[Senate Hearing 110-410]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 110-410
 
               COST EFFECTIVE AIRLIFT IN THE 21ST CENTURY

=======================================================================

                                HEARING

                               before the

                FEDERAL FINANCIAL MANAGEMENT, GOVERNMENT
                   INFORMATION, FEDERAL SERVICES, AND
                  INTERNATIONAL SECURITY SUBCOMMITTEE

                                 of the

                              COMMITTEE ON
                         HOMELAND SECURITY AND
                          GOVERNMENTAL AFFAIRS
                          UNITED STATES SENATE


                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                           SEPTEMBER 27, 2007

                               __________

        Available via http://www.access.gpo.gov/congress/senate

       Printed for the use of the Committee on Homeland Security
                        and Governmental Affairs


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        COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS

               JOSEPH I. LIEBERMAN, Connecticut, Chairman
CARL LEVIN, Michigan                 SUSAN M. COLLINS, Maine
DANIEL K. AKAKA, Hawaii              TED STEVENS, Alaska
THOMAS R. CARPER, Delaware           GEORGE V. VOINOVICH, Ohio
MARK L. PRYOR, Arkansas              NORM COLEMAN, Minnesota
MARY L. LANDRIEU, Louisiana          TOM COBURN, Oklahoma
BARACK OBAMA, Illinois               PETE V. DOMENICI, New Mexico
CLAIRE McCASKILL, Missouri           JOHN WARNER, Virginia
JON TESTER, Montana                  JOHN E. SUNUNU, New Hampshire

                  Michael L. Alexander, Staff Director
     Brandon L. Milhorn, Minority Staff Director and Chief Counsel
                  Trina Driessnack Tyrer, Chief Clerk


FEDERAL FINANCIAL MANAGEMENT, GOVERNMENT INFORMATION, FEDERAL SERVICES, 
                AND INTERNATIONAL SECURITY SUBCOMMITTEE

                  THOMAS R. CARPER, Delaware, Chairman
CARL LEVIN, Michigan                 TOM COBURN, Oklahoma
DANIEL K. AKAKA, Hawaii              TED STEVENS, Alaska
BARACK OBAMA, Illinois               GEORGE V. VOINOVICH, Ohio
CLAIRE McCASKILL, Missouri           PETE V. DOMENICI, New Mexico
JON TESTER, Montana                  JOHN E. SUNUNU, New Hampshire

                    John Kilvington, Staff Director
                  Katy French, Minority Staff Director
                       Liz Scranton, Chief Clerk


                            C O N T E N T S

                                 ------                                
Opening statements:
                                                                   Page
    Senator Carper...............................................     1
    Senator Voinovich............................................     7
    Senator Coburn...............................................    10

                               WITNESSES
                      Thursday, September 27, 2007

Sue C. Payton, Assistant Secretary of the Air Force for 
  Acquisition, U.S. Air Force, accompanied by Diane M. Wright, 
  Deputy Program Executive Officer for Aircraft, Aeronautical 
  Systems Center, Wright-Patterson Air Force Base................     8
General Norton A. Schwartz, Commander, U.S. Transportation 
  Command, U.S. Air Force........................................    11
Christopher Bolkcom, Specialist in National Defense, 
  Congressional Research Service.................................    13
Larry J. McQuien, Vice President of Business Ventures, Lockheed 
  Martin Aeronautics Company, accompanied by George Schultz, Vice 
  President, Lockheed Martin Aeronautics Company.................    36

                     Alphabetical List of Witnesses

Bolkcom, Christopher:
    Testimony....................................................    13
    Prepared statement with an attachment........................    66
McQuien, Larry J.:
    Testimony....................................................    36
    Prepared statement...........................................    95
Payton, Sue C.:
    Testimony....................................................     8
    Prepared statement...........................................    49
Schwartz, General Norton A.:
    Testimony....................................................    11
    Prepared statement...........................................    58

                                APPENDIX

Questions and responses for the Record from:
    Mr. McQuien..................................................    00
Charts submitted by Senator Carper...............................    00
Information from GE submitted by Senator Carper..................    00


               COST EFFECTIVE AIRLIFT IN THE 21ST CENTURY

                              ----------                              


                      THURSDAY, SEPTEMBER 27, 2007

                                   U.S. Senate,    
          Subcommittee on Federal Financial Management,    
                Government Information, Federal Services,  
                                and International Security,
                            of the Committee on Homeland Security  
                                          and Governmental Affairs,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 3:35 p.m., in 
Room 342, Dirksen Senate Office Building, Hon. Thomas R. 
Carper, Chairman of the Subcommittee, presiding.
    Present: Senators Carper, Coburn, and Voinovich.

              OPENING STATEMENT OF SENATOR CARPER

    Senator Carper. Good afternoon. The Subcommittee will come 
to order. We are to be joined by several of our colleagues here 
in a few minutes, but let me just start off before we introduce 
our witnesses.
    I just want to thank our witnesses for coming, and for your 
preparation. I am going to ask, Secretary Payton, if you and 
General Schwartz might stay around for the second panel, that 
would be much appreciated. If your schedules don't permit you 
to do that, I understand, but if you could stay, I would be 
grateful.
    The Senate will soon complete legislation intended to equip 
our Armed Forces to meet our national security threats and to 
keep our country safe. This is really one of the foremost 
responsibilities of our body, the Senate and the House.
    Our Armed Forces are charged with providing our Commander 
in Chief and our military leaders with flexible options for 
responding to a wide variety of threats.
    In Iraq, our Armed Forces are keeping the lid on a civil 
war and protecting civilians from terrorists and from one 
another. In Korea, our Armed Forces are charged with guarding 
an ally's border and deterring aggression on the part of a 
large conventional military force. In the Pacific and the 
Persian Gulf, our Armed Forces protect American interests 
through the projection of naval power and carrier-based air 
power. At home, our National Guard provides our Nation's 
governors with critical response capacity to cope with natural 
disasters like Hurricane Katrina.
    At times, it can seem as though the demands on our military 
are practically limitless. Unfortunately, the resources 
available for equipping our military to meet these demands are 
not limitless. At a time when our Federal budget remains mired 
in red ink, we need to be looking for ways to meet our military 
requirements in a fiscally responsible manner.
    It is my hope that today's hearing on ``Cost Effective 
Airlift in the 21 Century'' will help us determine the most 
cost-effective way forward as we ensure reliability and 
superiority of the U.S. Strategic Airlift Fleet.
    Though the men and women of the Strategic Airlift Fleet 
rarely receive the attention they deserve, the reality is that 
our military could not perform its many missions, some I just 
mentioned, if it were not for their hard work and dedication. 
Strategic airlift involves the use of cargo aircraft to move 
personnel, weaponry, and materiel over long distances, often to 
combat theaters on the other side of the globe. During the 
current War in Iraq, airlifted sorties have made up the 
majority of the nearly 30,000 total sorties made by U.S. 
aircraft.
    Strategic airlift enables our military to respond to 
threats wherever they occur in the world real time. Not only 
must our fighting men and women be transported to the fight, 
they must be continuously supplied, and airlifted, along with 
sealifted, makes that happen. Both the C-5 and the C-17 have 
fulfilled airlift duties admirably and the United States owes 
much of its rapid deployment capabilities to these machines.
    I want to let you know that right from the get-go, where I 
am coming from--I don't know if others do, but I like to think 
of myself as an honest broker in this issue and this debate. I 
don't pretend to be an expert on procurement. That is not my 
job. But I have spent about half my life around airplanes, an 
old Civil Air Patrol cadet, a Midshipman, Navy ROTC Midshipman, 
Naval flight officer on active duty and 5 years in--another 18 
years in Reserves and got to be Commander in Chief, not of the 
U.S. Armed Forces but of the Delaware National Guard replete 
with its helicopters and its C-130s.
    Today, I am privileged to represent the State of Delaware 
in the Senate and that includes a big part of that 
responsibility is the Dover Air Force Base, where we are 
blessed to have both C-17s and C-5s. In fact, we are just 
getting the first squadron of C-17s, not as we speak, but 
literally this month. It started a month or two ago.
    I just want to stop for a minute and say C-17 is a terrific 
aircraft. The C-17 has a great mission capable rate anywhere 
from 80 to 85 percent. The C-17 can go places where the C-5 
cannot. The C-17 uses a smaller crew. They use less gas. And 
while they can't carry as much as a C-5 or maybe fly as far as 
a C-5, they are a terrific plane and I am not here to question 
the value of the C-5. It is part of our airbridge, a big part 
of our airbridge.
    We have the seabridge, which moves mostly cargo, not so 
much personnel, and we have an airbridge, which moves mostly 
personnel and a fair amount of cargo. Some of the airbridge is 
provided by, on the commercial side, aircraft that we lease. 
Some of the airbridge is provided by--strategic airbridge is 
provided by the C-17 and the C-5. In my own view and I think 
the view shared by others is we need the capability of all of 
them, both of them, along with the capability of the C-130s.
    I have been around Dover Air Force Base long enough to know 
that the C-5 has had a checkered past. I have heard for years 
from crews that love the plane, in many cases. What I have 
heard for years are problems with reliability, largely engines, 
and when you have engines that you have to change every 1,000 
flight hours instead of every 10,000 flight hours, I would be 
complaining, too. We have had problems with hydraulic systems. 
We have had problems with landing gear. Initially, we had 
problems with C-5A wings that have, I think, largely been 
addressed.
    I am not here to defend the C-5. It needs work. It needs a 
fair amount of work. And the question in my mind is, given the 
amount of work that needs to be done in terms of modernization, 
given how much money we have to spend, does it make sense to 
modernize fully the C-5 fleet? My hope is during the course of 
today's hearing we will get a little closer to the truth.
    Over the past 10 years, the United States has reduced its 
cold war infrastructure. We have closed about two-thirds of our 
forward bases, including a lot of places I flew out of during 
the Vietnam War, or my crew and I flew out of during the hot 
war in Vietnam and the cold war after that. Therefore, to 
maintain the same level of global engagement, U.S. forces now 
must deploy more frequently and over greater distances.
    Since September 11, 2001, the scale and pace of operations 
has increased dramatically. Our current Strategic Airlift 
Fleet, including the aircraft currently flying and aircraft on 
order, consists of, I am told, 111 C-5s and, I believe, 190 C-
17s.
    There have been several efforts in the last decade or so to 
quantify our military's strategic airlift requirements. I think 
the most recent one was completed in 2006, the Mobility 
Capability Study commissioned by the Pentagon. I think we got 
their input early last year. And the conclusion, I am told, of 
that study was that the Nation's airlift requirements could 
best be met with a fleet of, at the time, 112 C-5s--we have 
lost one--and 180 C-17s.
    As I said earlier, our current Strategic Airlift Fleet 
includes aircraft currently flying and aircraft on order, 111 
C-5s and 190 C-17s. An update to the Pentagon's 2006 Mobility 
Capability Study included in the President's budget this year 
confirmed this mix is sufficient to meet our airlift needs.
    At present, there is a big debate regarding the degree to 
which aging C-5s are replaced by smaller C-17s. The question 
is, what is the right mix of C-5s, the right mix of C-17s that 
will provide the most cost effective airlift for this country 
in the 21st Century? And I might add to that, what is the right 
mix of aircraft that we would lease from the commercial sector 
or maybe even from other countries? We will get to that later.
    We know the United States needs oversized cargo aircraft to 
help meet the strategic airlift needs that flow from our 
military commitments around the world. My colleague, Senator 
Biden, has made large portions for us to ramp up quickly the 
number of MRAPs that we purchase and ship overseas and cargo 
airlift helps us to get them over there.
    Several years ago, Congress and the Bush Administration 
directed the Air Force to fully modernize three C-5s, known as 
C-5Ms. C-5Ms would be equipped with new engines, new 
hydraulics, new communications system, 70 other new systems in 
all, as well as a state-of-the-art cockpit. The 2004 defense 
authorization bill further directed the Air Force not to retire 
any additional C-5s until those three C-5Ms that had been 
modernized had been extensively tested and evaluated.
    To date, two C-5Bs and one C-5A have been fully modernized, 
as we know. They have flown a total of over 500 flight hours. 
The flight testing, I think, is a little more than halfway 
complete, maybe about two-thirds complete, and the flight 
testing on the three aircraft is to be completed, I think 
either next year or sometime maybe in the first part of 2009 
and the full evaluation of that flight testing is to be 
sometime in 2010.
    Lockheed Martin, the prime contractor on the C-5 
modernization program, is contractually bound to produce C-5Ms 
whose mission capable rate meets or exceeds 75 percent. 
Lockheed Martin reports that nothing--and let me just say, the 
mission capable rate, I am told, of C-5As, particularly those 
that are held in Guard and Reserve units, is below--may be as 
low as 50 percent or lower and the C-5s that are flying 
missions today around the world, their rate for mission capable 
is probably closer to 60, 65, maybe 70 percent.
    We shouldn't be surprised with that. I flew in an active 
duty squadron. I flew in a Reserve squadron for 18 years, and I 
can assure you, when we were an active duty squadron on the 
line off the coast of Vietnam flying missions that our mission 
capable rate of our aircraft was a lot better because we had 
all the spare parts we needed. If we needed an engine, we got 
it. If we needed avionics, we got it. When our squadron 
returned to the United States and we were not going to be 
deployed for another 8 months, we didn't get as much, and 
especially we didn't get as much in the first few months after 
returning to the States.
    Our National Guard unit don't have that kind of priority. 
Neither did my Reserve unit. Our National Guard units in 
Delaware and other States, they don't have the kind of priority 
for parts, for spare parts, for maintenance. So we shouldn't be 
surprised that as C-5As are moved into the Guard and Reserve 
squadrons, that their mission capable rate is going to be 
lower. They just don't get the priority that the airplanes that 
are out there flying missions between here and Kuwait or Iraq 
or Afghanistan are going to get.
    I guess the remaining question, at least to me, is at what 
price per aircraft can Lockheed Martin modernize all or part of 
the remaining C-5 fleet of 108 aircraft? First of all, they 
have a contractual obligation at Lockheed Martin to meet a 
mission capable rate of 75 percent. Can they meet that? Or can 
they maybe exceed that? And second, can they produce 
consistently aircraft that will meet a 75 percent mission 
capable rate at a price that we as taxpayers are willing to 
pay, and can we count on it? Can we take that to the bank?
    The company, Lockheed Martin, offered this past summer to 
modernize the C-5 fleet at what they call a flyaway cost of 
less than $90 million per aircraft whether the Congress and the 
Administration choose to modernize half of the C-5s, two-thirds 
of the C-5s, or the entire C-5 fleet. In my view, if Lockheed 
Martin can deliver C-5s consistently that meet or exceed a 75 
percent mission capable rate at a flyaway cost of $85 million 
or $95 million, even $105 million, if they can do that 
consistently with the avionics and engine modifications that we 
are talking about here, then we would have at least a quarter 
of a century, if not more, on this aircraft, which is what the 
2004 Fleet Viability Board estimates.
    If all of this is true, and if Lockheed Martin can meet 
this commitment, I just believe we would be foolish not to 
modernize all 108 C-5s. If they can't deliver, then we should 
find an alternative. The Air Force questions whether Lockheed 
Martin will actually be able to deliver what the company has 
promised.
    Mark my word, if we don't modernize C-5s in the next decade 
or so, we are going to come back in 15, 20, or 25 years and 
somebody from the Air Force and somebody at the Pentagon, maybe 
one of my colleagues are going to say, we need a big new 
aircraft to carry big, oversized cargo. Do we pay $85 or $95 
million or $105 million a copy now for an aircraft that may be 
able to provide 75 percent mission capable or higher, and 
arguably for the next 25 or 30 years, maybe longer, do we pay 
that money now or do we wait until somewhere down the line, 15, 
20 years from now when we are asked to pay maybe $485 million 
or $495 million or an even higher price?
    Again, our major goal in today's hearing is to better 
ascertain whether Lockheed Martin can be contractually bound to 
produce what they promised, fully modernized, highly reliable 
C-5Ms at a price the Pentagon and our Nation can afford?
    Let me just finish by commending the leadership of the 
Armed Services Committee and the Seapower Subcommittee, which 
has jurisdiction over this issue. The leadership of the 
Seapower Subcommittee has been very gracious in working with us 
as we discussed this hearing. We appreciate the kind of 
cooperation that we have had and we appreciate particularly the 
input of the staff of the Senate Armed Services Committee as we 
prepared for this hearing.
    The Subcommittee, the full Armed Services Committee and 
particularly the Seapower Subcommittee has shown a commitment 
over the years to identify the facts on this issue and make 
decisions based on the facts. The defense bill reported out of 
the Senate Armed Services Committee retains the requirement in 
the 2004 law that we flight test three fully modernized C-5s 
before retiring any C-5As or Bs beyond that. I thank the 
Members of the Subcommittee and their staff for their work on 
this issue.
    I am going to close where I started. I don't pretend to be 
an expert on this, but I do know a little bit about airplanes. 
I spent a fair amount of my life in the military, most of it in 
aviation. I know enough about acquisition probably to be 
dangerous, which probably pertains to other issues, as well, 
that we are not going to get into today. But I have learned a 
bit in the last month or two or three.
    I am not here to defend C-17s. I am not here to defend C-
5s. I want to make sure that at the end of the day, we get the 
most bang for our buck, and if that is a combination that 
includes a bunch of C-17s and C-5s fully modernized, good. If 
that is not where the chips fall at the end, we need to know 
that, as well. But if Lockheed Martin has the ability to 
produce on a consistent basis, if modernized C-5s can meet or 
exceed 75 percent mission capable rate for a price of $85 or 
$95 or even $105 million a copy, I think we would be foolish to 
pass up that deal.
    [The prepared opening statement of Senator Carper follows:]

