Boeing

| Tue Sep. 5, 2006 2:00 AM EDT

In the months following September 11, 2001, Boeing—the world's largest aircraft maker and the second-largest defense contractor in the United States—had a problem. The company's share price had tumbled after the terrorist attacks, and the resulting downturn in the airline industry meant that business would be sagging for the foreseeable future.

There was only one customer large enough, and rich enough, to put Boeing back on track: the Pentagon. And that's exactly what happened after September 11, as both Congress and the U.S. Air Force quickly offered to lease 100 air tankers from Boeing for a price tag that would eventually reach upwards of $30 billion. The deal was approved by all levels of government despite the fact that the tankers were, according to numerous reports, completely unnecessary, and despite the fact that leasing the aircraft was more expensive than purchasing them outright.

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Eventually, the Air Force nixed the deal in 2004, after loud opposition from, among others, government watchdog groups and Sen. John McCain. But the story of how the deal got as far as it did in the first place offers a great deal of insight into the world of military contracting, as well as the process by which the defense budget gets put together—often in ways that benefit contractors and large donors at the expense of national security.


In late 2001, Sen. Ted Stevens (R-AK), then the ranking Republican on the powerful Senate Appropriations Committee, put forward the idea of having the Pentagon lease one hundred 767 aircraft from Boeing to replace its aging KC-135 air-tanker fleet. The idea had support from several Washington State Democrats who wanted to help out the ailing Seattle-based company, including Sen. Patty Murray and Rep. Norm Dicks. (In October, Dicks had gone so far as to ask President Bush to include the leasing deal as part of the administration's post-September 11th stimulus package.)

There was only one problem: The Air Force didn't need new tankers, nor had it asked for them. They were not requested in the 2001 Quadrennial Defense Review; they weren't in the President's defense budget request in July; nor did the Air Force testify in need of them during the 2001 budget hearings. The Air Force's "Unfunded Priority List" for FY2002—a 60-item "wish list" of things not included in the budget—didn't include a request for tankers.

By several accounts, leasing new 767s wasn't even the most efficient way to upgrade the KC-135 tanker fleet. A report by the Government Accountability Office (then the General Accounting Office) in 2002 had found that, with relatively inexpensive repairs and upgrades, the Air Force's fleet of tankers could remain operational until 2040. (In fact, earlier in the year, the Pentagon had declined an offer from Boeing to purchase 36 767s at a reduced price.)

Nevertheless, the Air Force quickly changed its mind once confronted with Stevens' proposal. This was somewhat unsurprising; the military rarely turns down an offer from members of Congress for more hardware. What was unusual—and improper—was the extent to which the Air Force worked so closely with Boeing, tailoring its requirements for tankers to the 767 and allowing the company to rewrite the official specifications, putting Boeing's competitors at a disadvantage. Even worse, in July of 2002, Darleen Druyun, the chief of Air Force acquisition in the Pentagon, disclosed to Boeing the price of Airbus' tanker bid. (Druyun, who was overseeing the tanker deal while negotiating a position at Boeing, was later sentenced to nine months in prison for her role in the deal.)

Eventually, the Air Force submitted a study to Congress noting that it needed one hundred Boeing 767s, without even running an analysis to see if alternative planes might be more suitable. The initial proposal was to pay Boeing $20 million per aircraft per year, $20 billion in total, after which the Air Force could purchase the aircraft. As it turned out, this proposal was, all told, more expensive than simply buying the aircraft outright. A study by the Institute for Defense Analyses later determined that the Pentagon could have bought the planes for $120.7 million a piece, or $12.7 billion altogether. A number of studies reached similar conclusions: the Congressional Budget Office (CBO) found in 2003 that the savings for a purchase would have been about $5.5 billion.

So why were the planes being leased, rather than simply purchased? On one reading, the proposal was a sop to Boeing, a form of corporate welfare pushed by politicians in hock to a major corporation. The money trail certainly suggests as much. In the 1999-2000 election cycle, Boeing had given $1.9 million to federal parties in candidates. Ted Stevens, the main force behind the leasing proposal, had received $3,000 from the aircraft maker in 2001, and his candidate committee $10,000 the year before. If that wasn't enough, Boeing had spent $7.8 million on federal lobbying in 2000. There was no question that the company—the second-largest defense contractor in the country—had considerable weight in Congress. But that wasn't all that was going on.

For Stevens and other members of Congress, there were several advantages to the leasing proposal. Leasing could be paid for out of the defense budget's Operation & Maintenance account, rather than the procurement account, which would free up money for other big-ticket purchases. (As Winslow Wheeler puts it, "It did not seem to trouble [Stevens] that O&M also paid for training, spare parts, depot maintenance, and other 'readiness' activities.") Moreover, if the lease was structured just right, it could be paid for in installments, rather than all up-front—as required by federal guidelines—which would reduce the apparent cost of the lease and free up yet more money for other purchases.

