oversight

Air Force Depot Maintenance: Information on the Cost-Effectiveness of B-1 and B-52 Support Options

Published by the Government Accountability Office on 1997-09-12.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                     United States General Accounting Office

GAO                  Briefing Report to the Honorable Don
                     Nickles, United States Senate



September 1997
                     AIR FORCE DEPOT
                     MAINTENANCE
                     Information on the
                     Cost-Effectiveness of
                     B-1 and B-52 Support
                     Options




GAO/NSIAD-97-210BR
             United States
GAO          General Accounting Office
             Washington, D.C. 20548

             National Security and
             International Affairs Division

             B-277724

             September 12, 1997

             The Honorable Don Nickles
             United States Senate

             Dear Senator Nickles:

             This report responds to your request for information about programmed
             depot maintenance of five B-1B aircraft under contract with Boeing North
             American, Inc., and Boeing’s proposal to reengine the B-52 fleet.
             Specifically, you asked us to compare the cost of performing depot
             maintenance on five B-1B aircraft at Boeing’s Palmdale, California, facility
             to the estimated cost of performing similar work at the Oklahoma City Air
             Logistics Center. You also asked us to analyze the differences between
             Boeing’s proposal (and associated projected savings) to reengine the B-52
             fleet and the subsequent Air Force analysis and projected costs of
             implementing the proposal.

             As you requested, we briefed your staff on the results of our work on
             May 15, 1997. This report summarizes and updates the information
             presented in that briefing.


             The Department of Defense (DOD) spends about $13 billion—5 percent of
Background   its $250 billion fiscal year 1997 budget—on depot maintenance activities.1
             Over $4 billion of this amount is spent on Air Force systems and
             equipment. Most of the Air Force’s depot maintenance work is performed
             at five depots that are located at its five air logistics centers.2

             In 1990, the Air Force determined it could not meet the full depot
             maintenance requirement for 23 B-1B aircraft per year at the Oklahoma
             City Air Logistics Center without adding personnel or offloading other
             aircraft workload to contractors. The center awarded a sole-source
             contract to Rockwell International Corporation,3 the B-1B manufacturer,
             to perform programmed depot maintenance on about 5 aircraft per year,
             leaving 18 aircraft to be repaired at the air logistics center. At the time, the


             1
              Over $1 billion of this amount is procurement funding (rather than operation and maintenance
             funding) for contractor logistics support, interim contractor support, and some software maintenance.
             2
              Two of the air logistics centers—Sacramento and San Antonio—were identified for closure during the
             1995 base closure and realignment process.
             3
             The Boeing Company acquired several Rockwell Aerospace and Defense businesses, including the
             North American Aircraft Division of Rockwell International in December 1996.



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                   Air Force anticipated that contractor support would decrease and
                   eventually the entire annual B-1B workload would be repaired at the
                   center. The original depot maintenance contract (1-year contract with
                   4 option years) expired at the end of fiscal year 1995. At that time, the
                   Oklahoma City Air Logistics Center was ready to assume the entire
                   workload. However, because of uncertainties surrounding the 1995 base
                   closure and realignment process and the resulting need to maintain two
                   sources of repair, a contract extension was awarded to Rockwell for fiscal
                   year 1996. Subsequently, the Air Force awarded an additional contract
                   extension for five aircraft for fiscal year 1997, with an option for the same
                   number in 1998.

                   In June 1996, Boeing North American, Inc., submitted to the Air Force an
                   unsolicited proposal for reengining 94 aircraft in the B-52 fleet. Boeing
                   proposed modernizing the B-52 fleet by replacing the current TF-33
                   engines with a commercial engine through a long-term leasing agreement,
                   and providing fixed-cost, privatized maintenance based on the number of
                   hours flown each year. Boeing initially projected reengining cost savings
                   of about $6 billion, but later revised the projected savings to $4.7 billion to
                   reengine 71 B-52s. In the fiscal year 1997 Department of Defense
                   Appropriation Act conference report, Congress asked the Secretaries of
                   Defense and the Air Force to examine the costs, technical risks, schedule,
                   cost savings, and procurement policy implications of leasing new engines
                   for the B-52 fleet compared with (1) maintaining the current engines and
                   (2) purchasing new engines.


                   In fiscal years 1995 and 1996, the Air Force paid twice as much for each
Results in Brief   B-1B aircraft repaired under contract as the Oklahoma City depot
                   estimated it would have cost that depot to repair the same aircraft.4 The
                   Air Force paid approximately $19 million for five aircraft repaired by
                   Rockwell in each of the 2 fiscal years, compared to about $9 million
                   estimated for similar repair of five aircraft in the depot each year. In 1996,
                   when the Oklahoma City depot had the capability to repair the 5 aircraft
                   that were contracted out in addition to the 18 it already repaired each
                   year, the B-1B program office considered allocating the entire annual
                   requirement to the depot. Confronted with this situation and other factors,



                   4
                    While B-1B data used in this report generally refers to the price charged the customer rather than cost
                   data reflected in the Center financial data, Oklahoma City Air Logistics Center financial data indicates
                   that the Center performed B-1B maintenance for less than the customer was charged for fiscal years
                   1995, 1996, and thus far in 1997.



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                          B-277724




                          the contractor reduced the B-1B contract price from $18 million to
                          $11 million—about 39 percent.5

                          We estimate that in fiscal years 1997 and 1998 the Air Force could have
                          saved approximately $5.3 million by consolidating the B-1B depot
                          maintenance work at the Oklahoma City Air Logistics Center. This is
                          $4.5 million more than the Air Force projected it could save over that same
                          period if the five aircraft repaired at Boeing were consolidated with B-1B’s
                          being repaired at the Oklahoma depot. The two factors most significantly
                          influencing this difference are the impact of overhead savings at the
                          Boeing facility and at the depot.