                  OPENING STATEMENT OF SENATOR CARPER

    The Subcommittee will come to order.
    I would like to thank my colleagues, our witnesses and guests for 
joining Senator Coburn and myself today.
    The Senate will soon complete legislation intended to equip our 
Armed Forces to meet our national security threats and keep America 
safe. this is one of the foremost responsibilities of this body.
    Our Armed Forces are charged with providing our Commander-in-Chief 
and our military leaders with flexible options for responding to a wide 
variety of threats. In Iraq, our Armed Forces are keeping the lid on a 
civil war and protecting civilians from terrorists and from one 
another. In Korea, our Armed Forces are charged with guarding an ally's 
border and deterring aggression on the part of a large conventional 
military. In the Pacific and the Persian Gulf, our Armed Forces protect 
America's interests through the projection of naval power and carrier-
based air power. At home, our National Guard provides our Nation's 
governors with critical response capacity to cope with natural 
disasters, like Hurricane Katrina.
    At times, it can seem as though the demands on our military are 
practically limitless. At a time when our Federal budget remains mired 
in red ink, we need to be looking for ways to meet our military 
requirements in a fiscally responsible manner. It is my hope that 
today's hearing on cost-effective airlift in the 21st Century will help 
us determine the most cost-effective way forward as we ensure the 
reliability and superiority of the United States' strategic airlift 
fleet.
    Though the men and women of our strategic airlift fleet rarely 
receive the attention they deserve, the reality is that our military 
could not perform the missions I just mentioned if it were not for 
their hard work and dedication. Strategic airlift involves the use of 
cargo aircraft to move personnel, weaponry, and material over long 
distances--often to combat theaters on the other side of the globe. 
During Operation Desert Storm, U.S. aircraft moved over 500,000 troops 
and more than 540,000 tons of cargo. During the current war in Iraq, 
airlift sorties have made up the majority of the nearly 30,000 total 
sorties flown by U.S. aircraft.
    Strategic airlift enables our military to respond to threats 
wherever they occur in the world real-time. Not only must our fighting 
men and women be transported to the fight; they must be continuously 
supplied. Airlift makes that happen. Both the C-5 and the C-17 have 
fulfilled airlift duties admirably, and the U.S. owes much of its rapid 
deployment capabilities to these fine machines.
    Over the past 10 years, the United States has reduced its Cold War 
infrastructure and closed two-thirds of its forward bases. Therefore, 
to maintain the same level of global engagement, U.S. forces now must 
deploy more frequently and over greater distances. Since September 11, 
2001, the scale and pace of operations has increased dramatically.
    There have been several efforts in recent years to quantify our 
military's strategic airlift requirement. The most recent one--the 
Mobility Capabilities Study, which was commissioned by the Pentagon--
was completed in February 2006. It concluded that the Nation's airlift 
requirement could be met with a fleet of 112 C-5s and 180 C-17s.
    Our current strategic airlift fleet--including aircraft currently 
flying and aircraft on order--consists of 111 C-5s and 190 C-17s. An 
update to the Mobility Capabilities Study included in the President's 
budget this year confirmed that this mix is sufficient to meet our 
airlift needs.
    At present, there is a big debate regarding the degree to which the 
aging C-5s are replaced by the smaller C-17s. The question is, what is 
the right mix of C-5s and C-17s that will provide the most cost-
effective airlift for this country in the 21st Century?
    We know that the U.S. needs oversized cargo aircraft to help meet 
the strategic airlift needs that flow from our military commitments 
around the world in the fist half of this century. In fact, for the 
past several years, during Operations Enduring and Iraqi Freedom, the 
Department of Defense has been forced to lease. AN-124 aircraft, the 
world's largest cargo aircraft, from Russia because C-17s cannot carry 
some of the oversized cargo that needs to be transported to Iraq and 
Afghanistan, and not enough C-5 aircraft have been available.
    Several years ago, Congress and the Bush Administration directed 
the Air Force to fully modernize three C-5s, known as C-5M's. The C-
5M's would be equipped with new engines, new hydraulic and 
communications systems, and 70 other new systems, as well as state of 
the art cockpits. The FY2004 defense authorization bill further 
directed the Air Force not to retire any additional C-5's until those 
three C-5M's had been extensively flight tested and evaluated. To date, 
two C-5B's and one C-5A have been fully modernized and have flown a 
total of 531 hours. Flight testing on the three aircraft is to be 
completed in 2008 or 2009 and the full evaluation of that flight 
testing is to be completed by June 2010.
    Lockheed Martin, the prime contractor on the C-5 modernization 
program, is contractually bound to produce C-5M's whose mission capable 
rate meets or exceeds 75 percent. Lockheed reports that nothing in the 
flight data to date suggests that rate cannot be met or exceeded.
    A remaining question is at what price per aircraft Lockheed can 
modernize all or part of the remaining C-5 fleet of 108 aircraft. The 
company offered this past summer to modernize the C-5 fleet at a 
``flyaway'' cost of less than $90 million per aircraft whether the 
Congress and administration modernize half, two-thirds or all of the C-
5 fleet. If the company can meet that commitment, we would be foolish 
not to modernize all 108 C-5s.
    The Air Force questions whether Lockheed will actually be able to 
deliver what the company has promised.
    Our major goal in today's hearing is to better ascertain whether 
Lockheed can be contractually bound to produce what they've promised--
fully modernized, highly-reliable C-5M's at a price the Pentagon and 
our Nation can afford to pay.
    Let me finish by commending the leadership of the Armed Services 
Committee and the Seapower Subcommittee, which has jurisdiction over 
this issue. They have shown a commitment over the years to identify the 
facts on this issue and make decisions based on the facts. The defense 
bill reported out of the Armed Services Committee retains the 
requirement in current law that we flight test three modernized C-5s 
before making any C-5 retirement decisions. I thank the Members of the 
committee and their staff for their work on this issue.
    I look forward to hearing from each of you. And I look forward to 
continuing to work with our witnesses and with Senator Coburn and my 
other colleagues on this Subcommittee to provide the oversight and give 
taxpayers the kind of financial management they expect and deserve.

    Senator Carper. With that having been said, I again 
appreciate our witnesses being here and I am going to ask my 
former colleague as governor, who was also Commander in Chief 
of the Ohio National Guard, to take whatever time he needs for 
his statement. Welcome, Senator Voinovich.

             OPENING STATEMENT OF SENATOR VOINOVICH

    Senator Voinovich. Thank you, Senator. I am pleased to be 
here and appreciate the witnesses being here.
    Quite frankly, I have a very busy schedule and I am anxious 
to hear what you have to say, so I am going to put my opening 
statement in the record and, Mr. Chairman, let us hear from the 
witnesses.
    [The prepared statement of Senator Voinovich follows:]???
    Senator Carper. Senator Voinovich, thank you.
    Ms. Wright, I understand that you are here to, in part, 
respond to questions that are asked but not to provide 
testimony, is that correct?
    Ms. Wright. That is correct.
    Senator Carper. Secretary Payton, we are delighted that you 
are here. I am not going to provide your full background. It is 
available for the record, and your full statement will be 
entered into the record. Feel free to proceed. Thank you.

 STATEMENT OF SUE C. PAYTON,\1\ ASSISTANT SECRETARY OF THE AIR 
FORCE FOR ACQUISITION, U.S. AIR FORCE, ACCOMPANIED BY DIANE M. 
    WRIGHT, DEPUTY PROGRAM EXECUTIVE OFFICER FOR AIRCRAFT, 
  AERONAUTICAL SYSTEMS CENTER, WRIGHT-PATTERSON AIR FORCE BASE