But Stevens quickly ran into problems. Owing to budget rules that were enacted in 1990 precisely to regulate these sorts of expensive lease-purchases, Stevens could only get his $20 billion bill through the Senate with 60 votes, rather than the usual 51. Moreover, in order to cover the cost of the lease-purchase, $13 billion would need to be appropriated upfront—another rule intended to stop the exact sort of funding trickery that Stevens was trying to pull off.

Luckily, the chairman of the Senate Budget Committee at the time was Kent Conrad (D-ND), whose state could potentially benefit from the leasing deal. Conrad made an agreement with Stevens—if the Boeing deal was converted into an "operating" lease, rather than a lease-purchase, it could be paid for in installments. Mitch Daniels, the Director of the Office of Management and Budget, wrote a scathing letter to Conrad criticizing the move: "If the proposed lease of the 767 aircraft includes a waiver of the lease-purchase scoring rule… I would oppose its inclusion in any legislation presented to the President."

The kicker was that in order to turn the lease-purchase into an "operating" lease, Stevens needed to make the Boeing deal even uglier than it already was. Under the new proposal, the Air Force would have to lease one hundred 767 airliners—rather than tankers—from Boeing, pay to have them converted into tankers, use them for ten years, and then return the planes back to Boeing after paying yet again to convert them back. This would have bumped the total cost of the lease up to $30 billion, and what's worse, would only give the Air Force ten years' worth of use of the tankers, rather than the forty years they could have been used for had they been purchased outright.

The restructured amendment passed in the Senate, and looked to be a major boon to Boeing, precisely as planned. A stock analyst at Morgan Stanley estimated that the plan would yield the company a profit equal to what it would earn on a commercial deal of over 1,000 Boeing 737s. Sen. John McCain (R-AZ) called the deal "the envy of corporate lobbyists," while Sen. Phil Gramm (R-TX) said, "I do not think, in the 22 years I have been here, I have ever seen anything equal to this."

When it came time to reconcile the House and Senate versions of the defense bill, the conferees were so enamored of the tanker deal that they agreed to lease an additional four 737 aircraft under the same arrangement. According to the Washington Post, both the White House and Speaker of the House Denny Hastert had lobbied for the aircraft, which would technically be used to transport military dignitaries—but could also be used by members of Congress. The planes, which would cost $3.4 billion over ten years, had not been included in either the House or Senate bills—an insertion that was technically a violation of Senate rules.


The leasing deal finally fell apart in 2004, cancelled by the Air Force, after enduring relentless scrutiny by government watchdog groups such as the Project on Government Oversight and Public Citizen, as well as investigations in the Senate led by John McCain. In November 2004, Air Force Secretary James Roche and the Air Force's acquisition chief, Marvin Sambur, resigned just a few days before McCain made public a series of emails revealing the close collaboration between Boeing and the Pentagon.

The year before, the scandal had already affected Boeing, when the company's Chief Financial Officer, Michael Sears, was fired for improperly discussing employment at Boeing with Darleen Druyun, the Pentagon's number two procurement official, while the latter was overseeing the leasing deal.

Druyun was sentenced to nine months in prison in 2004. In her plea agreement with the government, Druyun admitted that she had agreed to a higher price than appropriate in the tanker deal, which she called a "parting gift" to her future employer. While overseeing the deal, Druyun had also been negotiating positions at Boeing for her fiancée and daughter—a move which, surprisingly, was not technically illegal.

Druyun, as it turned out, had a long history of favoring Boeing. In 2002, she awarded a $100 million contract to the company; in her plea agreement she admitted that the dollar amount could've been lower, but she wanted to help Boeing because her daughter and son-in-law worked there. She also admitted that she had favored Boeing over its competitors for a $4 billion contract to modernize avionics on the Air Force's C-130 J aircraft, again, because the company had recently given her son-in-law a job. In 2005, Sears was also sentenced to four months in prison, and Boeing eventually agreed to pay $615 million to settle its liabilities for the tanker scandal and an unrelated impropriety—it was the largest penalty ever paid by a defense contractor.

And where was the Secretary of Defense in all of this? In taped interviews with the Inspector General, acquired by the Washington Post, Donald Rumsfeld "cited poor memory, loose office procedures, and a general distraction with 'the wars' in Iraq and Afghanistan" to explain why he couldn't account for how the Pentagon squandered nearly $30 billion. Rumsfeld, the tapes revealed, tended to be largely uninvolved in procurement issues.

Although the Boeing deal was particularly egregious, it was not the first time that leasing proposals had led to waste and abuse. In the 1970s and 1980s, the Navy had agreed to a handful of long-term leasing deals to put several dozen tanker ships into commission. At the time, the leases were billed as cheaper than buying the ships, but the GAO later concluded that the reverse was true.

As a result of this and similar overpriced leases, Congress required the military services to submit analyses of the impact of long-term leasing and comparing it to the cost of purchasing equipment. But in November of 2001, Pentagon Comptroller Dov Zakheim and Undersecretary of Defense Pete Aldridge wrote a memo encouraging military department heads to consider multiyear leases. The memo also noted that the administration planned to ask Congress "to eliminate the most serious impediments" to leasing, including changing the budget scorekeeping rules—rules put in place precisely to prevent the type of abuses seen in the Boeing deal.

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