                          Boeing’s unsolicited proposal to reengine the B-52 fleet would cost the Air
                          Force approximately $1.3 billion rather than save approximately
                          $4.7 billion as Boeing projected. An Air Force team formed to study
                          Boeing’s proposal analyzed the lease and purchase alternatives and
                          concluded that both options are cost prohibitive compared to maintaining
                          the existing TF-33 engines. On April 15, 1997, DOD reported to Congress
                          that implementing Boeing’s reengining proposal is not cost-effective. Risks
                          such as the length of the lease, termination liability, and indemnification
                          made Boeing’s proposal unacceptable. Additionally, the Institute for
                          Defense Analysis projected that implementing the Boeing proposal would
                          cost the Air Force $1 billion. Faced with continuing pressure to modernize
                          the fleet, the Air Force is currently exploring alternatives for modernizing
                          all TF-33 engines. The Air Force has awarded contracts to three engine
                          manufacturers to explore modernization options and expects to develop a
                          rank-ordered list of alternatives by January 31, 1998.


                          The Air Force, Office of the Secretary of Defense (OSD), and Boeing
Agency and                provided comments to our draft report. Specifically, in oral comments, Air
Contractor Comments       Force officials said the Air Force was unable to reconcile its analysis with
and Our Evaluation        our analysis. The following provides a summary of the differences
                          between the Air Force and our estimates:

                      •   Our estimate of $7.9 million programmed depot maintenance costs for the
                          depot was $600,000 more than the Air Force estimate. We based our
                          estimate on price data projected for the depot for a work package


                          5
                           These figures reflect the negotiated contract price, which does not include over and above costs. Over
                          and above costs are associated with work that is discovered during the course of performing overhaul
                          maintenance and repair that is within the general scope of the contract, not covered by the line items
                          for basic work, and necessary to satisfactorily complete the contract.



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    B-277724




    comparable to the Boeing B-1B aircraft.6 Oklahoma City financial data
    shows that the depot accomplished B-1B programmed depot maintenance
    workloads during fiscal years 1996 and 1997 for less than the price
    charged the customer.
•   Our $5.4 million estimate for contractor overhead savings reflects Boeing’s
    reassessment of potential cost avoidance for other B-1B programs
    resulting from continuing to perform programmed depot maintenance on
    the five B-1B aircraft at the Palmdale facility. The Air Force estimate of
    $8 million did not reflect this reassessment.
•   The Air Force’s estimates for Oklahoma City reflected overhead savings of
    $1.5 million for only 1 year. Since a 2-year overhead cost avoidance was
    used for the contractor, we used a comparable time period for the depot
    and estimated a savings of $3.1 million. Further, using more current
    financial management information, a reassessment of the overhead
    savings to other Oklahoma City workloads from adding five B-1B aircraft
    to the depot would be $4.1 million over the 2-year period, rather than
    $3.1 million as previously estimated.
•   For property disposal, we used actual contract data, rather than an
    estimated amount as used by the Air Force. The resulting cost difference
    was $0.3 million.

    After accounting for these differences in cost and savings, we estimated
    net savings of $5.3 million by accomplishing the repairs in the Oklahoma
    City depot versus the Air Force’s estimate of $800,000.

    OSD  questioned our use of maximum potential capacity as an indicator of
    excess capacity at the Oklahoma City depot. Officials stated that to
    measure capacity and project excess capacity, DOD uses criteria
    established in the DOD Maintenance Capacity and Utilization Measurement
    Handbook. They noted that maximum potential capacity, which is not
    recognized by the handbook, is determined using a theoretical and
    historical basis that is frozen in time and does not reflect current force
    structure, tasking requirements, or the downsizing of equipment and
    facilities since the 1995 Base Realignment and Closure (BRAC) process.

    We recognize that measuring capacity based on the handbook procedures
    provides a different perspective of capacity utilization than using
    maximum potential capacity. It also requires updating projections made
    during 1995 to account for increases and decreases in facilities and
    equipment. However, capacity measurement based on the handbook


    6
     Since B-1B aircraft at the Oklahoma City depot includes some tasks not accomplished at Boeing’s
    Palmdale facility, the depot’s standard work package is larger than the contractor’s work package.



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                           B-277724




                           criteria constrains equipment and facility utilization by the availability of
                           personnel to operate the equipment. In preparing for the BRAC process, DOD
                           recognized that this measure does not reflect facility and equipment
                           utilization and that using it would obviate an analysis of the potential for
                           more cost-effectively using existing equipment and facilities. As DOD and
                           the BRAC Commission concluded in BRAC 1995, using the capacity measure
                           cited in the DOD handbook understates the potential for improving
                           equipment and facility utilization through the consolidation of similar
                           workloads. For example, using this criteria, in 1996 the Oklahoma City
                           depot operated at 91-percent capacity utilization with only 9-percent
                           excess capacity, while hundreds of pieces of industrial equipment stood
                           idle or were greatly underutilized, and buildings and sections of buildings
                           were unused. Using maximum potential capacity, which more accurately
                           reflects the potential for facility and equipment utilization, the Oklahoma
                           City depot was operating at 55 percent of its capacity in 1996. We continue
                           to believe that maximum potential capacity more accurately reflects
                           facility and equipment utilization at this activity.