    Ms. Payton. Mr. Chairman, Senator Coburn, distinguished 
Subcommittee Members, thank you for the opportunity to appear 
before you today to discuss how we are going to meet the 
Nation's strategic airlift demands in the most cost effective 
manner.
---------------------------------------------------------------------------
    \1\ The prepared statement of Ms. Payton appears in the Appendix on 
page 49.
---------------------------------------------------------------------------
    As the Assistant Secretary of the Air Force for 
Acquisition, I am honored to represent the Air Force, along 
with General Schwartz, my customer and Combatant Commander of 
U.S. Transportation Command, on such a vital national defense 
topic. I am also joined by Diane Wright, the Deputy Program 
Executive Officer at Aeronautical Systems Center who shares the 
day-to-day responsibility in directing our major aircraft 
acquisition programs. My statement will address the acquisition 
community's progress in modernizing and recapitalizing our 
strategic airlift.
    Relative to fleet modernization and recapitalization, as 
the Air Force's acquisition executive, I am responsible for 
replacing and modernizing a large number of aging aircraft in a 
fiscally constrained environment. I have inherited several 
programs with cost growth challenges because the cost, 
schedule, and performance were established well in advance of 
when we could reasonably project the technical and schedule 
issues that can drive costs out of control.
    It has, therefore, been my objective, informed by several 
GAO findings, to put affordability and cost control back into 
our weapons systems, to include insisting on better planning, 
better estimating, and well-defined, achievable requirements to 
drive well-written requests for proposals (RFPs), and these 
RFPs must include maintenance data rights for organic 
maintenance and life-cycle support; open systems architectures 
to allow rapid, affordable insertion of innovation; incentive 
and award fees that reward contractor results, not just best 
effort; time certain development that avoids immature 
technology; funding to realistic, high-confidence, and accurate 
cost estimates; and open and transparent communication that 
results in fair and open competition.
    In sole source environments, I insist that our program 
offices understand the cost and pricing data being proposed by 
prime contractors and comply with the Truth in Negotiations 
Act, Anti-Deficiency Act, and all Federal Acquisition 
Regulations to set the highest standards for Air Force 
procurement integrity to protect the taxpayer dollar and to 
deliver warfighter capability on time and on cost. And so 
today, I would like to briefly address three major aircraft 
programs that enable our strategic airlift mission, the C-5 
Avionics and Modernization Program, otherwise known as C-5 AMP, 
the C-5 Reliability Enhancement and Re-engining Program, C-5 
RERP, and the C-17 program.
    The C-5 modernization effort is a combination of two 
programs, C-5 AMP and the C-5 RERP. This Avionics Modernization 
Program provides modernized avionics and allows the aircraft to 
meet increasingly stringent communication, navigation system, 
and air traffic management requirements worldwide, thus 
allowing the C-5 to fly in many places around the world that 
would otherwise be restricted to us.
    The second program is the Reliability Enhancement and Re-
engining Program, or RERP, which builds upon the C-5 AMP 
modifications. C-5 RERP replaces the propulsion system and 
improves the reliability of 70 systems and different 
components. The C-5 RERP will increase the payload capability 
and transportation throughput by increasing the fleet 
availability or mission capability rate from the lower 50s 
today to at least 76 percent in the future. A RERP-ed C-5 will 
have a 30 percent shorter takeoff, be able to climb 58 percent 
faster, and be cleaner and quieter. These modifications are 
critical to ensuring our forces can go anywhere, anytime.
    Once a C-5 is both AMP-ed and RERP-ed, the fully modernized 
C-5 will be redesignated the C-5M. I personally know how 
important this modernization program is because my son-in-law, 
Captain Thomas R. Callan III, flew many missions from Dover Air 
Force Base to Europe, Kuwait, and Iraq as a member of the Third 
Airlift Squadron. I have spent many hours discussing C-5 flight 
operations with him and his fellow pilots, and I value the 
contribution all of our C-5s make to our national security. The 
C-5 modernization program will extend the C-5 fleet well into 
2040.
    Unfortunately, the C-5 RERP has experienced program cost 
growth, most notably in the upcoming production program 
currently scheduled to begin in 2008 and conclude in 2021. The 
Air Force is evaluating cost growth to determine affordability 
and the way ahead for this program. C-5 RERP costs have 
increased due to development delays, budget cuts due to Air 
Force priorities, the production cost increases in areas of 
engines, specialty metals, pylons, and touch labor. The C-5 
program office and the Air Force Cost Analysis Agency completed 
an independent cost estimate, several of them, and reconciled 
them to what we call a service cost position in early September 
2007. After further analysis on September 24, 2007, the C-5 
RERP Program Director and PEO notified me that the cost of the 
program has increased more than 50 percent from the original 
unit cost report of November 2001.
    As a result, I recommended yesterday to Secretary of the 
Air Force, Secretary Mike Wynne, that we begin the Nunn-McCurdy 
notification and certification process on C-5 RERP. Earlier 
today, Secretary Wynne signed the official documents notifying 
all parties that the C-5 RERP is, in fact, in a Nunn-McCurdy 
breach.
    Relative to the C-17, we have accepted delivery on 168 C-
17s. The original program buying of 180 aircraft was extended 
to 190 by the fiscal year 2007 bridge supplemental. The 
supplemental provided 10 additional aircraft which answered two 
concerns, our backup aircraft inventory shortfall and the 
wartime wear and tear. In addition to these additional C-17s, 
international sales have helped the C-17 production line stay 
intact. However, our Nation is rapidly approaching a major C-17 
production milestone with long-term implications to the 
mobility enterprise, the decision to terminate production.
    In conclusion, I would like to thank you very much for the 
opportunity to be here today and I very much look forward to 
your questions and comments.
    Senator Carper. Secretary Payton, thank you very much for 
those comments.
    We have been joined by our Co-Chairman of the Committee, 
Dr. Coburn, and I am going to recognize him at this time for as 
much time as he wishes to consume.

              OPENING STATEMENT OF SENATOR COBURN

    Senator Coburn. Thank you. I apologize for being late. I 
want to thank each of you for your service and your cooperation 
as we deal with this.
    We are not going to spend too much money, folks. As long as 
I am alive and in the Senate, the waste is going to stop. I 
find it peculiar that we got to a Nunn-McCurdy breach the day 
before this hearing, strangely peculiar. I think it is highly 
important that communication be effective and I am disappointed 
that the Air Force doesn't want to hear and sit and listen to 
the Lockheed Martin testimony on the other panel. I also am 
somewhat worried in some of the rumors I have picked up, the 
fact that Lockheed Martin is willing to stand and challenge 
some of the assumptions that the Air Force is making and some 
of the quiet talk is that it may cost them for doing that. 
There is no place for that. This didn't come from Lockheed 
Martin, this came from other sources.
    So what I would say is we have a lot of contracting 
problems in this country and we have a lot of efficiency 
problems and we have an airlift need. None of those other 
problems ought to get in the way of us developing and supplying 
what we need to have adequate airlift.
    I also find it strangely peculiar, for the first time since 
I have been in the Senate, that I get notice of an Air Force 
grant. The first time in my history, in 2 years and 9 months, 8 
months in the Senate, I finally get a notice of an Air Force 
grant that is going out. It never happened to me before. I 
can't understand why that would all of the sudden happen right 
before we are having a hearing.
    I say those things because I honor those people who are 
committed to our country and I am a straight shooter. If I have 
something on my mind, I say it. I just said it. I think we have 
to get this problem solved and I am thankful that Lockheed 
Martin has the courage to say, we are challenging some of your 
assumptions, and rightly so. Through conversations we have had, 
there are a lot of questions about the Air Force's assumptions 
that I think need to be questioned.
    So I look forward to your testimony. Thank you, Secretary, 
for yours, and General, I look forward to yours and Mr. 
Bolkcom, as well as Lockheed Martin's. My hope is that come the 
middle of November, we can have a fixed-price contract and we 
can be on the way of not wasting money and not buying a piece 
of equipment that we don't need when we have a piece of 
equipment that we could fix and supply for us for the next 30 
years.
    Senator Carper. Let me just add one thing in conjunction 
with what Dr. Coburn has said. It was not Lockheed Martin's 
idea to be here today. We directed them to come, and they are 
not here with any particular joy, but we are grateful that they 
have been willing to come.
    Dr. Coburn and I are going to be around here for a while, 
not just at this hearing but in this Senate for a while, and 
this guy is a bird dog or watchdog and I like to think I am, 
too. If we hear anything that smacks of retribution to them 
because they have been willing to speak out and to question 
some of the assumptions, I will be very disappointed with that 
and I hope that nothing like that will happen.
    With that having been said, General Schwartz, we welcome 
you. Thank you for your service and for being here today.

  STATEMENT OF GENERAL NORTON A. SCHWARTZ,\1\ COMMANDER, U.S. 
             TRANSPORTATION COMMAND, U.S. AIR FORCE

    General Schwartz. Mr. Chairman, Senator Coburn, it is my 
privilege to be with you today on behalf of the 150,000-plus 
men and women of our Transportation Command. I thank you for 
the opportunity to appear to discuss strategic airlift, which 
really is a critical capability for our Nation and, of course, 
our warfighters.
---------------------------------------------------------------------------
    \1\ The prepared statement of General Schwartz appears in the 
Appendix on page 58.
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    Whether by air, land, or sea, TRANSCOM provides support to 
the warfighter and the Nation by rapidly delivering combat 
power and sustainment to the Joint Force Commander, redeploying 
our forces home, and providing the utmost care in moving our 
wounded troops to move advanced medical facilities for 
treatment. We execute this mission through the Air Force's Air 
Mobility Command, a major focus of today's hearing, the Navy's 
Military Sealift Command, and the Army's Surface Deployment and 
Distribution Command, as well as our national and commercial 
partners.
    As the DOD's distribution process owner, Transportation 
Command is also leading a collaborative effort across the 
defense logistics community to increase the precision, 
reliability, and efficiency of the DOD's supply chain. By 
increasing collaboration, adapting our business models, and 
ensuring the appropriate mix of lift assets, we keep our 
promises to our warfighters and the Nation today and tomorrow. 
Ensuring that the appropriate mix of lift assets is available 
is vitally important given the scope of the demands on the 
airlift fleet around the globe.
    Since the start of 2007, Air Mobility Command has moved 
over 940,000 passengers in support of the Global War on Terror, 
an achievement accomplished in collaboration with their 
commercial industry partners as they provide us with cost 
efficient and effective means of moving our service personnel. 
This is important, this relationship with our commercial 
industry partners that has allowed our C-17 and C-5 aircraft to 
airlift almost 118,000 tons of vital cargo into the Central 
Command area of responsibility.
    The delivery of Mine Resistant Ambush Protected vehicles, 
or MRAP vehicles, is a top priority for us and we are currently 
delivering them almost exclusively by air, with a commitment to 
fly up to 360 MRAPs per month to support theater requirements. 
Additional MRAPs will likely move by a combination of air and 
surface modes of transportation to satisfy production rates as 
they evolve. As of September 25, our total of more than 980 
MRAP and MRAP-like vehicles have been delivered to Central 
Command.
    We also continue to satisfy ongoing force rotations, with 
up to 1,000 mobility sorties flown per day. This very high 
operation tempo equates to 350,000 aircraft departures per 
year, or one about every 90 seconds.
    Perhaps the most important of all our missions but the 
least heralded is the movement of our injured warfighters from 
the battlefield to world class medical treatment facilities. In 
2007, over 7,700 patients were moved from Central Command, and 
over 11,000 patients were transported globally.
    Our aging airborne tanker fleet, a key force multiplier, 
should also be mentioned here today. Air Mobility Command 
tankers delivered over 110 million gallons of fuel to United 
States and coalition aircraft in support of Operations Enduring 
Freedom and Operating Iraqi Freedom and has made long-range 
operations possible worldwide.
    As we look to the future, rapid global mobility will 
continue to be a key enabler. TRANSCOM needs out-sized and 
over-sized lift capability provided by the C-17 and the C-5. 
The C-17 is a highly productive platform with high departure 
reliability and high mission capable rates. In contrast, the C-
5 has had the lowest departure reliability and mission capable 
rates in the Air Mobility Command fleet. Additionally, the C-5 
cost per flying hour is the highest in the Command. C-5 
modernization must deliver the needed reliability, but we 
remain concerned about rising costs of the modification 
program.
    In terms of organic capacity, too much aluminum is just as 
counterproductive as not enough. We should guard against 
overbuilding the organic fleet to the detriment of other 
strategic necessities, such as modernizing the aging tanker 
fleet or the viability of our commercial partners
    Mr. Chairman, my top airlift priority is the 
recapitalization of the aging tanker fleet. The KC-X with 
multi-point refueling, significant cargo and passenger carrying 
capability, and appropriate defensive systems will be a game 
changer, a game-changing platform for the future of global 
mobility.
    And finally, sir, a critical partner in our Nation's 
ability to project and sustain forces is a viable Civil Reserve 
Air Fleet. The continued success of CRAF relies on the strength 
of U.S.-flagged airlines. Although the U.S. airline industry 
has recovered from the worst of the post-September 11, 2001, 
challenges, we are beginning to look forward to a post-Iraqi 
Freedom time frame when requirements will begin to subside. 
Given that eventual reality, we are looking at ways to 
encourage the participation, to continue that participation of 
our CRAF partners and we have proposed and encouraged support 
for the Assured Business Initiative reflected in the current 
Senate version of the fiscal year 2008 authorization bill, and 
I would be glad to discuss that with you further if you would 
like.
    With regard to the CRAF program, it is essential that 
action be taken to reauthorize the Aviation War Risk Insurance 
Program, which is set to expire in March 2008. The ability of 
our CRAF partners to fly missions in support of our operations 
in a combat theater is completely dependent--completely 
dependent--upon the replacement insurance coverage that this 
program provides.
    I am grateful to you, sir, and the Subcommittee for 
allowing me to appear before you today to discuss these and 
other issues at your discretion and I look forward, sir, to 
your questions. Thank you.
    Senator Carper. General Schwartz, thank you very much.
    Our third witness on this panel is Christopher Bolkcom, who 
is, I believe, the Defense Analyst at the Congressional 
Research Service and he has been a valuable resource. We 
appreciate very much your responses to our questions and the 
information you have provided to us from your perspective and 
you are now recognized. Your full testimony will be made a part 
of the record. You are welcome to outline it, if you wish.

