Military Aircraft:

Observations on DOD's Aerial Refueling Aircraft Acquisition Options

GAO-04-169R: Published: Oct 14, 2003. Publicly Released: Oct 14, 2003.

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During the Senate Armed Services Committee's September 4, 2003 hearing on the Department of Defense's (DOD) proposed lease of 100 Boeing KC-767A aerial refueling aircraft, Congress expressed concern about a significant "bow-wave" funding requirement in future years to pay for leasing and then buying these 100 aircraft at the end of their leases, while continuing efforts to modernize the remainder of the tanker fleet. Subsequently, Congress requested that DOD analyze the option of leasing 25 aircraft, followed by a procurement of the remaining 75 aircraft. The Deputy Secretary of Defense responded to the request on September 22, 2003, identifying several alternative acquisition strategies, with associated cost and savings estimates. On September 25, 2003, Congress asked that GAO review the DOD response and assess the validity of the department's assumptions and the accuracy of the cost and savings estimates, and identify any other alternative acquisition strategies that the Committee should consider. This letter responds to that request.

In our opinion, the assumptions used by DOD to develop its analysis of acquisition options generally appear to be reasonable, and the computations of the cost and savings estimates associated with these options appear to be accurate based on the current terms and conditions of the negotiated lease. We do believe, however, that the costs and savings numbers could be further refined under the options involving purchase. For example, Air Force officials indicated that The Boeing Company would pay the cost to underwrite the issuance of the bonds needed for financing in the original lease option. However, they could not definitively say whether the underwriting costs were included in the $131 million price for each aircraft. Because fewer bonds, if any, would be issued under the options involving purchase, the costs should be lower and the savings higher. With the exception of the fifth option, DOD did not significantly deviate from the costs, schedules, and support provisions contained in its July 10, 2003 report to the Committee and the Congress. Air Force officials stated that their analysis of options complied with the Chairman's request and that analyses outside the proposed lease's terms and provisions would be academic exercises that might not be representative of the final negotiated prices. These officials also stated that changes from the proposed contract would require new negotiations and new review and approval actions, and consequently would lead to additional delays. In addition to the options presented by DOD, we believe two other possible approaches--lease fewer tankers or purchase tankers on a slower schedule--may be of interest to the Congress. Both options would involve fewer than 100 aircraft--one through leasing and one through direct purchase. Both options have advantages and disadvantages that we have not fully explored in the time available.

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