Evaluation of Contractor   Boeing officials made several observations regarding our B-52 reengining
Comments                   information. For example they noted that we did not perform any
                           independent analysis. Our scope and methodology reflects that fact. Our
                           objective was to review Boeing’s proposal and subsequent Air Force
                           analysis to determine the basis for the differences between the two.
                           Boeing officials also said that we did not give proper attention to the fact
                           that the Institute for Defense Analyses (IDA) study shows significant
                           savings if operational benefits are included. Our report specifically
                           mentions IDA’s views that requirements for tanker support could be
                           reduced by reengining the B-52 fleet.

                           Concerning the currency of our information, Air Force officials told us
                           that its analysis of Boeing’s most recent estimate of B-52 reengining costs
                           was $100 million more than the estimate we reviewed. Since the most
                           recent estimate was higher than the estimate we reviewed, it would not
                           have changed our conclusion concerning the cost-effectiveness of B-52
                           reengining.


                           In conducting our work on the B-1B issue, we obtained information from
Scope and                  and interviewed officials of the Oklahoma City Air Logistics Center, Tinker
Methodology                Air Force Base, Oklahoma; the Air Force Audit Agency, Wright-Patterson
                           Air Force Base, Ohio; and the Defense Contract Management Command



                           Page 5                            GAO/NSIAD-97-210BR Air Force Depot Maintenance
B-277724




and the Defense Contract Audit Agency, Seal Beach, California. We also
interviewed and obtained information from officials of Boeing North
American Aircraft Division, Seal Beach and Palmdale, California. To
develop our comparison of the cost of having aircraft repaired under
contract by Boeing to the cost of repairing the aircraft at the depot, we
asked Oklahoma City Air Logistics Center personnel to estimate their cost
of performing programmed depot maintenance on the aircraft, identified
by specific tail number, scheduled to be repaired by Boeing during fiscal
years 1997 and 1998. We also asked center personnel to calculate the
impact on the center’s overhead rates of bringing the aircraft into the
depot for repair. We reviewed the Oklahoma City calculations and
determined them to be reasonable based upon actual cost data and
overhead savings estimates that were developed using the same
procedures used in supporting our prior reviews.7

To develop information on Boeing’s B-52 reengining proposal and the Air
Force’s analysis, we obtained information and interviewed officials at Air
Force Headquarters, Washington, D.C.; the Oklahoma City Air Logistics
Center, Tinker Air Force Base, Oklahoma; Air Force Materiel Command
Headquarters, Wright-Patterson Air Force Base, Ohio; Boeing Defense and
Space Group, Wichita, Kansas; and the Institute for Defense Analyses,
Alexandria, Virginia. We did not prepare our own analysis of Boeing’s
proposal. Rather, we reviewed Boeing’s proposal and subsequent Air
Force analysis to determine the basis for the differences between the two.

While both the B-1B and B-52 analyses used price rather than cost
information, the Oklahoma City Air Logistics Center financial data
indicates the depot showed a profit for both of these programs in fiscal
years 1996 and 1997.

We conducted our review between November 1996 and July 1997 in
accordance with generally accepted government auditing standards.


We are sending copies of this report to the Secretaries of Defense and the
Air Force; the Director, Office of Management and Budget; and interested




7
 Air Force Depot Maintenance: Privatization-in-Place Plans Are Costly While Excess Capacity Exists
(GAO/NSIAD-97-13, Dec. 31, 1996) and Depot Maintenance: Uncertainties and Challenges DOD Faces
in Restructuring Its Depot Maintenance Programs (GAO/T-NSIAD-97-111, Mar. 18, 1997, and
GAO/T-NSIAD-97-112, Apr. 10, 1997).



Page 6                                     GAO/NSIAD-97-210BR Air Force Depot Maintenance
B-277724




congressional committees. Copies will be made available to others upon
request. If you have any questions, please contact me at (202) 512-8412.
Major contributors to this report are listed in appendix I.

Sincerely yours,




David R. Warren, Director
Defense Management Issues




Page 7                          GAO/NSIAD-97-210BR Air Force Depot Maintenance
Contents



Letter                                                                                               1


Briefing Section I                                                                                  10
                        Background                                                                  10
B-1B Programmed         Contractor B-1B Repair Estimated to Be More Costly                          12
Depot Maintenance       Depot Ready to Assume Entire B-1B Workload                                  14
                        Potential Competition From Depot Contributed to Boeing                      16
                          Lowering Price
                        Air Force Cited Uncertainty and Need for Second Source of                   18
                          Repair
                        Air Force Comparison Showed Little Difference in Cost                       20
                        Comparison of Air Force and Our Analysis                                    22
                        Boeing’s Price Still Exceeds Price at Oklahoma City Air Logistics           24
                          center
                        Price Differences Result From a Variety of Factors                          26
                        Second Source Locations Add to Cost of Depot Repair Programs                28

Briefing Section II                                                                                 30
                        Boeing Projects Reengining Proposal Will Save Air Force Billions            30
Reengining May Prove    Air Force Determined Reengining Proposals Not Cost-Effective                32
Too Costly              Differences Can Be Attributed to Four Factors                               34
                        Institute for Defense Analyses Projects Costs Similar to Air Force          36
                           Estimate
                        Air Force Now Exploring Other Alternatives                                  38
                        Three Engine Manufacturers Participating in Roadmap Study                   40
                        Other Studies on Reengining Aircraft with TF-33 Engines                     42
                        Eliminating TF-33 Workload Will Increase Cost and Excess                    44
                           Capacity

Appendix I                                                                                          46

Major Contributors to
This Report
                        Abbreviations

                        AWACS      Air Warning and Control System
                        BRAC       Base Realignment and Closure
                        DOD        Department of Defense
                        GE         General Electric
                        IDA        Institute for Defense Analyses
                        OSD        Office of the Secretary of Defense


                        Page 8                           GAO/NSIAD-97-210BR Air Force Depot Maintenance
Page 9   GAO/NSIAD-97-210BR Air Force Depot Maintenance
Briefing Section I

B-1B Programmed Depot Maintenance




      GAO            Background


                      Air Force could not initially meet the
                      depot maintenance requirement for 23
                      B-1B aircraft.
                      Sole source contract awarded to
                      Rockwell for fiscal year 1991 (with 4
                      option years).
                      All contract options exercised through
                      fiscal year 1995.