  STATEMENT OF CHRISTOPHER BOLKCOM,\1\ SPECIALIST IN NATIONAL 
            DEFENSE, CONGRESSIONAL RESEARCH SERVICE

    Mr. Bolkcom. Thank you, Mr. Chairman. Mr. Chairman, 
distinguished Members, thanks for inviting me to speak with you 
today about cost effective airlift. I will address C-5 
modernization and C-17 procurement and some of the pros and 
cons of pursuing each program.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Bolkcom with an attachment 
appears in the Appendix on page 66.
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    The main point I would like to make today is that there are 
strong arguments for both programs and viewing them from an 
either/or perspective appears overly simplistic and 
unconstructive. There are several factors that complicate a 
comparison of these programs and a broader mobility context 
that should be considered to make the most informed decisions.
    I will start by addressing the complications. First, 
strategic airlift requirements are unclear. DOD's most recent 
analysis, the Mobility Capability Study, did not quantify 
requirements using the traditional measurement of million ton 
miles per day. Instead, the MCS found that fielding 290 to 380 
strategic airlift aircraft were required to meet the national 
military strategy with acceptable risk. The bottom of this 
range, 290 aircraft, coincided with the Air Force's plans for 
the C-5 and C-17 at that time. This led some to criticize the 
study as a budget-driven rather than an unbiased look at 
requirements. A number of MCS assumptions are debatable and 
there is little consensus on the optimum number of airlift 
aircraft required.
    Future cost estimates are another murky area. DOD's airlift 
plans were informed by a March 2000 study conducted by the 
Institute for Defense Analyses that compared the life-cycle 
costs of various C-5 and C-17 options. IDA found that fully 
modernizing the C-5 fleet and deferring additional C-17 
procurement provided the most cost effective airlift 
capability. Today, however, Air Force leaders project that the 
cost of the C-5's Reliability Enhancement Re-engining Program, 
or RERP, may increase by approximately 60 percent over December 
2006 estimates. As we have just heard, they believe we have 
breached the Nunn-McCurdy over the original baseline estimate.
    In contrast, Lockheed Martin expects modest cost growth, 
growth that would fall below Nunn-McCurdy thresholds and would 
fit within long-term Air Force budgets. Resolving the disparity 
between the cost estimates and understanding how projected cost 
growth would affect IDA's recommendations appears essential.
    Some have suggested that the Air Force should trade C-5 
RERP for C-17 procurement, but budget lines to pursue this 
option don't coincide. C-17 procurement is a fiscal year 2008 
issue. C-5 RERP funds for fiscal year 2008 are $253 million 
less than the cost of a single C-17. Significant C-5 RERP funds 
are not projected to be available until the end of the future 
year's defense plan. Therefore, to purchase more C-17s in 
fiscal year 2008, Congress and DOD will either need to find 
room in the Air Force's base budget or Congress will need to 
add funds to fiscal year 2008 Global War on Terrorism funding 
request, a move that some view as controversial.
    Unique C-5 and C-17 capabilities also complicate decisions 
on whether to support one program or the other. The C-5 is 
DOD's largest airlifter and by some measures can carry twice as 
much cargo as the C-17. The C-5's principal shortcoming has 
been its low reliability, which RERP is hoped to rectify. On 
the other hand, the C-17 has the unique ability to carry cargo 
long distances and deliver it directly to austere airfields 
close to the battle. The C-17 can perform intra-theater 
airlift, and due to its smaller size is less likely to clog 
airfields than the C-5.
    The last factor that complicates airlift decisions is the 
potential risk in closing the C-17 production line. The C-17 is 
currently the only strategic airlifter being produced and some 
are concerned that the line will close before C-5 operational 
testing and evaluation are complete. To mitigate risk, DOD 
could pay a one-time fee to shut down the facility in a manner 
that would help facilitate restart at a later date, but some 
worry that even this strategy doesn't hedge against the risks 
of losing the C-17's skilled production force or even the Long 
Beach Plan itself.
    As I mentioned a moment ago, informed decisions on airlift 
must also considered a broader context than just the C-5 and C-
17 programs. As General Schwartz mentioned, the Air Force is 
considering options to recapitalize the KC-135 aerial refueling 
fleet. Currently, airlift is a secondary mission for the 
replacement tanker aircraft. Procurement of a larger tanker 
with more airlift capability could increase the airlift 
provided by the tanker fleet and could potentially reduce the 
number of C-5s or C-17s required. In contrast, procurement of a 
smaller tanker could potentially have the opposite effect.
    Because the C-17 conducts tactical airlift missions, it is 
also linked to the C-130 and its recapitalization. In this 
role, C-17s deliver more cargo than the C-130, although at a 
higher cost. C-17s make a noteworthy contribution to tactical 
airlift, but the optimum mix of the two aircraft is currently 
unclear.
    There are other programs that also influence strategic 
airlift, and again, as General Schwartz mentioned, the Civil 
Reserve Air Fleet, which supports DOD during national 
emergencies when the demand for airlift is highest. Using CRAF 
is cheaper than using military aircraft and could potentially 
be expanded. However, the payload carried by civilian aircraft 
is limited and loading and unloading takes longer than military 
aircraft. This is just one example.
    Second, at least two studies have recommended that DOD 
invest more heavily in prepositioned equipment instead of 
strategic airlift. Finally, systems such as fast sealift ships 
or even airships, blimps in the early stages of development 
could have high potential for quickly moving large units to 
future battlefields.
    Mr. Chairman, this concludes my remarks. Thanks for the 
opportunity to appear before you.
    Senator Carper. Mr. Bolkcom, thank you very much for your 
excellent testimony, for your input today.
    Something that you said--let me just start off with some 
questions and then turn it over to Dr. Coburn. Something that 
you said, Mr. Bolkcom, reminded me of a conversation I had with 
General Moseley back, I want to say in May, the first half of 
May, and he was good enough to come over to my office and he 
shared with my staff and others who were there--and General 
McNab may have been with him, as well, I am not positive--but 
General Moseley said to us that, sort of outlining what his 
druthers would be, as to what his preference would be, it would 
be retire the 30 worst-performing C-5As and to use the savings 
there to acquire 30 additional C-17s.
    And I said to him at the time, I don't see how that works, 
and you just mentioned the difference in the cost if we do away 
entirely with RERP for a year. I think you suggested it was 
actually less than the cost of buying one C-17.
    Let me just ask Secretary Payton and General Schwartz, how 
can we pay for 30 C-17s by the savings of retiring 30 C-5As?
    Ms. Payton. Thank you very much for that question. I will 
tell you as the acquisition executive for the Air Force, we 
have no requirements for C-17s. There is no money for C-17s. 
And my acquisition workforce is totally dedicated to the C-5 
RERP, getting C-5 AMPs done and then following up by getting C-
5----
    Senator Carper. But if you will answer my question, please. 
How do we pay for buying 30 C-17s by retiring early 30 C-5As?
    Ms. Payton. My answer is, you cannot do that.
    Senator Carper. All right.
    Ms. Payton. That is my answer.
    Senator Carper. That would be mine, as well.
    Let me see if we can put up a couple of charts, please.\1\ 
This is a comment from General Moseley, I guess it was back in 
March of this year in testimony before the Senate Armed 
Services Committee. I will just read it out loud because the 
print is pretty small. This is what he said in testimony to the 
Senate Armed Services Committee. ``What we would like to do is 
to be able to run the Avionics Enhancement Program out on all 
the remaining C-5s and then run the Re-engining Program on the 
C-5s that have the most life.''
---------------------------------------------------------------------------
    \1\ The charts submitted by Senator Carper appears in the Appendix 
on page 207.
---------------------------------------------------------------------------
    An additional quote, I think this one is from the Secretary 
of the Air Force, and this was also on March 20, 2007. This was 
also at a hearing before the Senate Armed Services Committee. 
He said, in response, I guess, to a question, ``I can tell you, 
sir, that right now, some worry about the entirety of the C-5 
fleet. There are two things we should know about this. First is 
that we don't, we don't want to line up worst to best, and we 
think there are 20 to 25 or 30 of the bad actors that we would 
like to retire.''
    And in another comment from General Moseley before the 
House Armed Services Committee early this year, I think 
February 28, he said, ``In a perfect world, we would like to be 
able to manage that inventory and divest ourselves of the bad 
acting tail numbers. Some of them are bad actors. They are 
broke. A lot of the C-5As have low flight hours on them because 
they are broke and you can't fly them. If I could line up the 
best B models and the best A models at the head of the line, a 
59 to and 49 and go to the back of the line and begin to kill 
off the bad actors and replace them with something new, I would 
be very happy. That doesn't mean that we can block class or 
block retire airplanes. It just means let us get at the tail 
numbers that are bad actors.''
    And let me just ask, first of all to Mr. Bolkcom, are you 
aware of any effort to actually say by tail numbers what are 
the bad actors among the C-5s and the C-5A and the Bs?
    Mr. Bolkcom. Mr. Chairman, I am aware that on at least two 
occasions in hearings, Members of Congress have specifically 
asked the Air Force for that list of bad actors by tail 
numbers. I am unaware of whether they have provided that list. 
I suspect they have not, but I wouldn't say that is 
authoritative.
    Senator Carper. All right. General Schwartz.
    General Schwartz. Mr. Chairman, I have not seen such a list 
as the operator of the platforms.
    Senator Carper. Secretary Payton.
    Ms. Payton. Sir, I have not seen such a list.
    Senator Carper. Well, there may or may not be a list, but I 
am not aware that one exists. But for us to talk about being 
able to line up the bad actors among the C-5As and the Bs, it 
would be interesting to know if there is a list and how that 
list was developed.
    Let us look at another chart, the next chart, if you 
will.\1\ This is a chart that deals with proposed production 
schedules. Someone was good enough to give me a laser. It looks 
like we have three--what is that one, it says Presidential 
budget, I guess, in 2003, is it 2006, and this is President's 
budget in 2008. Let us just focus on those.
---------------------------------------------------------------------------
    \1\ The chart submitted by Senator Carper appears in the Appendix 
on page 108.
---------------------------------------------------------------------------
    It starts in fiscal year 2007 and runs out to fiscal year 
2021. The President's budget initially called for starting to 
modernize, I guess beyond the original three, five C-5s in 
2007, seven in 2008, 12 in 2009, and continuing up to fiscal 
year 2016 when we would do the last 12.
    That Presidential budget was amended in 2006 to say in 2007 
we are going to do one, three, five, seven, nine, and then 
finish it out in fiscal year 2018 with 12.
    And then the President's budget, the current President's 
budget, which I presume is the policy that the Air Force is 
promulgating that Lockheed Martin is supposed to respond to in 
terms of bids, but the latest President's budget calls for, I 
believe, one modernized aircraft in fiscal year 2008, three, 
seven, ten, and so forth, up to finishing up in fiscal year 
2019.
    Is that last one there, the 2008, is that still the 
Administration's position, and I presume the Air Force's 
position?
    Ms. Payton. Yes, sir, it is.
    Senator Carper. All right. When Lockheed Martin or really 
any contractor is asked to bid on a contract to build or 
rebuild aircraft, how do they know in terms of being able to 
say what the price would be if the numbers keep moving around? 
So one year we say, like in the 2003 budget, you are building 
12 a year, or they are going to be rebuilding 12 a year by 2009 
and by 2010, and then down here we have them in 2009 and 2010 
are doing three and nine.
    How does a contractor know how to bid if the numbers keep 
changing? And how can we hold them to the bids? I think if we 
put ourselves in the shoes of the contractor, you would want to 
know, what is the deal? Are there going to be nine aircraft? Is 
it going to be three? Is it going to be 10 or 12? Where is the 
sweet spot in terms of getting the most cost efficiency out of 
it? How does it work?
    Ms. Payton. I appreciate the question. I will tell you that 
when I mentioned in my opening testimony we baseline way too 
early both the quantity and the amount of money we need, and I 
would like to follow up by saying that when the C-5 AMP program 
was the leader program, and C-5 RERP is depending on AMP to be 
finished, and when we have C-5s that take much longer to get 
AMP-ed because while we are doing them legacy maintenance 
issues happen, like the landing gear break and things that 
aren't at all relevant to the scope of AMP happen, that takes 
longer to get the C-5 AMP done, which pushes the whole schedule 
out. So because we suffered slippage in the AMP program, that 
pushed us to not be able to start our production in fiscal year 
2007 and that pushed it further and further out.
    So you have brought up a very good point, that there are 
things that are sometimes out of the control of even the Air 
Force. C-5s go into maintenance. They can have some 
catastrophic problems happen. Their maintenance flow days can 
be extended. They can be at war and we cannot get them back 
sometimes to get them on the schedule. And that is why variable 
quantities are very important for us, because once we break the 
schedule that we have committed to in a firm fixed price, that 
is a re-opener and everything can be renegotiated in that 
contract.
    So we are in a time of war. We have very old aircraft. Lots 
of things happen to them. We have noticed the wings, for 
instance, in the C-5 needed to be strengthened in order to be 
able to have the pylons and the engines on them. These were 
things that we were overly optimistic----
    Senator Carper. Excuse me for interrupting, but weren't the 
C-5A wings all restrengthened like 20 years or so ago?
    Ms. Payton. These have to be stiffened for the RERPs to be 
applied to them. As you open up a C-5, you can find cracks in 
the wings and things you never expected to find because they 
average 29 years old, but some of the older ones are 35.7 years 
old.
    Senator Carper. I am going to ask you to just hold on that 
point, if you will. My time is expired and I don't want to be 
abusive of the rights of my colleague here. Let me just mention 
in closing on this point, Dr. Coburn and to our panel, I think 
if you look up there on the top line at the President's 2003 
budget, what you find in 2007, 2008, and 2009, initially this 
Administration wanted to have us modernizing, fully 
modernizing, it looks like by 2009 24 of these aircraft----
    Ms. Payton. Absolutely.
    Senator Carper [continuing]. And that suggests to me that 
they are anxious to get out of the starting gate and get going. 
Now with the slow ramp-up, I don't think we are going to get to 
an optimal production rate any time soon. In fact, likely we 
won't get there until maybe 2011 or 2012 or beyond that, which 
indicates to me that maybe somebody doesn't want to really do 
this as much anymore, and I am not suggesting it is the 
Administration, but that is one of the lessons I derive from 
this chart. I will just say that. Dr. Coburn.
    Senator Coburn. Thank you, and thank you for your 
testimony.
    Let us talk about the breach and the delta on the breach 
and the reasons for the delta. Madam Secretary, I talked to you 
yesterday. You were going to try to find out how much of the 
delta was based on a delayed roll-out of numbers coming from 
the production decline because the AMP didn't come up. Can you 
explain for us the breakdown of what is in the delta, the 
change, the area that is over budget? Can you explain, what was 
it, $5.4 billion?
    Senator Carper. Four-point-five billion dollars.
    Senator Coburn. Four-point-five billion dollars, and then 
they managed to eliminate through talks with Lockheed Martin 
$300 million, and then there is some engine component that has 
brought it even down further. But the question remains how much 
of that has to do with decreased units on a slower take rate 
and how much of that delta is associated with that versus some 
other difference between Lockheed Martin and the Air Force?
    Ms. Payton. OK. Relative to the $4.2 million, that equates 
to basically $30 million per aircraft where we have delta. As 
we look at the pricing and costing data that we have received 
from Lockheed Martin, and some of that data has not been 
received yet, so we need to get more data in from them, but 
what we can tell at this point is that we are about $10 million 
of that $30 million disconnected because of what we believe the 
actual price of the engines will be when we have to reopen the 
contract due to the fact that we probably will not be able to 
keep to discrete quantities for the next--until 2021, or 2020.
    As you saw, this goes for an extended period of time, and 
so we have an engine in which we believe that by 2013 we will 
probably be one of the few customers for that CF-6 engine, and 
we believe that after looking into some databases relative to 
