The Air Force Tanker Lease Proposal

This report assesses the Air Force's plan to replace a portion of its KC-135 aerial refueling tanker fleet with leased Boeing 767 aircraft. It also assesses aerial refueling tanker requirements; the cost-effectiveness of different options (lease, purchase, modify, or extend the service life of the fleet); the policy for leasing major defense acquisition programs; the costs associated with infrastructure improvements; and the depot maintenance backlog. Recognizing that the full extent of this analysis could not be done before the terms of the lease were negotiated, you asked that we provide the preliminary results of our efforts by May 15, 2002.

The proposed lease of the KC-767 tanker aircraft was one of the most infamous procurement scandals of the post-Cold War era. Interactions within the military-industrial-congressional complex led to legislation permitting the Air Force to lease tankers from Boeing using an operating lease rather than standard procurement. Following the outcry from Congress, industry, the media, and numerous watchdog groups, Congress and the Department of Defense (DOD) launched a wave of investigations and hearings. During the lease debate, participants reached a number of compromises documented in congressional legislation. However, this was not sufficient to continue the lease process. After nearly 4 years, Congress cancelled the tanker lease and directed the Air Force to pursue a traditional procurement approach.

GAO addressed the Air Force's plan to replace a portion of its KC-135 aerial refueling tanker fleet with leased Boeing 767 aircraft. Although the Air Force has a long term requirement to replace its aging fleet of KC-135 tankers, the urgency of the need in the short term is unclear. The Air Force stated that the leasing arrangement would allow it to acquire new tankers three years earlier than through its most recent procurement plan. This would allow the Air Force to retire old, less capable KC-135s, thus saving maintenance costs on those aircraft. Because the Air Force is still negotiating the lease details, it could not provide information on the cost effectiveness of leasing aircraft instead of purchasing them. Although GAO has not taken a position on the overall policy of leasing versus purchasing defense equipment, it found that, from a cost standpoint, leasing is more expensive in the long run. Because the 767 aircraft is larger than the KC-135, there will be some infrastructure improvement costs, such as for building or modifying hangars, taxiways, and runway aprons. Additional costs would likely include simulators and project management. The depots have undertaken some measures to speed up KC-135 maintenance and repair times; however, the extent to which these actions are helping or whether other measures could be taken is unknown.

This project analyzes the proposed United States Air Force "acquisition" of 100 KC-767A tankers to replace KC-135E Statotankers. The Air Force intended to use an operating lease to obtain the services of these KC- 767As in a timely manner and begin recapitalization of the aging aerial refueling fleet. There are three major research questions driving this project. First, in terms of national security, mission, and readiness, is there an immediate need for the Air Force to replace the KC-135? Second, if there is a need to replace the KC-135, is the KC-767A the best aircraft to satisfy the Air Force's long-term objectives? Finally, using the proposed lease of 100 aircraft, as the Air Force suggested, is leasing the best financial alternative to replace the KC-135? To answer these questions an examination of the KC-135 history, history of the proposed lease, comparison of alternative aircraft and solutions, stakeholder analysis, comparison of operating and capital leases, cost analysis, acquisition process, and other issues are presented. The examination concludes that the Air Force's proposed solution using the KC-767 aircraft and the operating lease method is not the best available.