                              Page 10         GAO/NSIAD-97-210BR Air Force Depot Maintenance
Briefing Section I
B-1B Programmed Depot Maintenance




In 1990, it was not practical for the Air Force to meet the depot
maintenance requirement of 23 aircraft per year in its organic depot. In
fiscal year 1990, the Air Force awarded a 1-year time and materials
contract with 4 option years to Rockwell International, the original B-1B
manufacturer, to perform depot maintenance on the aircraft that could not
be repaired in the depot. All options were exercised on the original
contract through fiscal year 1995. The number of aircraft repaired by
Rockwell during this period varied from two to seven per year. According
to the Air Force, the contract was awarded on a sole-source basis because
Rockwell was the only firm with the skilled technical expertise, facilities,
support equipment, and certified technicians capable of working on the
B-1B’s complex egress system. This system contains over 700 parts that
work together to ensure a safe ejection process for the four flight crew
members.1 At the time the contract was awarded, the Air Force anticipated
that over time contractor support would decrease and become
unnecessary. The Oklahoma City Air Logistics Center currently repairs
about 18 of the 23 aircraft required per year. For fiscal year 1996, the Air
Force awarded a 1-year contract extension to Rockwell International. In
extending the contract, the Air Force cited uncertainties surrounding the
1995 base closure and realignment process and the resulting need to
maintain a second source of repair for the B-1B.




1
 This is a very complex repair wherein the tolerance for components is extremely narrow and parts
must pass inspection at each step of the supply/installation process. There is a zero mistake allowance
for life support systems.



Page 11                                      GAO/NSIAD-97-210BR Air Force Depot Maintenance
              Briefing Section I
              B-1B Programmed Depot Maintenance




GAO   Contractor B-1B Repair Estimated to
      Be More Costly
       The Air Force paid twice as much per
       aircraft repaired by Boeing (formerly
       Rockwell) when compared to estimated
       costs of performing the same repairs in
       the depot.




              Page 12                             GAO/NSIAD-97-210BR Air Force Depot Maintenance
Briefing Section I
B-1B Programmed Depot Maintenance




In fiscal years 1995 and 1996, the Air Force paid twice as much per B-1B
aircraft repaired under contract as the cost estimated by Oklahoma City
depot officials to repair the same aircraft at the depot. The Oklahoma City
estimates were based on actual costs for performing repairs at the Center
for the same tasks included in the contract work package. The Air Force
paid approximately $19 million for five aircraft repaired by Rockwell in
each of the 2 fiscal years, compared to about $9 million estimated by
Oklahoma City depot officials for the same work.




Page 13                             GAO/NSIAD-97-210BR Air Force Depot Maintenance
               Briefing Section I
               B-1B Programmed Depot Maintenance




GAO   Depot Ready to Assume Entire B-1B
      Workload
       As of 1996, Oklahoma City Air Logistics
       Center was capable of assuming the
       entire B-1B depot maintenance
       workload.
       Depot officials planned to augment the
       second shift to reduce flow days to
       accommodate five additional B-1Bs.
       In fiscal year 1999, B-1B programmed
       depot maintenance requirements will
       decrease from 23 to 18 aircraft per year.




               Page 14                             GAO/NSIAD-97-210BR Air Force Depot Maintenance
Briefing Section I
B-1B Programmed Depot Maintenance




As of fiscal year 1996, the Oklahoma City Air Logistics Center had the
capability to accomplish the full B-1B depot maintenance workload of 23
aircraft without hiring additional employees. Depot officials plan to
augment the second shift with 95 additional employees to decrease the
flow days2 on other aircraft. This would accommodate 5 additional B-1B
aircraft for a total of 23. In fiscal year 1999, the B-1B depot maintenance
schedule will be extended from 4 years to 5 years, reducing the yearly
depot maintenance requirement for B-1B aircraft to 18 aircraft per year
(the depot’s current annual workload).




2
 Flow days refers to the number of days required to move an aircraft through the entire depot repair
process.



Page 15                                      GAO/NSIAD-97-210BR Air Force Depot Maintenance
               Briefing Section I
               B-1B Programmed Depot Maintenance




GAO   Potential Competition From Depot
      Contributed to Boeing Lowering Price
       Potential competition from Oklahoma
       City Air Logistics Center and changes
       in the work requirements contributed
       to Boeing lowering its price for fiscal
       year 1997.
       Boeing reduced its negotiated
       contract price from $18 million in
       fiscal year 1996 to $11 million in fiscal
       year 1997 (about 39 percent) for B-1B
       programmed depot maintenance.




               Page 16                             GAO/NSIAD-97-210BR Air Force Depot Maintenance
Briefing Section I
B-1B Programmed Depot Maintenance




Boeing reduced its contract price for B-1B depot maintenance by about 39
percent for fiscal year 1997 (from about $18 million to about $11 million).3
The reduction in Boeing’s price can be attributed to differences in the
condition of the aircraft to be repaired in 1997, changes in work
requirements, and Boeing’s efforts to reduce its costs in light of the Air
Force’s assertions that the air logistics center was ready to assume the
entire B-1B workload.




