An Assessment of the Life-Cycle Cost: Executive Summary

Prepared for:
The Boeing Company
Seattle, Washington
23 August 2010

Prepared by: AeroStrategy Management Consulting

Executive Summary
The United States Air Force is conducting a competition to replace the 50-year old KC-135. Two competitors, The Boeing Company and the European Aeronautic Defence and Space Company (EADS) have each offered a refueling tanker derived from a currently available commercial airliner. Boeing offered a tanker based on the Boeing 767; whereas, EADS offered a tanker based on the Airbus A330. The Air Force will award a contract for 179 aircraft with deliveries between 2014 and 2026 which are expected to have at least a 40-year life before retirement. This analysis compares the lifecycle cost of a fleet of 179 Boeing 767-200ER aircraft equipped with Pratt & Whitney PW4000-94 engines with the lifecycle cost of the Airbus A330-200 equipped with GE CF6-80E engines. AeroStrategy has been collecting and analyzing aircraft maintenance costs since 2003 on behalf of major clients in the aerospace and aviation industry. The analysis concludes:

• Significant life cycle cost savings are accrued by a Boeing 767 in the areas of fuel usage, the full spectrum of maintenance activities from day-to-day flightline maintenance to depot-level maintenance and inspections, and initial investment for tools and spare parts.

• Depending on aircraft usage rates and fuel prices, total life cycle cost savings for a fleet of 179 Boeing 767 aircraft compared to a fleet of 179 EADS Airbus A330 aircraft are 20-25% and range from $11 billion to $36 billion dollars.

A total of six cost categories were included in the analysis: (1) the cost of fuel for flying the aircraft over 40 years, (2) the cost of overhauling the engines at their respective maintenance intervals, (3) line maintenance activities up to and including A-checks, (4) airframe heavy maintenance, (5) component repair, and (6) the initial investment required in spare parts and maintenance tooling. Because the KC-X tanker is expected to operate for at least 40 years, these fuel and maintenance cost drivers can be as much as 60-80% of the total program costs from initial aircraft acquisition through aircraft retirement.

Ten different scenarios were analyzed with variations in annual aircraft utilization, fuel price escalation and aircraft maintenance programs. The variations in aircraft utilization included a typical commercial airline utilization of 4,000 flying hours per year and two utilization levels that would be more typical of military use – 489 hours per year, which is the level specified in the Air Force’s current requirements and 750 hours per year which would reflect a higher operations tempo experienced during conflicts such as during operations in Iraq, Afghanistan and Kosovo. Given the KC-X’s multi-role capabilities and high availability rate, a higher utilization rate – 750 hours per year – is not unreasonable to expect. In fact, the Air Force’s stated requirement for KC-X tanker flight hours per year during the previous tanker competition was 750 hours per year. As a point of comparison, the C-17 airlift aircraft averages nearly 1,000 flight hours per year.

Two approaches were evaluated to determine the cost of fuel over time. In the first approach, indices provided by the Air Force were used to calculate the fuel price for any given year. Over 40 years, the average annual escalation in fuel price is approximately 2.5%. The second approach used a market-based industry composite derived from various sources such as the Department of Energy and the International Energy Agency with an annual escalation of 5.1%, a level that reflects potential actual fuel price growth given increasing demand for and declining supply of oil.

Conclusions
The EADS A330 aircraft is over 50 percent larger and 25 percent heavier than the Boeing 767; therefore, it consumes substantially more fuel, costs more to perform line and heavy maintenance and requires more initial upfront investment than the 767. In all ten scenarios analyzed, the life-cycle cost of the A330 was at least 20% higher than that for the 767. However, the three scenarios referenced below most closely approximate potential Air Force KC-X tanker utilization rates and maintenance plans.

• Scenario 1 considers the Air Force provided aircraft utilization rate (489 flying hours/year) and annual fuel price escalation (2.5% escalation). In this scenario, the Total Program Life-Cycle Cost in then-year dollars for the A330 is $11 billion (20%) more than the Boeing 767.

• Scenario 2 considers a higher, but realistic, utilization rate consistent with Air Force stated requirements in the previous KC-X tanker competition (750 flying hours/year) and the Air Force issued annual fuel price escalation (2.5%). In this scenario, the life-cycle cost in then year dollars of the A330 is $16 billion (22%) more than the Boeing 767.

• Finally, Scenario 3 considers a 750 flying hour/year utilization rate and, an industry composite fuel price annual escalation forecast (5.1%). In this scenario, A330 life-cycle costs are $36 billion (25%) more than the Boeing 767.

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