what commercial companies are paying for those engines right 
now, that we have at least a $2 million per engine--there are 
four----
    Senator Coburn. Did you all speak directly to General 
Electric?
    Ms. Wright. Yes, sir.
    Senator Coburn. And you got that number from them?
    Ms. Wright. We got information from General Electric. The 
Service Cost Team got information from General Electric. As 
well, for the engine portion we subscribe to a commercial 
database that identifies the actual commercial prices for 
engines over the past 10 years and makes projections for the 
future, and by using that, we came up with what we believe is a 
more realistic cost for the engines than what the Lockheed 
Martin proposal indicated.
    Senator Coburn. Did you all ask GE if you could buy the 
engines as government-furnished equipment?
    Ms. Wright. No, we did not.
    Senator Coburn. So you didn't even make that comparison 
before you decided that they are out of whack on the engine 
costs?
    Ms. Wright. I am sorry, we didn't make----
    Senator Coburn. You did not make the comparison of what the 
government could have bought them directly for versus what is 
coming through the contract to see if you were anywhere close 
on price--Lockheed Martin can buy as well as you can buy, 
right?
    Ms. Wright. Absolutely.
    Senator Coburn. So if you were to be buying those, it would 
seem to me if you are going to look at what the potential cost 
increase is going to be, you might inquire of GE as to what if 
we bought them versus it going through a contractor. Was there 
any discussion on that?
    Ms. Wright. As far as I know, we did not ask them 
specifically whether or not we could buy them as GFE.
    Senator Coburn. OK.
    Ms. Wright. The strategy is to have them bought through the 
prime contractor. However, in looking at the commercial 
database, the source that we subscribe to, which talks about 
the actuals that commercial people pay for those engines for 
the past 10 years, we believe that we know what it would cost 
to----
    Senator Coburn. You know better than Lockheed Martin knows 
what it would cost?
    Ms. Wright. We believe that the Lockheed Martin proposal--
and they have a general procurement agreement now. They did not 
at first, but now they have a general procurement agreement 
with GE. We believe that the prices of those engines are much 
less than we had anticipated and that if we do not stay with 
the quantities per year as they were proposed by Lockheed 
Martin, which do not match the SAR quantities and which we 
probably cannot commit to out in the out years unless we would 
have some sort of multi-year, that we would have to open that 
up.
    Senator Coburn. Has the Air Force looked at man hours on 
both de-mate and RERP? Their estimates were that Lockheed 
Martin was extremely low on their estimate and they were 
higher.
    Ms. Wright. Yes.
    Senator Coburn. Did you look at the man hours on the KC-135 
de-mates and how long it takes to de-mate and reassemble both 
through the contract for the engines and also through the 
operations at the various places around this country where we 
do that? Did you look at the hours for that?
    Ms. Wright. I do not know whether or not they specifically 
did. With respect to the installation----
    Senator Coburn. Well, let me make my point.
    Ms. Wright. OK.
    Senator Coburn. Why would you not?
    Ms. Wright. They may have. I just don't know----
    Senator Coburn. Well, why would we not know whether we 
have, because if, in fact, you are going to say Lockheed Martin 
is wrong, you ought to be able to say, well, here is the data 
on a KC-135 where we have redone all of these older, just as 
old or older airplanes than a C-5. Here is what it has taken. 
Here is what we have discovered. Here is what is done. Why 
would that not be there and say, you are wrong, Lockheed 
Martin. Here is what it has taken on a KC-135 and we have done 
a hundred and how many of them? A hundred and forty-nine. So 
why would that not be an important statistic to have at your 
hand if you are going to say Lockheed Martin is wrong?
    Ms. Wright. On that point, sir, for the installation hours, 
we use the installation hours that were used specifically on 
this program, on the three what they call SDD aircraft, the 
aircraft that were done----
    Senator Coburn. Well, I understand where you got the 
numbers. I have been in the meetings on all that.
    Ms. Wright. OK.
    Senator Coburn. I have all that information. When you look 
at production runs like we have on KC-135, you can learn a 
whole lot from them because they have been doing it for a long 
time with multiple different years of aircraft birth, with 
multiple different problems, and you can get a great estimate 
of what kind of things you are going to run into.
    What I am worried about, I am worried about spending $80 to 
$95 million to get a C-5A or a modified C versus having 
nothing. That is what I am worried about.
    General Schwartz, you mentioned on the KC-X program that if 
C-5 can't be solved and the C-17 line is shut down, is it in 
your estimation you will solve your lift problems through a 
combination of tanker lift capability through the new tanker 
program?
    General Schwartz. No. I think, sir, the KC-X program is an 
augment to the lift equation. It is not a solution set, 
especially for out-sized and over-sized equipment. Remember, 
the KC-X, both offers are not roll-on, roll-off airplanes. I 
mean, the bird's we have are designed to do what we need.
    Senator Coburn. You end up with the same problems you do 
with private contracting.
    General Schwartz. Exactly.
    Senator Coburn. OK. Well, I am going to excuse myself for a 
very short moment and I will be back. I apologize.
    I have a Supreme Court Justice waiting on me and it is not 
nice to keep them waiting in case I am ever in front of them.
    Senator Carper. I am going to ask if we can look at some 
more charts.\1\ In the Senate, our colleague, Kent Conrad, is 
famous for his charts, Chairman of the Budget Committee. I will 
never come to rival him. He is a great role model when it comes 
to that.
---------------------------------------------------------------------------
    \1\ The charts submitted by Senator Carper appears in the Appendix 
on page 107.
---------------------------------------------------------------------------
    This really relates to the question that Senator Coburn was 
beginning to ask and I want to use this chart as a sort of a 
starting off point. In the meetings that we have been fortunate 
enough to have with a number of you and folks that work with 
you and people from Lockheed Martin, we have learned that this 
major difference in terms of what Lockheed Martin says they can 
produce, RERP 108 aircraft over time and what the Air Force 
believes that the actual number is more likely to be, a 
difference of about $4.5 billion, and $300 million of that has 
been--you agreed that number can come down by $300 million, so 
we are talking about $4.2 billion.
    The major three areas that we have here are the ones that 
Senator Coburn has been talking about. The propulsion system, 
the difference is about $1.2 billion. Second, the installation 
and other labor costs, and the difference there is about--I 
guess you call this touch labor--the difference there is about 
$1.6 billion. And the third, you call it other RERP costs, 
overhead and so forth, which I don't have a complete 
understanding of. Maybe you can inform me a bit on that. But 
the difference there is about $1.6 billion.
    What I want to do is just to start off and follow up on Dr. 
Coburn with respect to the engines. We actually reached out to 
the folks at GE. We talked with them about their ability to 
offer engines over a long period of time.
    It was interesting, one of the meetings we had just in the 
last week, maybe it was on September 25, with a group of Air 
Force folks led by Major General Gray and there was an open 
speculation on the part of our friends from the Air Force. They 
were asking, or they were speculating, does GE even want this 
business? Is this a line of business, these engines--what are 
they called, the CF-6 engines--are they really interested in 
continuing to produce these for the Air Force? Do they have any 
customers beyond the Air Force in the next couple of years? 
Does GE have a desire to actually use the facility where they 
are making these CF-6 engines? The speculation was that they 
would rather be using that facility to build engines for the 
Boeing Dreamliner. Those were the kind of questions that were 
raised in our conversation.
    So we turned around and called GE and we said, is it true 
you want to stop producing these engines? Do you have any other 
customers? As somebody here just suggested, no, they do have 
other customers, not only customers around the world that want 
to buy these engines, but they also are going to be in the 
business of providing spares for the customers who have already 
bought them in the past. While GE would like to build an engine 
for the Dreamliner, they have no interest in closing the 
production facility, I don't know if it is in Cincinnati or 
wherever they make these engines. But they have no interest in 
closing the manufacture of the CF-6 engines and beginning to 
manufacture an engine for the Dreamliner. They would like to do 
both.
    We talked with them about their price and it is proprietary 
information. They were not able to disclose the price. But it 
sounds to me like GE told us, and maybe they have told Lockheed 
Martin, I am not sure what they told the Air Force, but it 
sounds to me like they are willing to commit to producing 
engines for a good deal less than the Air Force is willing to 
believe. It is one of those weird situations. It is kind of an 
ironic situation where you may have a contractor who is 
offering to produce an engine for less than you are willing to 
accept. It is almost like being unwilling to take yes for an 
answer. I hope that is not the case.
    I would just ask unanimous consent to enter into the record 
the response that we received, the written response that we 
received from GE, and since I am the only one here right now, I 
guess no one is going to object.\1\
---------------------------------------------------------------------------
    \1\ The information from GE submitted by Senator Carper appears in 
the Appendix on page 115.
---------------------------------------------------------------------------
    Let us just talk a little bit more about this engine. If 
there is a difference, and I think the difference of $1.2 
billion comes from a difference in assumptions. What we are 
hearing from the supplier and the subcontractor, and it looks 
like there is a $2 or $3 million delta just per engine. If you 
have a customer who wants to buy 10, 12, or 20 of these engines 
and you have a customer that wants to buy--what is four times 
108, that would be 432, plus 25 spares, what would that be, 
457? That is a lot of engines. Is it possible that given that 
kind of buy over the next dozen or so years that you have a 
supplier, GE, who finds a way to continue to manufacture these 
engines and have already covered a lot of their fixed costs 
that maybe it makes sense to supply them at the cost that we 
recorded and the cost that underlies Lockheed Martin's 
assumptions?
    Let me just ask anyone on the panel to react to this.
    Mr. Bolkcom. Sir, if I may, I would like to answer your 
question the way I want to answer rather than the way you asked 
me, and this is what I mean. It is important to get to the 
difference between cost estimates on this, and I take your 
point, I think it is very important that risk can cut either 
way. If we are the last buyer, that can be leveraged or maybe 
can be used against us, depending on how savvy we are, how we 
negotiate.
    The point I would like to mention here, since I have the 
opportunity, is this. If it is a firm fixed-price contract and 
Lockheed Martin is mistaken and it actually costs them more to 
buy the engines than they think, we don't care because they 
have to eat that cost.
    Senator Carper. They being----
    Mr. Bolkcom. Lockheed Martin, except, as Ms. Payton has 
noted, if there is a variable quantity that breaks the 
agreement, then it is an opener and we could get stuck.
    I think the important thing to understand besides the 
difference in cost estimates is are these future lots options 
that we can exercise or not, and therefore if we have a choice 
of exercising them, that would tell you that there is little or 
no risk. If in the out years it turns out that it is an opener, 
we don't have to exercise that option.
    Senator Carper. All right.
    Mr. Bolkcom. So we are not committed. It is not a multi-
year procurement. That would be a line of inquiry I think would 
be very important to assess the importance of the deltas in 
these cost estimates.
    Senator Carper. Thank you. Ms. Payton.
    Ms. Payton. Sir, if I might add that I would like to take 
for the record the ability to answer the question about the 
engines because I recall that the PB-2003 that was really to 
fund the original baseline, those engines, I believe, were $4.1 
million. Now that we know--I can't mention now what the number 
is because that is competition-sensitive or proprietary, but I 
know that the number is higher than that now and I believe it 
is higher by a significant number, and that would be an example 
for you to look at the growth that has happened just since 2003 
as we have now gone back and gotten the actual bid in from 
Lockheed Martin. So I would like to take that for the record to 
give you information about how much that engine has already 
grown just in the last couple of years relative to our cost 
estimating.
    Senator Carper. Let me just ask as a follow-up, can the 
difference between Lockheed Martin's proposal and the Air Force 
baseline budget, could it be addressed through--I don't know 
what it is called--a variation in quantity within a Lockheed 
Martin fixed-price offer? Ms. Wright.
    Ms. Wright. The request for proposal that we went out for 
was asking for Lots 1, 2, and 3. We did not ask for any firm 
fixed price, or a firm fixed incentive fee contract for past 
that. We didn't do that because we didn't know how to structure 
the quantity profile out in those years and we believe that if 
in Lots 1, 2, and 3, that those were close enough in in 
projections that we could figure out from a risk perspective, 
so that we did not run into risk, what would be the pricing for 
those three lots?
    We did in Lot 3 indicate a variable between five and eight, 
and we asked Lockheed Martin to price that so that we could see 
what the variable would be had we changed or if we do change 
what annual quantity we buy in that Lot 3.
    What was proposed to us was a full 12-year program, and the 
concern that we have, not just with the GE but also with the 
Lockheed Martin portion of that, is that we can't project that 
we will stay with that 12-year annual quantities for those 12 
years. In fact, it is highly unlikely that we would buy those 
annual quantities for the next 12 years.
    So rather than commit the Air Force future and the future 
Congresses to those 12 years, we asked----
    Senator Carper. I don't mean to be rude. I am going to 
interrupt you, though, and please forgive me.
    Ms. Wright. Sure.
    Senator Carper. But I don't know that you are answering the 
question that I asked. Let me just try it again and maybe you 
could take another shot at it.
    Ms. Wright. OK.
    Senator Carper. Would price variation in quantity--would a 
clause eliminate the risk of reopeners and the risk to the 
government?
    Ms. Wright. A proposal that did not include what they call 
an EPA clause, or an Equitable Pricing Adjustment clause, would 
do that. The Equitable Pricing Adjustment clause says if you 
change anything--it is essentially the fine print in a quote 
that says, if you change any of those quantities out there, we 
can reopen negotiations and we can change our prices. What we 
have from Lockheed Martin is, in fact, a proposal that includes 
an EPA clause, which means there is risk to the Air Force.
    The cost proposal, the service cost proposal or cost 
position, has got to take into account that risk that we would 
incur if those quantities change. So we kind of have to 
separate the Lockheed Martin proposal from the service cost 
position. The service cost position says what we truly believe 
the entire program is going to cost, not just the Lockheed 
Martin proposal the way it is stipulated with the fine print.
    General Schwartz. Could I just----
    Senator Carper. Before you do, then what I think I hear you 
saying is that if we are smart, we will have one of these price 
variation and quantity clauses, and if we have one of those, 
that can eliminate the risk to us, to the Air Force and to the 
taxpayers.
    Ms. Wright. Yes, and that is what we did in Lot 3 was asked 
for variable pricing where they can get the information that we 
need to certify the cost that they are proposing to us. If you 
do it too far out, though, it becomes a very difficult process.
    Senator Carper. Thank you. Dr. Coburn.
    Senator Coburn. What if Lockheed Martin comes to the table 
and puts in your lap an absolute guaranteed price for this many 
at this rate, another guaranteed price for this many at this 
rate, and another guaranteed price for this many at this rate 
that gives you the flexibility you want and it is a firm fixed 
price, no variables, no openers, no nothing? What happens then?
    Ms. Wright. No variables, no reopeners, no EPA----
    Senator Coburn. Nothing.
    Ms. Wright. Lockheed Martin is at a lot of risk----
    Senator Coburn. The price would reflect that risk.
    Ms. Wright. The price would reflect that risk, and the 
other thing that we would make sure that we would need to know 
is that the cost and pricing data is compliant with the Truth-
in-Negotiating Act, meaning that we have certified costs and 
pricing for----
    Senator Coburn. So that is the only real requirement, that 
they have every intent to fulfill this contract by being 
truthful about the pricing?
    Ms. Wright. Absolutely.
    Senator Coburn. OK. But if they choose to do that and they 
choose to do that because they see an option for a $10 billion 