3
 These figures reflect the negotiated contract price, which does not include over and above costs. Over
and above costs are associated with work that is discovered during the course of performing overhaul,
maintenance and repair that is within the general scope of the contract, not covered by the line items
for basic work, and necessary to satisfactorily complete the contract.



Page 17                                      GAO/NSIAD-97-210BR Air Force Depot Maintenance
               Briefing Section I
               B-1B Programmed Depot Maintenance




GAO   Air Force Cited Uncertainty and Need
      for Second Source of Repair
       The Air Force extended the contract
       with Boeing for fiscal year 1997 (with an
       option for 1998).
       Justification cited uncertainties
       surrounding the recommended closure
       and possible privatization-in-place at
       other air logistics centers and the need
       to maintain a second source of repair
       for 2 more years.




               Page 18                             GAO/NSIAD-97-210BR Air Force Depot Maintenance
Briefing Section I
B-1B Programmed Depot Maintenance




In their “Justification for Other Than Full and Open Competition,” dated
October 1996, Air Force officials cited uncertainty over depot workloads
associated with BRAC decisions and privatization-in-place. Air Force
officials decided that due to the uncertainty and resulting difficulty in
forecasting the future ability to meet B-1B depot maintenance needs, it
was necessary to maintain a second source for depot maintenance for 2
more years. The Air Force negotiated a firm-fixed price contract extension
with Boeing for fiscal year 1997, with an option for fiscal year 1998.




Page 19                             GAO/NSIAD-97-210BR Air Force Depot Maintenance
              Briefing Section I
              B-1B Programmed Depot Maintenance




GAO   Air Force Comparison Showed Little
      Difference in Cost
       Air Force comparison based on data
       available at the time showed relatively
       little difference in cost.
       Our analysis based on updated
       information showed that the Air Force
       could save $5.3 million in fiscal years
       1997 and 1998.




              Page 20                             GAO/NSIAD-97-210BR Air Force Depot Maintenance
Briefing Section I
B-1B Programmed Depot Maintenance




The Air Force analysis, prepared in July 1996, based on the best
information available at the time indicated that it would cost about
$800,000 more over the 2-year period to have the five B-1B aircraft
repaired under contract with Boeing than at the depot. This reduction in
the cost difference between the Oklahoma City depot and the contract
price combined with the desire to maintain two sources of repair resulted
in the Air Force’s decision to award the contract extension to Boeing. Our
analysis, prepared in June 1997, incorporates updated information and
shows that the Air Force could have saved approximately $5.3 million in
fiscal years 1997 and 1998 by having the five B-1Bs repaired within the
depot.




Page 21                             GAO/NSIAD-97-210BR Air Force Depot Maintenance
                         Briefing Section I
                         B-1B Programmed Depot Maintenance




GAO      Comparison of Air Force and GAO
         Analysis
      Cost elements            Air Force analysis                     GAO analysis
                                   (June 1996)                         (June 1997)
 PDM cost difference                  $7.3                                $7.9

 Impact on contractor                    (8.0)                               (5.4)
 overhead rates
 Impact on depot                          1.5                                 3.1
 overhead rates
 Property disposal for                   (1.0)                               (1.2)
 fiscal year 1996
 Property disposal for                    1.0                                 0.9
 fiscal year 1998
 Total                                   $0.8                                $5.3




                         Page 22                             GAO/NSIAD-97-210BR Air Force Depot Maintenance
Briefing Section I
B-1B Programmed Depot Maintenance




We estimate that the Air Force could have saved a total of $5.3 million in
fiscal years 1997 and 1998 by consolidating the B-1B depot maintenance
workload at the Oklahoma City Air Logistics Center, compared to the Air
Force’s estimate of $800,000. We compared the contract cost of depot
maintenance for 10 aircraft, by aircraft tail number, scheduled for repair at
Boeing in fiscal years 1997 and 1998 to the Oklahoma City depot’s
estimated cost of doing similar work. Boeing provided us an updated
estimate of potential costs that would be applied to other Boeing B-1B
programs if the 5 B-1B contract repair aircraft were repaired at the
Oklahoma City depot rather than at Palmdale. The updated estimate
reduced from $4 million to $2.7 million per year the potential costs on
other programs (or $5.4 million over the 2-year period) compared to
$8 million shown in the Air Force analysis. Further, the Air Force’s
analysis included the impact on overhead rates at the depot for fiscal
year 1998 only, while we included the impact on overhead rates for both
fiscal years in our analysis.




Page 23                             GAO/NSIAD-97-210BR Air Force Depot Maintenance
               Briefing Section I
               B-1B Programmed Depot Maintenance




GAO   Boeing's Price Still Exceeds Price at
      Oklahoma City Air Logistics Center
       Even with Boeing's reduced price, the
       Air Force could have saved a total of
       approximately $5.3 million in fiscal
       years 1997 and 1998 if B-1B PDM work
       had been consolidated in the depot.
       Boeing's reduced price still exceeds the
       depot price by an average of $847,000
       per aircraft in fiscal year 1997 and
       $747,000 per aircraft in fiscal year
       1998.




