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Experts: Budget woes could affect AF's KC-46

Jan. 15, 2013 - 01:11PM   |   Last Updated: Jan. 15, 2013 - 01:11PM  |  
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The KC-46 tanker program faces potential budget issues that could force a renegotiation of the Defense Department's contract with Boeing, according to budget analysts.

The program, considered a future cornerstone of the Air Force, is being squeezed by both current funding levels and a potential sequester.

DoD planned to spend $1.8 billion on the tanker program in fiscal 2013. However, Congress has failed to pass a new budget, leaving programs funded under a continuing resolution that leaves financial support at 2012 levels. For the KC-46 program, that means making do with just $900 million, or half of what the program office had planned for this year.

That presents a major problem for the aerial tanker program, said Todd Harrison, a budget expert with the Center for Strategic and Budgetary Assessments.

The KC-46 is particularly vulnerable, Harrison said, because it is still in the development stage, where budgets are slated to ramp up significantly year to year. But there is also concern that spending cuts could force the government to change a contract that is considered very friendly to the Pentagon.

The KC-46 contract is capped at $4.9 billion, with a floor of $3.9 billion. The Air Force is responsible for 60 percent of those costs and Boeing for 40 percent; anything above $4.9 billion is paid for solely by Boeing. If the Air Force, due to the continuing resolution, cannot meet its funding requirement for fiscal 2013, Boeing could face a choice paying out of pocket to maintain planned spending levels, or slowing down the tanker's development.

The Air Force, in turn, could find itself forced to choose between delaying development, which would drive up per-unit cost, and renegotiating its contract with Boeing something DoD would desperately like to avoid.

"The USAF will be bending over backwards not to damage this contract, so I rather think the program managers will muddle through," Rebecca Grant, an analyst with the Iris Research Group, said in an email.

But in a worst-case renegotiation, "Boeing might have an opening to increase the price, due to overall cost increases in the supply chain or their own share," she wrote. "Anyway you look at it, delay adds cost. The question is how much."

The tanker aircraft program, like the rest of the federal government, is also facing the threat of steep cuts under sequestration. For a growing program already operating at half cost under a continuing resolution, the added hit from automatic budget cuts would be a "disaster," said Harrison, who warns it could force DoD to renegotiate with Boeing on the program.

The thought that sequester could force the Pentagon to work out a new deal with Boeing was first raised by a DoD official last September.

"I don't want to break my contract, and I'm fearful sequestration may force me to do that," Maj. Gen John Thompson, the KC-46 program executive, said at the Air Force Association conference in National Harbor, Md. "If I have to break my fixed-price contract, then I stand the potential to lose out on some of the great things that we put in this vehicle up front."

Boeing directed request for comment on the tanker program to the Air Force.

"The program is not impacted under the current [continuing resolution]," Air Force spokeswoman Ann Stefanek said in an email.

Both Grant and Harrison are quick to agree that operating under the continuing resolution is not a death sentence for the program. If DoD can work a new budget so that the program reaches that $1.8 trillion figure by the end of fiscal 2013, there should be little impact.

But the longer the government operates at last year's funding levels, the greater the risk to the program, Harrison warned.

"There's still room to avoid the most devastating effect on this program, but that window is narrowing," Harrison said. "But if sequestration happens, all bets are off."

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