contract and they are willing to take some of the risk to get 
over the years $10 billion worth of business, or some number, 
maybe it is $11 or $12 billion because what they option to you, 
why shouldn't they be able to do that and why shouldn't we take 
all this other stuff where there is debate and take it offline 
and put the responsibility on them if they are willing? They 
have to answer to their shareholders. What is wrong with that 
proposal?
    Ms. Wright. There is, I guess, nothing wrong with that, but 
that is not what we have.
    Senator Coburn. I know that is not what you have now, and I 
know there is a debate between Lockheed Martin and the Air 
Force about where you come down with the numbers and where they 
have. Just for honesty's sake, so you will know, I am not loved 
by Lockheed Martin. I go after their earmarks all the time. So 
that need to be said here. I am not defending Lockheed Martin. 
What I want is the best price for airlift that gives us what 
the Air Force wants to get done. So I am not here touting 
Lockheed Martin or trying to beat up the Air Force.
    I have this really uncomfortable burning in my stomach that 
somewhere there is not the real commitment to get this C-5 
modification done, and I can just tell you that from everything 
I have looked at, everybody I have talked to, everything I have 
read, everything I know about C-17, everything else. I am real 
worried that truth in advertising isn't with the commitment of 
the Air Force on the C-5, and that is not your area. I know 
that. Your area is to look at the numbers and say if it doesn't 
look realistic.
    I think Chairman Carper would like to go to the next panel. 
I want to thank each of you for being here.
    One last point for Mr. Bolkcom. There is no question on a 
per ton, million ton miles per day, if we flew to a large 
airfield and we put C-17s compared to C-5s and they both had 
the same reliability rate, the cost for shipping and the cost 
for getting goods to the same place would be significantly 
lower with the C-5, or modified C-5, is that true?
    Mr. Bolkcom. I can tell you that there is no doubt that a 
modified C-5A would move more. I don't know if it would be 
less. I would have to do the math, to be honest, because----
    Senator Coburn. Well, we have done the math. It is about 25 
percent less.
    Mr. Bolkcom. The only figure I have in my head, sir, is 
that the cost per flying hour of the modernized C-5 is about 
twice that of the C-17.
    Senator Coburn. Yes, but the fuel efficiency is markedly 
with the modified and the load is twice----
    Mr. Bolkcom. Yes, sir.
    Senator Coburn [continuing]. And the load-on and load-off, 
plus the capability of carrying other things. Well, that is not 
a fact, is what you are saying. You can't tell us that. Would 
you look at that for us----
    Mr. Bolkcom. Sure. Yes.
    Senator Coburn [continuing]. And get back to us to let us 
know that?
    Mr. Bolkcom. I would be happy to.
    Senator Coburn. I have no other questions. I will hope, 
General, that your staff will stay around and listen to the 
Lockheed Martin testimony. Thank you again.
    Senator Carper. I am not quite ready for panel two. I want 
to go back to our chart here for a moment and maybe we can--let 
us take a look at the second area of difference, and it is 
called the installation and labor management costs.\1\ I guess 
it is labor and materiel costs, which we called touch labor, 
and the difference is $1.6 billion. Do we have another chart 
that relates to that?
---------------------------------------------------------------------------
    \1\ The chart submitted by Senator Carper appears in the Appendix 
on page 109.
---------------------------------------------------------------------------
    That is good. Thanks. What we are looking at here is the 
touch labor hours for the C-5 RERP per aircraft, and this is 
the very first aircraft that was RERP-ed and Lockheed Martin 
tells us they invested about 145,000 man hours in that 
aircraft.
    This is the second one. They tell us they invested about 
124,000 man hours in that aircraft.
    The third C-5--those are both Bs, C-5Bs. This is the third 
one, and in the third aircraft we are told that they spent 
about 111,000 man hours working on that aircraft.
    The Lockheed Martin folks tell us, and we are going to be 
questioning them extensively about how they get down to 95,000 
for their estimate for the fourth aircraft, but it seems 
peculiar to me that the Air Force's estimate for the fourth 
aircraft goes from 111,000 or 112,000 back up to 116,000. I 
understand the line has been closed down for the modernization 
at Marietta, Georgia. There has been some scattering of the 
workforce. Not everybody is available. Some folks are going to 
have to be hired, rehired, brought back. New people have to be 
hired and trained. But it just seems strange to me that the 
number would go up that much for the fourth aircraft.
    It also seems strange to me that the number that is 
estimated by Lockheed Martin would be as low as it is for the 
fourth aircraft. Maybe one is right and maybe not. In asking 
Lockheed Martin, if they were on this panel I would just ask 
them right now, but we will ask them later, but one of the 
things that we have heard from Lockheed Martin is the reason 
why they go down, they are using some kind of slope I think 
they call the learning curve slope, about 85 percent.
    It took me a while to understand this, but I understand if 
you have 100 aircraft, you have 85 percent slope, the first 
aircraft takes, we will say, 100 hours. The second aircraft 
would be 85 percent of that, or 85 hours. The third aircraft 
would be 85 percent of that, and so forth. It took me a while 
to learn that.
    Go ahead and put up the other chart. We asked the folks at 
Lockheed Martin, how do you drop? How do you get it as low as 
95,000? And obviously, if they can move from 145,000 to 124,000 
to 111,000, you might assume, especially if they had the line 
running again, that this number could be pretty low. Lockheed 
Martin--maybe not as low as 95,000, but Lockheed Martin comes 
back and they say, well, we have learned some things in the 
first three aircraft that tells us how to work differently with 
wiring harnesses and they feel that is worth about 4,000 man 
hours on the fourth aircraft.
    They indicate that, and I don't fully understand this, but 
they indicate that they think they can save several thousand 
hours with respect to pylons and that is something they learned 
from the first three aircraft and it would be an improvement.
    All told, Lockheed Martin says that there is almost 20,000 
man hours that they are going to be able to improve cost, but I 
think the two biggest ones and the only ones that I know enough 
about to even mention, one is the wiring harnesses and the 
second is the pylon. Together, it is about 7,000 man hours. You 
knock 7,000 man hours off of 111,000, it brings it down to 
104,000, and from 104,000 to 95,000, it is not as great a leap 
as would otherwise seem to be the case. We will ask Lockheed 
Martin about this.
    Explain for us how given what I think Lockheed Martin has 
learned about using wiring harnesses, what they have learned 
about the pylon installation, why does this number go up on the 
fourth aircraft from 111,000 to 116,000? I can see that it 
maybe shouldn't go down to 100,000 and to 95,000, but how does 
it end up going up to 116,000 man hours? Ms. Wright.
    Ms. Wright. Yes. Because the first three dots that you have 
there are for the SDD aircraft and had we----
    Senator Carper. I am sorry?
    Ms. Wright. For the development aircraft. Had we continued 
the production line without a gap, it would have continued to 
go down. That is typical of a production, a learning curve. And 
then it tapers off because----
    Senator Carper. I understand.
    Ms. Wright [continuing]. You leaned out your manufacturing 
and then it goes on. And if you have a production break, which 
we have, we have a production break of 29 months, so a 
production break will make your curve go back up because it is 
a disruption. Your workmen are off doing other things. They are 
not doing it on a day-to-day basis and that is why it pops back 
up.
    The other thing that is of concern to us from the 
installation that is proposed is that the Lockheed Martin 
projections are that it will continue to go down at a very 
steep rate. In fact, that 145,000 is what they call a T-1. In 
the production language, that is the first aircraft, and you 
have a fairly steep learning and then you taper off. Lockheed 
Martin's proposal indicates that not only are they going to 
spend less time making this next aircraft after a 29-month 
production gap, but that they are going to continue--they are 
going to reset the 95,000 as a T-1 and take a steep dive down.
    We believe that is double-counting learning. You have 
learned, and we are encouraged by the fact that they have 
learned and come down, but we think a 15 percent reduction 
during a production gap is not the right way. It is not typical 
of what a production would be. And in addition, we think if you 
had added more dots on the charts to what they had proposed, 
that is also too steep because they are projecting that they 
are going to learn at the same rate for an even longer period 
of time.
    So our rate is not as steep. It is a little flatter, which 
means that more man hours will go into the product, which means 
more cost will go into the product and it will level out. So 
those are the two parts of it.
    Senator Carper. In our conversations with our friends from 
the Air Force, we have learned that an 85 percent slope is not 
uncommon for a new aircraft. We have asked for some 
information. I think Dr. Coburn was trying to get some 
information on aircraft modernization, and I don't know that we 
have that yet, but we are looking forward to seeing when we are 
modernizing aircraft, if you were to do a RERP on another 
existing aircraft, if the curve is closer to 85 percent or not.
    What we have been able to glean--do we have another chart, 
as well, on the AMP, that actually has the visual 
demonstration?\1\ We couldn't find a true apples-to-apples 
comparison to find out, is it 85 percent? Is the slope on the 
learning curve 90 percent or not? But we actually have some 
experience with the aircraft in the first part of the 
modernization that you all have talked about and that is the 
AMP.
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    \1\ The chart submitted by Senator Carper appears in the Appendix 
on page 112.
---------------------------------------------------------------------------
    I was actually on the line at Dover Air Force Base, I think 
with the very first C-5 that we AMP-ed, and I had a chance to 
watch the folks literally pull out the guts of the cockpit and 
go to work and trying to modernize it. It took a good period of 
time. In fact, the first one took, I think, almost 30,000 man 
hours. This says up to 26, I think we have actually AMP-ed 
about 30 and they have another six underway today.
    But the slope for the touch labor hours for the C-5 AMP has 
been about, actually, 84 percent, and I don't know if it is 
fair to say that if they could do 84 percent here, then maybe 
we could do 85 percent on the RERP. I am just not smart enough 
to figure that out. But I thought that was interesting. At 
least on the same aircraft, the first part of the 
modernization, they not only met 85 percent, but they actually 
were able to beat it by a little bit, and I thought that was 
worth knowing.
    But the more interesting thing that came out in our 
conversation--if the number actually does turn out that this 
95,000 number is wrong and it is something in between 95,000 
and 116,000, and even if this assumption for a learning curve 
is 90,000 or closer to 90,000 than it is to 85,000, there is a 
way to structure this deal, this modernization program with 
Lockheed Martin so that if there is a difference in the number, 
if the Air Force is closer to right than Lockheed Martin, there 
is a way to structure it so that Lockheed Martin eats the 
difference.
    Is that true? How do we structure the deal so that if they 
are wrong and if it is 90 percent and if it is 116,000, they 
eat the loss and we don't?
    Ms. Wright. If it is a firm fixed price and it takes them 
longer to do it, then they eat the cost of it.
    Senator Carper. Why wouldn't you try to do that?
    Ms. Wright. Well, if it takes them longer to do it, then we 
get less aircraft. I mean, there is a schedule delay there. We 
get less aircraft and our schedule gets pushed out and it gets 
stretched----
    Senator Carper. But they have a huge incentive----
    Senator Coburn. You are already pushing the schedule out. I 
mean, you all have pushed it out by 20 aircraft over the last 3 
years. That is the cost.
    Ms. Wright. I agree. We have had budget cuts and we have 
pulled out the schedule, but part of the reason why we do the 
service cost position is to try to figure out what is 
reasonable to believe and executable. So we have to budget in 
there and look at the schedule and when we could get this done. 
So we don't want to be overly conservative in our service cost 
position. If we go on contract for a shorter schedule and they 
are committed to doing that and we make that, then obviously 
that is great. But for service cost position, we need to be 
reasonable about what we believe is executable and that is how 
ours is structured.
    Senator Carper. Go ahead.
    Senator Coburn. So let us say that Lockheed Martin in the 
middle of November drops in your lap four options for every one 
of these over a different spend-out and different everything, 
firm fixed price, nothing there. What happens if you say in 
looking at it, you don't think they can do it?
    Ms. Wright. If they have the supporting data for cost and 
pricing----
    Senator Coburn. Yes.
    Ms. Wright [continuing]. In compliance with the Truth-in-
Negotiating Act, there would be no reason why we would disagree 
with them. Right now, we don't----
    Senator Coburn. So we might eventually get a real 
commitment to get the C-5s modernized and take care of our 
airlift capability?
    Ms. Wright. Absolutely. That is my goal.
    Senator Coburn. All right. Thank you.
    Senator Carper. I want to go to our next chart, if we 
could.\1\ I am running out of charts, so you will be pleased to 
hear that.
---------------------------------------------------------------------------
    \1\ The chart submitted by Senator Carper appears in the Appendix 
on page 113.
---------------------------------------------------------------------------
    We talked about the first two of three major areas of 
disagreement between the Air Force and Lockheed Martin. First, 
engine costs. Second, the assumptions for touch labor costs and 
the slope of the learning curve. I think we want to go to the 
other RERP costs. Do we have anything on that? We may not have 
a chart on that. If we don't, that is OK.
    I don't fully understand these other RERP costs, but one 
thing I think I do understand is that part of the difference of 
this $1.6 billion--not all of it, part of it--maybe has to do 
with assumptions on spares or whatever. But I think part of it 
has to do with this question of when we open up an airplane and 
start RERP-ing it and we are changing the engines and changing 
the hydraulics or these other 70 systems, what if we find 
things that are structurally wrong with the aircraft, that 
there are things that need to be fixed? How do we account for 
those?
    I think what I heard you all saying in your explanation to 
Dr. Coburn and myself and our staff earlier is that the reason, 
part of the reason why there is this difference of 1.6 on this 
other RERP is because it is not that Lockheed Martin would be 
spending more than they agreed to spend or they proposed to 
spend on putting on the engines, changing out the hydraulics, 
the cockpit and all, it is just that other stuff is found that 
needs to be fixed because of the RERP-ing that takes place.
    It doesn't seem fair to me to charge that against the 
contractor. And one of the things that--I remember in my old 
squadrons in the Navy, every now and then we would send 
aircraft to depot. I don't know how often these aircraft go to 
depot, but it would seem to make sense to me, and we have 108 
of them to work with and a fairly slow start-up off the line in 
2008 and 2009 and in 2010, it would seem smart to me to 
sequence it so that the aircraft that go to Marietta--I don't 
know where they do the depot, maybe they do it there--but the 
aircraft that go to be RERP-ed, that they would be just coming 
right out of depot, and if there are problems like this, then 
they would have been addressed.
    I would also say we have had a chance to look at these 
aircraft for a while, and I know that we have had testimony 
from the Air Force leaders that there are a bunch of bad 
actors, there are 25 or 30 of them that can be identified by 
tail number, although we have never seen that done, but if we 
are smart, we put them through depot, we fix most of their 
structural problems, but in the fleet viability examination of 
the aircraft, at least in their more cursory view, I don't 
think they identified major structural problems or corrosion 
problems. I think they looked at the fuselage and the wings and 
they said there are another 25 or 30, maybe 35 years on the 
fuselage and the wings if the RERP can go forward.
    We had one C-5A, I think, which is literally torn apart. I 
remember one of our P-3s a couple of years ago was taken by the 
Chinese. They were forced to land over there and they literally 
sent it back to us in boxes and crates. I think we must have 
taken a C-5 and taken it apart just like that, a C-5A to see 
what the corrosion looks like, the problems that we could 
identify, and pretty much they said it is not anything you 
wouldn't expect to see on an aircraft that is 30 or 35 years 
old.
    Plus we have had a chance to actually RERP three of these 
aircraft, Bs and an A, and I don't know that they have sent up 
big warnings.
    So we have had the Fleet Viability Board, we have had the 
aircraft that was torn apart, we have had three of them 
modernized, and yet we still say that we are going to--punish 
is probably the wrong word--but we are going to punish the 