               Page 24                             GAO/NSIAD-97-210BR Air Force Depot Maintenance
Briefing Section I
B-1B Programmed Depot Maintenance




Even after reducing their price by 39 percent, the price of repairing five
B-1B aircraft per year at the contractor facility still exceeded the estimated
price of doing the same work at the Oklahoma City depot. The contract
price exceeded the depot’s estimated price of performing similar work by
an average of about $847,000 per aircraft in fiscal year 1997 and about
$741,000 per aircraft in fiscal year 1998. While this data reflects the price
charged not the cost of performance, the Oklahoma City depot’s financial
data indicates that the depot accomplished B-1B repair work for less than
the projected price in 1995, 1996 and 1997, indicating the cost was less
than the price.




Page 25                             GAO/NSIAD-97-210BR Air Force Depot Maintenance
               Briefing Section I
               B-1B Programmed Depot Maintenance




GAO   Price Differences Result From a
      Variety of Factors
       Differences in contract and depot prices
       are attributed to a variety of factors,
       including higher labor hour rates, higher
       standard hours, inefficiencies of such a
       small workload, and contractor's profit.




               Page 26                             GAO/NSIAD-97-210BR Air Force Depot Maintenance
Briefing Section I
B-1B Programmed Depot Maintenance




Program officials told us that the differences between the contract and
depot prices can be attributed to a variety of factors, including higher
labor hour rates, higher standard hours, and the inefficiencies of such a
small workload. In addition, the contractor builds a profit into the
negotiated contract price.




Page 27                             GAO/NSIAD-97-210BR Air Force Depot Maintenance
              Briefing Section I
              B-1B Programmed Depot Maintenance




GAO   Second Source Locations Add to Cost
      of Depot Repair Programs
       We have previously reported that
       performing the same work at two
       locations results in additional costs to the
       government.




              Page 28                             GAO/NSIAD-97-210BR Air Force Depot Maintenance
Briefing Section I
B-1B Programmed Depot Maintenance




In our report on the Navy’s decision to discontinue F/A-18 repairs at the
Ogden Air Logistics Center,3 we commented that additional costs to the
government are incurred when the same work is performed at two depots.
As a result of DOD’s recognition of the advantages of single-siting depot
maintenance workload, it has consolidated numerous depot maintenance
workloads that had previously been split among two or more depot
activities. For example, in response to declining requirements and
criticisms for maintaining duplicate sources of repair, the Department of
Defense (DOD) has consolidated engine maintenance of each of the military
services at a single location.




3
 Depot Maintenance: The Navy’s Decision to Stop F/A-18 Repairs at Ogden Air Logistics Center
(GAO/NSIAD-96-31, Dec. 15, 1995).



Page 29                                    GAO/NSIAD-97-210BR Air Force Depot Maintenance
Briefing Section II

Reengining May Prove Too Costly




      GAO             Boeing Projects Reengining Proposal
                      Will Save Air Force Billions
                       Boeing proposed reengining the B-52s,
                       replacing the TF-33 engines with
                       commercial engines in June 1996.
                       Boeing planned to replace the TF-33
                       engines with leased commercial engines
                       and provide full "power-by-the-hour"
                       support.
                       Boeing's unsolicited proposal projected
                       cost savings of about $6 billion (later
                       revised to $4.7 billion).




                              Page 30          GAO/NSIAD-97-210BR Air Force Depot Maintenance
Briefing Section II
Reengining May Prove Too Costly




In June 1996, Boeing presented an unsolicited proposal to the Air Force
for reengining the B-52 fleet. Boeing’s proposal included modernizing the
B-52 fleet by replacing the TF-33 engines with the Allison/Rolls
commercial RB-211 engine through a long-term leasing agreement and
providing a fixed-cost, privatized maintenance concept through a
“power-by-the-hour” arrangement. Under this arrangement, the contractor
would provide fixed-cost, privatized maintenance based on the number of
hours flown each year. The proposal also included an option to purchase
rather than lease the engines. The Boeing proposal projected cost savings
of about $6 billion for reengining 94 B-52s. Boeing later revised its
estimated savings to $4.7 billion based on the Air Force’s plans to maintain
the B-52 fleet at 71 aircraft.




Page 31                           GAO/NSIAD-97-210BR Air Force Depot Maintenance
               Briefing Section II
               Reengining May Prove Too Costly




GAO   Air Force Determined Reengining
      Proposals Not Cost-Effective
       Air Force analysis concluded that
       reengining would cost $1.3 billion.
       Costs and other risks such as
       termination liability made Boeing's
       proposal unacceptable.

         Cost of lease option - $9.9 billion
         Cost to retain TF-33 - $8.6 billion
       Air Combat Command agreed that the
       proposal was not cost-effective.




               Page 32                           GAO/NSIAD-97-210BR Air Force Depot Maintenance
Briefing Section II
Reengining May Prove Too Costly




The Air Force analyzed the lease and purchase alternatives and concluded
that both options are cost-prohibitive compared to maintaining the current
engine. Maintaining the existing TF-33 engines would cost $8.6 billion (in
then-year dollars) over the remaining life of the program. The Air Force
team formed to study the proposal estimated that implementing Boeing’s
proposal would cost $9.9 billion (in then-year dollars). Implementing
Boeing’s proposal would result in a net cost of approximately $1.3 billion.
In addition, other risks such as the length of the lease, termination liability,
and indemnification also made Boeing’s proposal unacceptable. On
April 15, 1997, DOD reported to Congress that implementing Boeing’s
reengining proposal was not cost-effective. The Air Combat Command, the
end-user of the B-52, agreed that while Boeing’s proposal would provide
operational and logistical benefits, it was not affordable as structured.

