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Second sweetheart deal: The final tranche may go for 10% because it's the riskiest one. Payment would be contingent on the government actually buying the planes at the end of the lease. It's hard to imagine Washington won't, but there's a risk premium here.
Some sources on Capitol Hill are taken aback because of the possibility that Boeing will be able to buy a healthy chunk of those bonds, perhaps in excess of 10%. Getting double-digit, government-backed returns ain't too shabby, so it looks as if Boeing will be making a killing coming and going.
It turns out, however, that manufacturers often buy some of the riskiest bonds, especially if they're not selling well. This means that the plane maker will shoulder some of the risk. That's neither a bad idea nor unusual, but that won't stop Washington from being suspicious.
The wrong plane? Hardly anyone seems to be focusing on whether the 767 was the right plane to buy. From Boeing's standpoint, it clearly was. The production line had only 27 more orders. The planemaker had done tests to see if the model could function as a tanker, and it already had sold four tanker versions to Italy and Japan, so it had some experience. And from the Air Force's point of view, Boeing had a production line with very little waiting time.
But the 767 is a dinosaur headed toward extinction. That's why it has so few orders. Some analysts wonder whether the Air Force should have waited for Boeing's blended-wing aircraft, which would be more efficient to operate and could refuel more than one plane at a time. It's expected to be available in a decade, around the time the Air Force originally expected to see delivery of new tankers. And advocates say the blended-wing aircraft could assure Boeing's survival in the medium term.
Perhaps the Air Force also should have looked more seriously at Airbus's A330, which flies hundreds of miles farther than the 767, though it doesn't yet have a well-developed boom, the pipe used to transfer fuel to another plane. All of these possibilities were scotched when lawmakers specified leases for 767s in the 2002 defense appropriations bill, however.
This isn't the brightest way to spend $20 billion. And I fault not only Boeing and its supporters but their critics. Serious issues are involved that haven't been publicly aired. Fortunately, a House Armed Services subcommittee started to probe them June 24, when it began looking into the tanker fleet's condition. One general who testified said it was time for a study of the Air Force's needs -- a rather belated epiphany.
Congress has 30 days to reject the Boeing deal once the Pentagon sends up a report on its terms. The Air Force and Defense Dept. civilians are still haggling over some of the details, including the economic assumptions. That gives lawmakers time for the debate that's sorely needed on all of these issues before it's too late.
Crock covers national security and foreign affairs for BusinessWeek from Washington. Follow his views in Affairs of State twice a month, only on BusinessWeek Online Edited by Beth Belton
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