contractor if there are problems that are uncovered in RERP-ing 
these other aircraft. That doesn't seem right. Maybe I am 
misinterpreting it, but let me ask you to take a minute or two 
and straighten me out.
    Ms. Wright. If I might, in that category, it is not just 
what is commonly referred to as over and above cost or legacy 
repair. That also includes----
    Senator Carper. What do you mean by legacy repair costs?
    Ms. Wright. Well, this is the same as it is in the 
baseline, so this is not something different for this cost 
estimate. It has always been in there. We do intend to send 
them to the depot ahead of time, and there is a number of 
things in the deck, they call it, to do, to take care of in 
what they call PDM. So it will go to the depot and it will have 
the things fixed that need to be fixed, and as they go through 
the depot, if they find things, if they take off the pylon and 
there happens to be a crack and they need to fix it, they will 
fix it there in the depot.
    However, then when it goes to the RERP line to be mod-ed, 
if in the modification of the RERP we find something that was 
not found in the depot, and these should be minor things that 
come up afterwards, that you didn't know. Maybe they didn't 
open up that portion of the wing in the depot. These are things 
that you don't know about. We, in our cost estimates, and have, 
like I said, in the baseline we did it also, we have what they 
call over and above or legacy repair, where you fix it. It is 
like if you take your car to the garage for an oil change and 
you find out that there is a hole in the oil pan. You fix the 
oil pan. They have to do it there.
    In fact, under the Anti-Deficiency Act, it is required that 
we do it with the money that is associated with the 
appropriation for the mod, so that you can't spend production 
money on things that you should have been doing in depot. As 
well, you can't spend depot money on things that you should 
have been doing--so it is to keep from augmenting different 
appropriations. So by law, we have to have funding so that we 
can take care of those things that are uncovered during the 
time that we are in the modification, and that is where--and 
that is the portion that you are talking about.
    But the other part that is inside that discrepancy, that 
disconnect there, are spares----
    Senator Carper. I apologize, but I have to interrupt you. 
Why isn't that a depot cost instead of a RERP cost?
    Ms. Wright. It is because under the Anti-Deficiency Act, 
you have to use the appropriations that is appropriated for the 
RERP mod, you have to use that if you uncover it during the 
time that it is in mod. So it is to keep you from augmenting 
appropriations with different money.
    Senator Carper. OK. Let me just make one comment and then 
we will move on. I am not sure how you develop your estimate 
for what these RERP costs are going to be that relate to stuff 
that has to be fixed after you have opened up the aircraft. I 
would hope that those estimates are informed by what we learned 
by going through the first three mod----
    Ms. Wright. Absolutely.
    Senator Carper [continuing]. And I hope they would be 
informed by what we saw when we tore apart the C-5A, and I hope 
they would be informed by what was uncovered when the Fleet 
Viability Board looked at all of the other aircraft.
    Dr. Coburn mentioned earlier, and he thought it was quite a 
coincidence that we learned of a suggested Nunn-McCurdy breach 
on the eve of our hearing. Maybe it is just a coincidence, 
maybe not. I don't know.
    But in one of our conversations within the last week with 
some senior folks from your team, again, I think, led by Major 
General Gray, some people from Lockheed Martin were there, as 
well, we discussed the communications between Lockheed Martin 
and the Air Force. Really, we discussed the lack of 
communications. And sometimes we run into problems here in the 
Senate, as you know, because we stop communicating. And I heard 
from both sides, both from Lockheed Martin and from the Air 
Force, that the communications, particularly this year, haven't 
been very good, and as the concerns were raised, and I heard 
this from the Air Force--I had acknowledgement from the Air 
Force that it hasn't been what they should have been and they 
haven't been from Lockheed Martin what they should have been.
    We get in trouble when we stop talking around here, and I 
was concerned about what I heard. I am not going to ask you to 
answer here, but in our conversation, I think with Secretary 
Payton, when you called and spoke to me yesterday, and I think 
you spoke to Dr. Coburn, as well, one of the things that you 
cited as an advantage of getting into a Nunn-McCurdy breach 
scenario is that it would improve communications, or at least 
that is what I understood you to say. All I can say is we 
should have been communicating better before we got to this 
point in time, and I am not sure that we were.
    Dr. Coburn.
    Senator Coburn. I just have one other question for Ms. 
Wright, just one. Is any of the RERP cost overhead difference 
between you and Lockheed Martin based on units?
    Ms. Wright. On units?
    Senator Coburn. On buyout rate.
    Ms. Wright. It is based on----
    Senator Coburn. Let me be very specific with my question.
    Ms. Wright. OK.
    Senator Coburn. Is there any factor of dollars in the 
propulsion system, the installation and other LM costs, or in 
the other RERP costs, is there any factor of that based on 
roll-out rates in any of those numbers to account for a 
difference between what Lockheed Martin might assume and what 
you are assuming?
    Ms. Wright. Yes, in the sense that, like for the propulsion 
system, we don't believe that we will be able to stay with the 
quantity stream that is proposed in the Lockheed Martin, and 
therefore we don't believe the propulsion costs will stay the 
same----
    Senator Coburn. OK. Was that communicated to Lockheed 
Martin?
    Ms. Wright. Yes.
    Senator Coburn. When?
    Ms. Wright. It was communicated--actually, they have been 
talking about it since--the team at Wright-Patterson who does 
both the service cost estimate as well as the team that is 
negotiating, or are part of the negotiating team, has been in 
near daily communications----
    Senator Coburn. Since when?
    Ms. Wright [continuing]. With Lockheed Martin. Since May 
17.
    Senator Coburn. OK. And you are saying the fact that there 
is going to be a lower roll-out rate by units has been 
communicated to them throughout this?
    Ms. Wright. Yes.
    Senator Coburn. OK. Thank you.
    Senator Carper. Mr. Bolkcom, did you have anything you 
wanted to say in response to the last question?
    Mr. Bolkcom. Yes, sir.
    Senator Carper. Go ahead, please.
    Mr. Bolkcom. I have said--I am sorry. I misunderstood your 
question. I didn't have anything else to add.
    Senator Carper. OK. Fair enough. One of the things we have 
talked about in, I think, conversations certainly with 
Secretary Payton and General Schwartz and others, too, the 
question on strategic airlift needs, we need big aircraft and 
we have the option of flying C-5s or we have the option of 
RERP-ing and modernizing the C-5s. We have the option of going 
out and leasing other aircraft.
    There is an aircraft that is actually bigger than the C-5, 
maybe a couple, but one of them is the AN-124 and it turns out 
it is a Russian aircraft. I was startled to find out that we 
have wound up and paid almost $200 million to the Russians to 
lease to us the AN-124. I am not criticizing that decision, but 
as a cold war warrior, the idea that we are paying that kind of 
money to the Russians so that they can let us use their 
airplanes to provide strategic airlift because we don't have it 
is a real irony.
    Does the AN-124 carry something that the C-5 can't? I asked 
my staff to dig out for me, like MRAPs. I said, tell me what it 
costs per MRAP to carry them in an AN-124, a C-17, or a C-5, 
and they came back and they told me--I hope these numbers are 
correct--they said, if you are flying a C-17 carrying MRAPs, it 
is about $150,000 per vehicle. If you are sending them over in 
AN-124s, it is about $134,000 per vehicle. If we are flying 
them over in C-5s, it is about $125,000 per vehicle. So they 
can all carry MRAPs, but there is a difference in the cost of 
delivering each vehicle.
    Are there some things that the AN-124 can carry that the C-
5 cannot? Has our reliance on the AN-124, the Russian aircraft, 
accelerated of late? I know we have been using them for a 
while. And does the Air Force plan to continue to lease the 
124s?
    General Schwartz. Sir, let me take that question because I 
am the operator here. The AN-124 is an excellent vehicle 
carrier. In fact, it has somewhat greater capacity than the C-
5. The AN-124 can carry five or six, depending which MRAP 
category you are speaking to, four or five on the C-5, two or 
three on the C-17.
    Senator Carper. But in terms of the cost per vehicle, were 
my cost numbers about right?
    General Schwartz. The numbers you have are about right. I 
would say that, frankly, C-5 and AN-124 are about the same, 
$130,000 in round numbers. But the difference is reliability. 
Mr. Chairman, when the AN-124 goes--when it is scheduled, it 
flies, and----
    Senator Carper. Do they have some kind of cost penalties 
built in so that if they don't, they pay a heavy cost?
    General Schwartz. No, sir. They just operate. They are a 
very reliable outfit. And by the way, we access that capability 
through our CRAF partners, Atlas Air, a U.S. company, Lynden 
Air, another U.S. company. But the key point here is that they 
fly, and when the expectation is that we will move MRAPs as 
expeditiously as possible because kids are in jeopardy, I am 
not going to have airplanes broke in Europe or somewhere else 
when I have an alternative which, to date, has not resulted in 
a late delivery.
    Senator Carper. OK.
    General Schwartz. Yes, sir.
    Senator Carper. All right. Mr. Bolkcom, anything else? You 
haven't had a chance to say as much as some of our other 
witnesses. Is there anything that you would like to add?
    Mr. Bolkcom. No, sir. Did you want me to stay for the 
second panel?
    Senator Carper. Yes, if you would. I would be grateful if 
our other witnesses could stay, as well, and you are welcome to 
respond for the record. We may have some more questions to 
submit, and we just ask that you respond in a timely way.
    Ms. Payton, I am going to ask you just to be brief, but go 
ahead.
    Ms. Payton. Very briefly. I appreciate the question about 
the timing of the Nunn-McCurdy. The very first meeting I 
attended in the Pentagon in my new role in August 2006 was the 
program manager briefing, Secretary Wynne, that we were very 
concerned because we had heard from Lockheed Martin about the 
cost growth. He directed the program office to go gather as 
much information as possible to do a program office estimate, 
to put an official RFP to Lockheed Martin so that they could 
respond in writing what the costs really were, and then to 
bring in an independent cost agency of the Air Force to look 
over everything.
    This has taken some time. It was supposed to have been 
completed in July. We did finally get everything consolidated 
on September 24. And here is the advantage of knowing you are 
in a Nunn-McCurdy breach, and this is a critical Nunn-McCurdy 
breach. We can take away a lot of numbers up here before we get 
down to the point we are no longer in a Nunn-McCurdy breach.
    The good thing about the timing of this is that we can 
deliver the quarterly SAR to you, the report that says----
    Senator Carper. What is a SAR? Selected Air Reservist? That 
is what I was.
    Ms. Payton. Selected Acquisition Report. That indicates to 
you that we are in a Nunn-McCurdy breach, and then the clock 
starts and we believe we can be through the analysis of this 
with a well-structured program by the end of January and we can 
have Lockheed Martin on contract for an excellent C-5 program 
before their bid to us becomes invalid on February 28.
    So we did this in the best interest. Now, Secretary Wynne 
could wait 45 days to tell you of this, but we want to move 
out, because if we don't do it in September, then we won't be 
able to start the Nunn-McCurdy process until January, and then 
we will have lost all the good data that Lockheed Martin has 
provided us.
    I would also like to mention that we have--I will submit 
for the record the 45 different meetings and discussions in 
person and between our contracting officers that we have had 
with Lockheed Martin trying to get the kind of cost and pricing 
data that we need in order to comply with the law and get the 
best we can do for our tax dollars.
    Senator Carper. Let me just ask the question, are those 
meetings that you participate in?
    Ms. Payton. No, sir. Here is how I like to manage my 
acquisition workforce. We have a very small number of excellent 
acquisition workforce. People or contracting officers need to 
be empowered and I have been very proud that they do the work 
and do the proposal work at their level. When senior people 
from Lockheed Martin start talking to the Chief and the 
Secretary and me about details like this, we could make a very 
serious mistake because we are not the experts on Truth-in-
Negotiations and the Anti-Deficiency Act and the Federal 
Acquisition Regulation.
    So I do not want to marginalize my people. I want my people 
to be empowered to work with the people at Lockheed Martin. I 
have had discussions about this with the senior people at 
Lockheed Martin, that our people need to negotiate this out and 
get the data in that we need from Lockheed Martin.
    I have talked to Ralph Heath about this. I talked with him 
this week about it. I called him to give him a courtesy 
notification that we were going into a Nunn-McCurdy breach so 
that he would know it before everyone else. And we do meet from 
time to time. I have a CEO roundtable scheduled on October 17 
and 18. The CEO won't be there, but Chris Kubasik will be 
there. We do discuss things at the senior levels, but it is 
very important that we do not marginalize our acquisition 
workforce and that we empower the few that we have.
    Senator Carper. Well, I appreciate your saying that. Having 
said that, I heard from both the Air Force side and the 
Lockheed Martin side, we heard as recently as last week that 
the communications hasn't been what it could have been and 
should have been. My hope is it gets a whole lot better in the 
weeks that lie ahead.
    I am told by my staff that the Air Force briefed the Senate 
Armed Services Committee staff that the Air Force feared that 
there were cost problems with the RERP back in January and 
February this year. I will just ask you to answer it on the 
record and the question would be, why is the Air Force 
leadership only looking at it in the August time period? We 
will come back to you in writing with a question on this and 
just ask you to respond in writing.
    Ms. Payton. Thank you very much.
    Senator Carper. I am a big movie buff and I especially like 
Paul Newman's films. Some of you have seen a few of those 
films. One of them was ``Cool Hand Luke.'' Remember the great 
line from the prison warden in ``Cool Hand Luke'' where he 
said, ``What we have here is a failure to communicate.'' I 
think that may be part of the problem.
    I am not sure why there has been a failure to communicate. 
I am not sure if it is--and like in couples, husbands and 
wives, there is usually some blame for both. But in the Senate, 
we get into trouble when we don't communicate and I think we 
have gotten into trouble here, at least in part because we are 
not communicating as well as we should.
    We appreciate very much your being here today. Ms. Wright, 
nice to have met you. Thank you for joining us, as well. 
Secretary Payton, General Schwartz, good to see you. And Mr. 
Bolkcom, thank you very much, not just for your presence and 
testimony today but for the input that you and the 
Congressional Research Service have provided to us in the past. 
Thank you very much.
    With that, I am going to ask our fourth panel to come 
forward, and again, our other witnesses may stay at the table 
or you may just have a seat in the audience if you prefer. You 
are welcome to sit in the audience if you would like.
    Senator McCaskill hoped she would be able to join us but 
she is not going to be able to. She has sent a statement for 
the record, and if there is no objection, then I will ask that 
her statement be included in the record.
    [The prepared statement of Senator McCaskill follows:]???
    Mr. McQuien, would you take just a moment and tell me--I 
understand you are a representative from Lockheed Martin--your 
position, your title is?
    Mr. McQuien. Yes, sir. I am the Vice President for Business 
Ventures for the Lockheed Martin Aeronautics Company, 
headquartered out of Fort Worth, Texas. In that role, I am 
responsible for all the contracts and estimating and all of the 
new business transactions the company enters into.
    Senator Carper. And what is your relationship, if you will, 
to this program?
    Mr. McQuien. Well, last November, at Thanksgiving, I was 
assigned by our President, Ralph Heath, to be a full-time 
responsibility for working to transition the C-5 RERP program 
from development into production, and so that has been my role 
since Thanksgiving.
    Senator Carper. Are you the senior person at the company?
    Mr. McQuien. I am the senior person for responsibility for 
transitioning to production. In the audience here today, I have 
George Schultz. He is the Senior Program Director for 
continuing the development program and he will have 
responsibility for actually implementing the production when 
and if awarded.
    Senator Carper. Mr. Schultz is welcome to come and take a 
seat at the table. We may or may not call on him, but a lot of 
times, witnesses will have somebody who happens to be in the 
nitty-gritty and I would invite him to join us, if he would 
like. I don't know that we have a name tag made up for him, but 
please join us, if you would.
    I want to recognize you for a statement. Thank you both for 
joining us, and to Mr. Bolkcom, thank you for staying at the 
table. Please, Mr. McQuien, your statement.