Subsequent to this report to Congress, Boeing revised its proposal. Air
Force officials told us that the Air Force analysis of a more recent Boeing
estimate of B-52 reengining costs determined that the cost of the revised
proposal was $1.4 billion—$100 million more than the previous estimate.
In a July 9, 1997, letter to the Chairman of the Senate Armed Services
Committee, the Air Force Chief of Staff stated that the Boeing B-52
reengining proposal proved to be $1.4 billion more expensive than
maintaining and, in the future, enhancing the TF-33 engines. It also noted
that the proposed termination liability for the program was unaffordable.
The letter concluded that based on this data, the Air Force will not
reengine the B-52.




Page 33                            GAO/NSIAD-97-210BR Air Force Depot Maintenance
               Briefing Section II
               Reengining May Prove Too Costly




GAO   Differences Can Be Attributed to Four
      Factors
       Differences between Boeing's $4.7
       billion savings and Air Force's $1.3
       billion cost estimates can be attributed
       primarily to four factors:
        fuel inflation rate--$1.1 billion
        OSD inflation rate--$1.7 billion
        engine removal rate--$1.3 billion, and
        engine unit repair costs--$1.1 billion.




               Page 34                           GAO/NSIAD-97-210BR Air Force Depot Maintenance
Briefing Section II
Reengining May Prove Too Costly




Four factors account for about 86 percent of the difference between the
Boeing and Air Force estimates: fuel inflation rates, Office of the Secretary
of Defense (OSD) inflation rates, total engine removal rates, and engine unit
repair costs. Boeing used a fuel inflation rate of 4.8 percent in developing
its proposal. Using the OSD fuel inflation rate as the baseline, the Air Force
team projected a most probable fuel inflation rate of 3.09 percent. The
different fuel inflation rates account for about $1.1 billion of the difference
in the Boeing and Air Force estimates. In estimating the inflation rate,
Boeing considered the OSD-approved factor, but added 1 percent in its
calculation. The Air Force used the OSD factor, resulting in a difference of
$1.7 billion between the two estimates.

Differences in the engine removal rate for the Boeing and Air Force
estimates accounted for approximately $1.3 billion of the total difference
between the two estimates. In calculating the total engine removal rate,
Boeing used TF-33 replacement rate data for the last 6 years. This data
included engines that were brought into the depot early for the engine
rejuvenation modification program. Air Force officials stated that using
removal rate data for only 6 years when the removal rate for part of that
period was artificially high because of this modification program, did not
provide an accurate projection of the engine removal rate. To get a more
accurate projection, Air Force officials used a statistical average based on
26 years of historical data. This data also included engines that had been
through the rejuvenation program.

To estimate the cost for maintaining the existing TF-33 engines for the
remaining life of the B-52 program, Boeing surveyed commercial engine
manufacturers to determine their price to overhaul the TF-33 engine. The
Air Force did not agree with the contractor’s approach. Air Force officials
told us that only 14 percent of the TF-33 engines returned to the depot
require a complete overhaul and there is a different cost for less than a
complete overhaul. The Air Force analysis of unit repair costs for the
TF-33 used actual sales rate data for the TF-33 engines in fiscal year 1997,
excluding engines modified through the engine rejuvenation program. The
Air Force estimate for repair costs of the TF-33 was about $1.1 billion less
than the Boeing estimate.




Page 35                           GAO/NSIAD-97-210BR Air Force Depot Maintenance
               Briefing Section II
               Reengining May Prove Too Costly




GAO   Institute for Defense Analyses Projects
      Costs Similar to Air Force Estimate
       The Institute for Defense Analyses (IDA)
       projects that implementing the Boeing
       proposal would cost the Air Force $1
       billion.
       IDA also explored the potential for
       reducing the size of the tanker fleet as a
       result of reengining the B-52s, but the Air
       Force disagrees with that assessment.




               Page 36                           GAO/NSIAD-97-210BR Air Force Depot Maintenance
Briefing Section II
Reengining May Prove Too Costly




Preliminary briefings prepared by IDA show that it estimates that
implementing Boeing’s proposal will cost the Air Force about $1 billion in
then-year dollars.1 IDA projected some savings when it considered potential
reductions in the number of tanker aircraft needed to support the
reengined B-52 fleet. IDA projected that reengined B-52s would be able to
fly for longer periods without refueling, thereby reducing the requirement
for tanker support. However, the Air Force disagrees with IDA’s tanker
analysis. The Air Force’s position is that the tanker fleet is overstressed
and any potential reductions in the number of tankers required to support
B-52s will simply relieve some of the stress on the tanker fleet. We did not
assess the validity of IDA’s tanker analysis or the Air Force response for
this report. However, we have previously examined the services’ air
refueling needs and reported that demands on the tanker fleet have not
diminished since Operation Desert Storm.2 We also noted that the
drawdown of U.S. forces from overseas bases has added to air refueling
requirements because of the need to refuel U.S.-based tactical aircraft to
enable them to reach overseas destinations, perform their missions, and
return.




1
 The IDA study will not be finalized until late summer.
2
 U.S. Combat Air Power: Aging Refueling Aircraft Are Costly to Maintain and Operate
(GAO/NSIAD-96-160, Aug. 8, 1996).



Page 37                                      GAO/NSIAD-97-210BR Air Force Depot Maintenance
              Briefing Section II
              Reengining May Prove Too Costly




GAO   Air Force Now Exploring Other
      Alternatives
       Under continued pressure to modernize
       the fleet, the Air Force is now exploring
       other options.
       Air Force preparing an engine roadmap
       study to develop and evaluate
       propulsion system modernization
       alternatives for the TF-33 engine.




