The facts:

The key elements of the Air Force’s proposal, as presented in the GAO's reports of September 3 and 4, 2003 to the Congress, are summarized below:

• The Air Force proposes to lease 100 KC-767A aircraft for 6 years each; the first aircraft would be delivered in August 2006 and the final ones by the end of 2011...
• The Air Force’s report includes an analysis required by OMB Circular A-94 comparing the net present value of the lease approach against that of purchasing the aircraft. The Air Force acknowledges that its analysis indicated that purchase would be cheaper than leasing by about $150 million in net present value terms.
  ...Specifically, the Air Force said that if the aircraft were purchased at the same rate as planned under the lease, it would need $5 billion more funding through fiscal year 2006 and more than $14 billion more for the 6 years reflected in the Future Years Defense Program. Under the procurement budget plan that the lease would replace, the Air Force would not begin acquiring new tankers until fiscal year 2009 and would not have 100 new tankers until 2016, 5 years later than planned through the lease.
• The key justification for the lease, according to the Air Force, is an urgent need to replace the current fleet of KC-135 aircraft...
• The Air Force plans to award a contract to a special purpose entity (SPE), a trust to be created under the laws of Delaware, that will issue bonds to raise sufficient capital to purchase the new aircraft from Boeing and lease them to the Air Force...
• Office of Management and Budget Circular A-11 requires that an operating lease meet certain terms and conditions, including a criterion that the net present value of the lease payments not exceed 90 percent of the fair market value of the asset at the time that the lease is initiated... If the fair market value is assumed to be the cost to buy the aircraft, then the lease payments represent about 93 percent of the fair market value and would not meet the requirement.
• If Boeing sells up to 100 comparable aircraft during the term of the contract to another customer for a lower price than that agreed to by the Air Force, the government would receive an "equitable adjustment." The report also states that Boeing has agreed to a return-on-sales cap of 15 percent and that an audit of its internal cost structure will be conducted in 2011, and that any return on sales exceeding 15 percent would be reimbursed to the government.
• According to the report, if the government were to terminate the lease, it must
  (1) do so for all of the delivered aircraft, and any aircraft for which construction has not begun,
  (2) give 12 months advance notification prior to termination,
  (3) return the aircraft, and
  (4) pay an amount equal to 1 year’s lease payment for each aircraft terminated. If termination occurs before all aircraft have been delivered, the price for the remaining aircraft would be increased to include unamortized costs incurred by the contractor that would have been amortized over the terminated aircraft and a reasonable profit on those costs.
• The government will pay for and the contractor will obtain commercial insurance to cover aircraft loss and third-party liability as part of the lease agreement...
• At the expiration of the lease, the Air Force can return the aircraft to the SPE after removing, at government expense, any Air Force-unique configurations added by the Air Force after delivery of the aircraft from the SPE...
• The contractor will warrant that each aircraft will be free from defects in materials and workmanship and that the warranty will be of 36 months’ duration...

The GAO says it's a sweet deal for Boeing

One report notes, "The cost differential between leasing and purchasing was presented by the Air Force as about $150 million favoring purchase in net present value terms, although the differential can rise to $1.9 billion favoring purchase, depending upon the assumptions used. For example, according to the Air Force report to the Congress, had the Congress provided multiyear procurement authority and had DOD been able to accommodate that while preserving “program stability,” the net present value could favor purchase by up to $1.9 billion."

The GAO also noted that the Air Force hadn't seen this program as an urgent need in the past; but now it is. Additionally, The report said that the deal isn't really an 'operating lease,' because of the high percent of market value transfered. Besides that, the GAO said the Air Force has been deceptive: "...the report does not present the total costs of this program, including the costs to acquire the aircraft at the expiration of the lease or to maintain the aircraft during the period of the lease." The deception ran to the net present value analyses, that looked like a $150 million problem [and that's still a lot of money to just throw at a favored contractor --ed.], but that could, under entirely plausible conditions, be a $1,900,000 problem for the taxpayers to pick up. Explaining just part of the possible deception (or bad math), the OMB says, a "...1-percentage point change in the discount rate can cause a change of over $660 million in the net present value results."

There's too much guesswork to have the Air Force's hair-splitting bring any degree of confidence. As the report noted, "if the actual cost increases for the construction of the aircraft are higher than the assumed cost increases in the Air Force analysis, the cost of leasing will be higher than the cost presented in the report to the Congress. The reverse could also be true." In other words, nobody knows; but the deal, as presented, seems to be loaded all one way.

FMI: www.gao.gov/new.items/d03923t.pdf; www.gao.gov/new.items/d031143t.pdf