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Air Force Depot Maintenance: Information on the Cost-Effectiveness of B-1 and B-52 Support Options (Briefing Report, 09/12/97, GAO/NSIAD-97-210BR).

Pursuant to a congressional request, GAO provided 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, focusing on: (1) comparing 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; and (2) analyzing 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.

GAO noted that: (1) in fiscal years 1995 and 1996, the Air Force paid
twice as much for each B-1B aircraft repaired under contract as the
Oklahoma City depot estimated it would have cost that depot to repair
the same aircraft; (2) the Air Force paid approximately $19 million for
five aircraft repaired by Rockwell International Corporation in each of
the 2 fiscal years, compared to about $9 million estimated for similar
repair of 5 aircraft in the depot each year; (3) 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; (4) confronted with this situation and other
factors, the contractor reduced the B-1B contract price from $18 million
to $11 million--about 39 percent; (5) GAO estimates 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; (6) 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; (7) the two factors most significantly influencing this
difference are the impact of overhead savings at the Boeing facility and
at the depot; (8) 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; (9) 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; (10) on April 15,
1997, DOD reported to Congress that implementing Boeing's reengining
proposal is not cost-effective; (11) risks such as the length of the
lease, termination liability, and indemnification made Boeing's proposal
unacceptable; (12) additionally, the Institute for Defense Analysis
projected that implementing the Boeing proposal would cost the Air Force
$1 billion; (13) faced with continuing pressure to modernize the fleet,
the Air Force is currently exploring alternatives for modernizing all
TF-33 engines; and (14) 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.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  NSIAD-97-210BR
     TITLE:  Air Force Depot Maintenance: Information on the 
             Cost-Effectiveness of B-1 and B-52 Support Options
      DATE:  09/12/97
   SUBJECT:  Defense economic analysis
             Aircraft engines
             Bomber aircraft
             Air Force procurement
             Contract costs
             Aircraft maintenance
             Defense capabilities
             Privatization
             Maintenance services contracts
             Cost effectiveness analysis
IDENTIFIER:  B-1B Aircraft
             B-52 Aircraft
             TF-33 Engine
             Palmdale (CA)
             
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Cover
================================================================ COVER


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

Air Force Depot Maintenance

(709268)


Abbreviations
=============================================================== ABBREV

  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

Letter
=============================================================== LETTER


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. 


   BACKGROUND
------------------------------------------------------------ Letter :1

The Department of Defense (DOD) spends about $13 billion--5 percent
of 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 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. 


--------------------
\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. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :2

In fiscal years 1995 and 1996, the Air Force paid twice as much for
each 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, 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. 


--------------------
\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. 

\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. 


   AGENCY AND CONTRACTOR COMMENTS
   AND OUR EVALUATION
------------------------------------------------------------ Letter :3

The Air Force, Office of the Secretary of Defense (OSD), and Boeing
provided comments to our draft report.  Specifically, in oral
comments, Air Force officials said the Air Force was unable to
reconcile its analysis with 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 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
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. 


--------------------
\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. 


      EVALUATION OF CONTRACTOR
      COMMENTS
---------------------------------------------------------- Letter :3.1

Boeing officials made several observations regarding our B-52
reengining 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. 


   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :4

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


--------------------
\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). 


---------------------------------------------------------- Letter :4.1

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

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


BRIEFING SECTION I B-1B PROGRAMMED
DEPOT MAINTENANCE
============================================================== Letter 



   (See figure in printed
   edition.)


   BACKGROUND
------------------------------------------------------------ Letter :5


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. 



   (See figure in printed
   edition.)


--------------------
\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. 


   CONTRACTOR B-1B REPAIR
   ESTIMATED TO BE MORE COSTLY
------------------------------------------------------------ Letter :6


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. 



   (See figure in printed
   edition.)


   DEPOT READY TO ASSUME ENTIRE
   B-1B WORKLOAD
------------------------------------------------------------ Letter :7


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 days\2 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). 



   (See figure in printed
   edition.)


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


   POTENTIAL COMPETITION FROM
   DEPOT CONTRIBUTED TO BOEING
   LOWERING PRICE
------------------------------------------------------------ Letter :8


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. 



   (See figure in printed
   edition.)


--------------------
\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. 


   AIR FORCE CITED UNCERTAINTY AND
   NEED FOR SECOND SOURCE OF
   REPAIR
------------------------------------------------------------ Letter :9


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. 



   (See figure in printed
   edition.)


   AIR FORCE COMPARISON SHOWED
   LITTLE DIFFERENCE IN COST
----------------------------------------------------------- Letter :10


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. 



   (See figure in printed
   edition.)


   COMPARISON OF AIR FORCE AND OUR
   ANALYSIS
----------------------------------------------------------- Letter :11


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. 



   (See figure in printed
   edition.)


   BOEING'S PRICE STILL EXCEEDS
   PRICE AT OKLAHOMA CITY AIR
   LOGISTICS CENTER
----------------------------------------------------------- Letter :12


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. 



   (See figure in printed
   edition.)


   PRICE DIFFERENCES RESULT FROM A
   VARIETY OF FACTORS
----------------------------------------------------------- Letter :13


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. 



   (See figure in printed
   edition.)


   SECOND SOURCE LOCATIONS ADD TO
   COST OF DEPOT REPAIR PROGRAMS
----------------------------------------------------------- Letter :14


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. 

BRIEFING SECTION II

--------------------
\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). 


REENGINING MAY PROVE TOO COSTLY
============================================================== Letter 



   (See figure in printed
   edition.)


   BOEING PROJECTS REENGINING
   PROPOSAL WILL SAVE AIR FORCE
   BILLIONS
----------------------------------------------------------- Letter :15


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. 



   (See figure in printed
   edition.)


   AIR FORCE DETERMINED REENGINING
   PROPOSALS NOT COST-EFFECTIVE
----------------------------------------------------------- Letter :16


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. 



   (See figure in printed
   edition.)


   DIFFERENCES CAN BE ATTRIBUTED
   TO FOUR FACTORS
----------------------------------------------------------- Letter :17


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. 



   (See figure in printed
   edition.)


   INSTITUTE FOR DEFENSE ANALYSES
   PROJECTS COSTS SIMILAR TO AIR
   FORCE ESTIMATE
----------------------------------------------------------- Letter :18


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. 



   (See figure in printed
   edition.)


--------------------
\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). 


   AIR FORCE NOW EXPLORING OTHER
   ALTERNATIVES
----------------------------------------------------------- Letter :19


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. 



   (See figure in printed
   edition.)


   THREE ENGINE MANUFACTURERS
   PARTICIPATING IN ROADMAP STUDY
----------------------------------------------------------- Letter :20


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. 



   (See figure in printed
   edition.)


   OTHER STUDIES ON REENGINING
   AIRCRAFT WITH TF-33 ENGINES
----------------------------------------------------------- Letter :21


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



   (See figure in printed
   edition.)


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


   ELIMINATING TF-33 WORKLOAD WILL
   INCREASE COST AND EXCESS
   CAPACITY
----------------------------------------------------------- Letter :22


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 percent\4
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. 


MAJOR CONTRIBUTORS TO THIS REPORT
=========================================================== Appendix I

NATIONAL SECURITY AND
INTERNATIONAL AFFAIRS DIVISION,
WASHINGTON, D.C. 

James F.  Wiggins, Associate Director
Julia C.  Denman, Assistant Director

DALLAS FIELD OFFICE

Penney M.  Harwell, Evaluator-in-Charge
Larry J.  Junek, Senior Evaluator
John D.  Strong, Senior Evaluator


*** End of document. ***




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