              Page 38                           GAO/NSIAD-97-210BR Air Force Depot Maintenance
Briefing Section II
Reengining May Prove Too Costly




Faced with continuing pressure to modernize the fleet, the Air Force has
begun exploring other alternatives. For example, it recently began
preparing an engine roadmap study to develop and evaluate modernization
alternatives for the TF-33 engine. This study, which is not limited to the
B-52, will allow engine manufacturers to present alternatives for
modernizing the TF-33. Options may include modifying the existing TF-33
engines, reengining all aircraft equipped with the TF-33, and revising the
current maintenance concept. The expected cost of the study is about
$950,000.




Page 39                           GAO/NSIAD-97-210BR Air Force Depot Maintenance
              Briefing Section II
              Reengining May Prove Too Costly




GAO   Three Engine Manufacturers
      Participating in Roadmap Study
       Air Force awarded contracts to Pratt &
       Whitney, GE, and Allison/Rolls to
       explore options for modernizing all
       aircraft equipped with the TF-33 engine.
       Study includes 4 airframes--B-52, E-3,
       E-8, and C-135 (about 342 aircraft).
       Expected completion--January 1998.




              Page 40                           GAO/NSIAD-97-210BR Air Force Depot Maintenance
Briefing Section II
Reengining May Prove Too Costly




The Air Force awarded contracts to three engine manufactures—Pratt and
Whitney, General Electric (GE), and Allison/Rolls Royce—in June 1997.
The engine manufacturers are to include all aircraft equipped with TF-33
engines in their study. This will encompass 4 different airframes—B-52,
E-3, E-8, and C-135—for a total of about 342 aircraft. The engine
manufacturers are to submit their alternatives by November 30, 1997. The
Air Force evaluation is expected to be completed by January 31, 1998,
resulting in a rank-ordered listing of all alternatives.




Page 41                           GAO/NSIAD-97-210BR Air Force Depot Maintenance
              Briefing Section II
              Reengining May Prove Too Costly




GAO   Other Studies on Reengining Aircraft
      With TF-33 Engines
       Recent Air Force studies on reengining
       E-3 and B-52 aircraft showed that
       reengining is not a cost-effective option
       for these aircraft.
       Reengining the KC-135 aircraft proved
       to be the most cost-effective option
       available to alleviate tanker shortfalls.




              Page 42                           GAO/NSIAD-97-210BR Air Force Depot Maintenance
Briefing Section II
Reengining May Prove Too Costly




Other studies conducted by the Air Force on reengining aircraft have
shown that reengining is not a cost-effective option. For example, the Air
Force completed a study on reengining the E-3 aircraft in September 1996.
This study concluded that reengining was not cost-effective and
recommended rejuvenating the TF-33s to ensure airworthiness for the life
of the Air Warning and Control System (AWACS) program. As discussed
earlier in this report, the Air Force’s B-52 study, completed in April 1997,
concluded that Boeing’s proposal would cost $1.3 billion and, although it
offered some operational and logistical benefits, is simply not
cost-effective.

In some situations, reengining has proven to be the most cost-effective
option. For example, in the 1970s, the Air Force initiated a program that
has resulted in reengining 406 KC-135 aircraft with the CFM-56 engine to
give the aircraft greater fuel efficiency and extend its range to alleviate
tanker shortfalls. Additionally, we reported in 1992 that replacing the
TF-33 engine on the RC-135 aircraft offered significant savings.3




3
 Intelligence Programs: New RC-135 Aircraft Engines Can Reduce Cost and Improve Performance
(GAO/NSIAD-92-305, Aug. 25, 1992).



Page 43                                   GAO/NSIAD-97-210BR Air Force Depot Maintenance
               Briefing Section II
               Reengining May Prove Too Costly




GAO   Eliminating TF-33 Workload Will
      Increase Cost and Excess Capacity
      Preliminary analysis shows that
      removing the TF-33 workload from the
      depot would increase the depot's
      overhead rates by about $4.42 per labor
      hour.
      In addition, removing 1 million direct
      labor hours of TF-33 work from the
      depot, without bringing in work to replace
      it, would increase excess capacity at the
      Oklahoma City depot.




               Page 44                           GAO/NSIAD-97-210BR Air Force Depot Maintenance
Briefing Section II
Reengining May Prove Too Costly




Removing the TF-33 workload (about 1 million hours) from the Oklahoma
City Air Logistics Center workload would result in increasing the depot’s
overhead rates by about $4.42 per labor hour in fiscal year 1998. This
would increase the operations and maintenance cost to customers for the
remaining workload performed by the depot by about $31 million annually.
In addition, the loss of 1 million direct labor hours of workload at the
Oklahoma City Air Logistics Center would further increase its excess
capacity. The center’s excess capacity is already projected to be
41 percent by 1999. The removal of 1 million direct labor hours would
increase the center’s excess capacity to almost 50 percent4 using
maximum potential capacity and projected workload for fiscal year 1999.




4
 This estimate is based on maximum potential capacity using workload projections for 1999, excluding
the potential movement of workloads from the San Antonio Air Logistics Center.



Page 45                                    GAO/NSIAD-97-210BR Air Force Depot Maintenance
Appendix I

Major Contributors to This Report


                        James F. Wiggins, Associate Director
National Security and   Julia C. Denman, Assistant Director
International Affairs
Division, Washington,
D.C.
                        Penney M. Harwell, Evaluator-in-Charge
Dallas Field Office     Larry J. Junek, Senior Evaluator
                        John D. Strong, Senior Evaluator




(709268)                Page 46                        GAO/NSIAD-97-210BR Air Force Depot Maintenance
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