per hour in favour of the KC-767 (767-200 fuel burn: 11400 lbs per hour).
We want to calculate the Net Present Value (NPV) for the difference in fuel burn between the two aircraft (using Boeing’s fuel burn figures).
|Year||Cost of JP8 Then Year $||Discount Factor|
(44.8 cents per lb)
Mean Indicator Value
(84.5 cents per lb)
Last KC-X retired
(165.7 cents per lb)
A (2010): (2850 lbs per hour) x (179 a/c) x (489 hrs/year) x $0.448/pound x 0.9783 (Discount Factor)
B (2040): (2850 lbs per hour) x (179 a/c) x (489 hrs/year) x $0.845/pound x 0.2730
C (2071): (2850 lbs per hour) x (179 a/c) x (489 hrs/year) x $1.657/pound x 0.0697
(2010 + 2040)/2
(2040 + 2071)/2
(D + E)/2
|$83.3 million||$43.2 million|
Not wanting to do the NPV calculation for the fuel burn differential for every year, we’ve used the NPV for the year 2040 as a “mean indicator value”. Using this “mean” NPV figure for the entire life-cycle calculation of 40 years; would seem to indicate that the fuel burn differential is around $2.5 billion (in favour of KC-767)
Again, this is the number we get when using Boeing’s claim that the A330-200 burns 25 percent more fuel than the 767-200 (presumably the 767-200ER). This is a Boeing “best case” scenario in relation to the NPV fuel cost calculations, and a far cry from Boeing’s claim that the Air Force would likely have to pay up to $30 billion more in fuel cost for operating the KC-30 over that of the KC-767. In fact, Boeing’s claims regarding the NPV fuel burn delta between the KC-30 and KC-767 is way off base by more than one order of magnitude!
2nd, let’s examine the IFARA claims from Loren Thompson that allegedly Boeing officials close to the competition , after reviewing EADs’ IFARA data, had concluded that EADS held a substantial edge in the Integrated Fleet Aerial Refueling Assessment. Of course, he could have been blowing smoke, but it’s not surprising that the IFARA assessment for the KC-46A would be lower than that of the KC-767AT.
In the previous KC-X competition, the IFARA Fleet Effectiveness Value was 1.79 for the KC-767AT (Frankentanker) and 1.9 for the KC-30; or about 6 percent better IFARA scoring for the KC-30.
Boeing has not revealed much about the KC-46A, but Iet’s assume that it’s based on a 767-200ER, a less capable plane than the proposed KC-767 Advanced Tanker (AT) that Boeing offered last time around. I wouldn’t say that 6 percent is a “substantial edge”. Sure, it’s an edge , but for it to be substantial, I’d reckon that it must be at least double that; or 12 percent. That would mean that the KC-46A’s IFARA score would be about 1.7, and doesn’t look unreasonable in regard to the 1.79 scored by the 767-200AT.
Using 1.7 for the KC-46A and 1.9 for the KC-30, we have:
Fleet Effectiveness Difference = (1 – 1.7/1.9) x 179 = 19 (rounded up)
3rd, as for the MILCON adjustment, the best we could do is to make an educated guess, but I’d be surprised if the adjustment is more than $500 million in favour of the KC-46A.
4th, Estimating EADS’s bid price.
It’s not unreasonable to assume that the Average Unit Price (AUP) for EADS’ final offer could have been as much as 15 percent lower than NG’s final bid in 2008. Northrop Grumman would have had different profit requirments and added one level of cost to the value chain as well. Add to that the fact that the KC-30 is almost through certification and that most of the devlopment costs have been sunk.
Now, let’s say EADS was “conservative” and made an offer 10 percent lower than NG’s inflation adjusted offer from 2008 ($188.2 million for first 68 airframes). EADS’ AUP offer would then be $169.38 million and their Total Proposed Cost (TPP) would be $30.3 billion.
EADS’s IFARA adjustment = 19 x AUP = 19 x $ billion = $3.22 billion
EADS’ Total Evaluated Price (TEP) = $30.3 billion -$3.22 billion = $27.08 billion
5th, Estimating Boeing’s bid price.
If EADS’ TEP was $27.08 billion, then Boeing’s TEP would have to be lower than $27.08 billion in order for EADS’s TEP to be one percent higher than that of Boeing’s TEP. Since Boeing was said to be the “clear winner”, let’s assume that that means EADS’ TPP was around 2 percent higher than Boeing’s TEP which would lead to a Boeing TEP of $26.55 billion.
Now we would have to add the fuel burn and MILCON adjustment to Boeing’s TEP of $26.55 billion; or $2.5 billion and $0.5 billion respectively.
Having used Boeing’s claimed fuel burn figures for the A330-200 (and not EADS’ figures), I’m estimating that Boeing’s Total Proposed Price (final offer) was $29.55 billion.
Since the EMD is allowed to be over budget by up to 25 percent, we have: 1.25 x $3.5 billion = $4.38 billion. $0.875 + Boeing’s TPP = $30.42 billion. This figure is consistant with the statement that the KC-46A program is valued at over $30 billion (EMD phase valued at over $3.5 billion).
If the KC-30 doesn burn as much as 25 percent more than that of the KC-46A, then Boeing’s TPP would, of course, be less than $29.55 billion. This would seem to suggest that the Average Unit Price for the KC-46A is about $165.1 million.
The $3.5 billion EMD contract accounts for the first 18 aircraft; or $194.4 million per unit.
Boeing TPP –EMD = $26.05 billion
So, the flyaway unit cost for the remaining 161 KC-46As would be about $161.8 million.