World News Roundup
Boeing Punished Over EELV
The Pentagon left no doubt that it found Boeing guilty of wrongdoing during the 1998 Evolved Expendable Launch Vehicle (EELV) competition, and has suspended indefinitely three Boeing space divisions and shifted seven launches to its competitor Lockheed Martin.
Lockheed Martin's Atlas V program will receive contracts for three more
launches, awards that would have ordinarily gone to Boeing, because it
maintains the only EELV heavy-lift launch facility at Vandenberg AFB,
"Boeing has committed serious and substantial violations of federal law," USAF undersecretary and Pentagon space czar Peter B. Teets said. Moreover, he stressed, Boeing was "not forthcoming" and took four years to return to Lockheed Martin nearly 25,000 pages of proprietary documents. Boeing still faces a Justice Dept. investigation, although Teets indicated the Air Force review didn't find culpability beyond the company's space operations.
The three divisions suspended from receiving new government business are Launch Systems, Launch Services and the Delta program, including Delta II and Delta IV. Even though Boeing last week shuffled its space organizations (see p. 17), the suspension of the three entities, just one step short of debarment, remains in effect.
The move could pose a risk to the government. The three latest EELV launches awarded to Lockheed Martin will all be West Coast-based, but the company may not be able to upgrade its Atlas IIAS site in time. Lockheed Martin decided against a West Coast launch facility after failing to win sufficient business there in the now-tainted 1998 competition. The upgrade is expected to cost $200 million and could take more than two years, although all three satellites are slated for launch in 2005. But Teets said that's a risk the government has to absorb. Lockheed Martin will finance the upgrade, but the facility will later be leased back to the government.
The National Reconnaissance Office, which has a launch requirement in mid-2005 from Vandenberg, is also concerned. The Atlas V facility almost certainly won't be ready. The Pentagon can either wait for the suspension to be lifted, or invoke a national security clause to buy Boeing's Delta IV.
Teets noted that the Pentagon could lift suspension of the Boeing units relatively quickly if the company takes swift action and demonstrates its commitment to fixing internal problems. The Pentagon wants to award a third round of EELV launches later this year--a potential 15-20 launcher deal.
"We are extremely disappointed by circumstances that prompted our customer's action, but we understand [USAF's] position that unethical behavior will not be tolerated. We apologize. . . . We will continue to . . . address the issues that caused this suspension," said Boeing CEO Phil Condit.
Teets said he hopes Boeing will address the military's concerns so the government can again have two competitors for EELV, giving them a launch option should one of the systems be grounded for technical reasons.
Some of the details of the Air Force's revised EELV plan remain to be worked out. For instance, the Pentagon set aside money in Fiscal 2004 to aid the financial well-being of the two launcher families in this depressed commercial market. What portion Boeing is now entitled to hasn't been determined.
Under the revision to the 1998 procurement plan, Lockheed Martin will now hold the majority of launches with 14, with Boeing reduced to 12. The first of the seven Delta IV launches shifted to the Atlas Vs is set for 2005. Two will be launched in 2006, two in 2007 and one each in 2008 and 2009. Contracts for rockets are awarded two years in advance.
World News & Analysis
EELV Disclosure Could Cost Boeing Over $1.5 Billion
Risk to Boeing Growing
Boeing's use of proprietary pricing information allegedly stolen from Lockheed Martin Corp. to win the Evolved Expendable Launch Vehicle (EELV) competition in 1998 almost certainly will mushroom into an even more costly blunder than has emerged thus far.
"People haven't connected the dots yet," a major investor told Aviation Week & Space Technology. Boeing is facing damages of at least $500 million, and if punitive damages are included, the total easily could exceed $1-1.5 billion, according to legal sources close to the case.
He said Lockheed is likely to seek substantial civil damages, using the government's own action to bolster its case. At the heart of Lockheed's civil suit will be a legal concept known as "tortious (wrongful) interference," in which the company will argue that it was the victim of industrial espionage.
The Air Force recently stripped Boeing of seven EELV launches, each worth about $100-150 million in revenues, with a 10-15% profit margin. USAF also awarded Lockheed three additional launches that were up for grabs, giving them 17 of the 29 set so far. And three Boeing space units were suspended from NASA and other government competition.
While the company may not be able to recover its pre-1998 development costs on the EELV program, Lockheed stands a good chance of recouping its investment now that its EELV position has been strengthened. Lockheed also is expected to press a civil suit in which it stands to recover from Boeing three times the actual lost profits, although that would require a higher burden of proof of Boeing's alleged misdeeds.
Legal experts note that Boeing's suspension, unless lifted, will shut the company out of competition for 15-20 launches at stake in the Air Force's next buy. Moreover, all of Boeing's business practices will be scrutinized, which will play to its competitors' advantage.
Boeing Responds to
"We are extremely disappointed by the circumstances that prompted our customer’s action, but we understand the U.S. Air Force’s position that unethical behavior will not be tolerated. We apologize for our actions. We will continue to work with the Air Force to address the issues that caused this suspension.
"Last week, I asked former Senator Rudman to review the company's policies and procedures regarding ethics and the handling of competitive information. His review will include looking at any management or cultural factors that could affect how these policies and procedures are respected and enforced.
"To reinforce the impact unethical behavior has on the customer and the company, a stand-down will take place on July 30 for all 78,000 employees in our Integrated Defense Systems business unit. These employees will be briefed on today’s action taken by our Air Force customer and the events that caused it, and participate in specialized interactive ethics and procurement integrity training.
"As I've said before, I am proud of the 160,000 men and women of The Boeing Company. The unethical conduct that led to this action does not reflect the high standards that we exhibit day-in and day-out to our customers, suppliers and communities. We want to ensure that Boeing will never again have to face such criticism."