 STATEMENT OF LARRY J. McQUIEN,\1\ VICE PRESIDENT OF BUSINESS 
 VENTURES, LOCKHEED MARTIN AERONAUTICS COMPANY, ACCOMPANIED BY 
  GEORGE SCHULTZ, VICE PRESIDENT, LOCKHEED MARTIN AERONAUTICS 
                            COMPANY

    Mr. McQuien. Yes, sir. I want to say it is a privilege for 
me to appear before you this afternoon in support of this 
hearing on ``Cost Effective Airlift in the 21st Century.''
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. McQuien appears in the Appendix 
on page 95.
---------------------------------------------------------------------------
    Lockheed Martin is normally shoulder-to-shoulder with our 
Air Force customer, and this is an awkward instance in which I 
will be presenting a different perspective on the cost for 
performing the C-5 Reliability Enhancement and Re-engining 
Program than the Air Force.
    Lockheed Martin is committed to supporting our customers' 
decisions on America's strategic airlift. Modernization of the 
C-5 Galaxy is a fiscally sound means of addressing U.S. 
strategic airlift requirements. The acquisition strategy for 
the C-5 RERP program is to improve reliability, 
maintainability, and availability while reducing total 
ownership costs. Current developmental testing indicates these 
goals are attainable. Analysis indicates a 30 percent or higher 
improvement in mission capability.
    The principal driver underlying these improvements is the 
reliability and maintainability of the new General Electric, 
GE, CF-6 ADC-2 propulsion system. This propulsion system has 
demonstrated outstanding reliability, having accumulated more 
than 300 million flight hours in both commercial and military 
applications, including Air Force One.
    Modernization will produce about $50 billion in C-5 
operation and support cost savings through 2040. The Air Force 
will realize $4 in savings for every dollar invested in the 
program, based on our estimate.
    Lockheed Martin is aware that the Air Force and the Nation 
are depending on us to deliver on this program. As stated 
earlier, the 2005 Mobility Capability Study and the 2006 
Quadrennial Defense Review included modernized C-5s as a 
critical part of the Nation's strategic airlift. We are 
committed to ensuring the success of this program. I am acutely 
aware the Air Force recapitalization is fiscally constrained 
and it is imperative that every dollar be spent wisely.
    As stated earlier, C-5 modernization is a two-phase 
program, including the Avionics Modernization Program and the 
Reliability Enhancement and Re-engining Program. Development 
for the Avionics Modernization Program is complete and the Air 
Force has declared initial operational capability for the 
aircraft. We have produced 28 updated aircraft at this point.
    Development of the Reliability Enhancement and Re-engining 
Program is progressing well with the C-5M Super Galaxies, three 
of them, two former C-5Bs and one C-5A, active in developmental 
testing which we plan to complete by August 2008. The three 
aircraft are meeting performance expectations.
    We have taken what I consider to be exceptional steps to 
ensure the program meets Air Force expectations. We provided 
the Air Force a firm fixed-price commitment for modernization 
of the remaining 108 aircraft. Lockheed Martin chose to assume 
this inherent risk of a firm fixed-price proposal based on 
rigorous objective analysis, demonstrated performance, and our 
best judgment. Our proposal balanced the cost risk to the Air 
Force for the portion of the Reliability Enhancement and Re-
engining Program to be performed by Lockheed Martin, namely 
modernization of the aircraft. We took this action to 
demonstrate our confidence in the estimated cost for the 
program and to support Air Force deliberations on the right 
composition of its force structure going forward.
    The proposal was structured as an initial production lot 
and eleven additional options. Our offer does not require the 
Air Force to commit to modifying all C-5s but gives them a 
solid price commitment by lot.
    Lockheed Martin's firm fixed-price offer ensures the Air 
Force that the aircraft could be modernized for an average cost 
of $83 million per aircraft. Our offer, however, does not 
address other costs, as has been discussed earlier, to be 
incurred by the Air Force, such as training, spares, support 
equipment, over and above aircraft maintenance, and program 
management, costs typically associated with ongoing programs. 
Accounting for these other costs, the total average cost for 
modernization based on our proposal would be between $108 
million and $118 million per aircraft, assuming that such costs 
are between $2.7 and $4 billion.
    Our proposal can be executed within the total C-5 
Reliability Enhancement and Re-engining Program dollars 
available in the current future years defense plan, but a 
rephasing of the funding would be necessary. Our full proposal 
could be executed within the current program of record plus 
additional new appropriations of at least $1.4 billion and as 
much as $3.1 billion in the 2014 to 2020 time frame, depending 
on the amount of the Air Force other costs.
    The C-5 air frame has more than half of its structural life 
remaining, more than 30 years of utility. The Air Force Fleet 
Viability Board, as discussed, has concluded the C-5A fleet was 
healthy. The Air Force's internal cost analysis has repeatedly 
concluded that the C-5 modernization not only pays for itself, 
but generates significant savings over the life of the 
aircraft. It would be fiscally prudent to continue modernizing 
the C-5 to protect the investment made by the government and 
the taxpayer and the realize the C-5's full potential rather 
than parking them in the Arizona desert.
    Mr. Chairman, Lockheed Martin understands the challenges 
faced by the Congress and the Air Force. We appreciate having 
an opportunity to participate in open and constructive dialogue 
concerning the merits of our proposal. The Air Force program of 
record supports C-5 modernization, and Lockheed Martin is 
committed to making it a reality. The C-5, unheralded, flew 25 
percent of the Operation Iraqi Freedom airlift missions 
deploying for the war, yet delivered 50 percent of the cargo. 
The C-5M Super Galaxy can continue providing this exceptional 
capability through 2040.
    I thank you and I look forward to your questions.
    Senator Carper. Thanks, Mr. McQuien. Let me just start off 
by going over here--you have seen this chart. You have had an 
opportunity to think about it, probably a lot more than just 
today.
    Before we start talking about engines, let me just ask you, 
we were talking with the earlier panel about communications. 
Would you be the person who would dialogue with Secretary 
Payton or General Schwartz? Are you that person?
    Mr. McQuien. I am that person. I have dialogued with both 
at one level or another, earlier on with General Schwartz. My 
primary role lately has been dialoguing with Ms. Wright, with 
General Hudson and the program staff that is implementing the 
C-5 modernization program.
    Senator Carper. OK. Let us go up here to the propulsion 
system. GE engines, potentially 457 of them. I understand you 
are constrained by telling us what the cost would be. I 
understand it is proprietary information. But $1.2 billion is a 
lot of money and the last thing we want to do is to go ahead 
with this project and find out that it is going to cost $1.2 
billion more than you say it is going to cost. What kind of 
assurance can you give us that is not a correct number and that 
the number you are citing or quoting, I guess which is implicit 
in the $83 million flyaway cost, how do we know that it can be 
held to? How can we hold your feet to the fire? What assurance 
can you provide for us?
    Mr. McQuien. Well, first, General Electric is a very 
reputable company. Today, I hold a firm commitment from them to 
produce the engines on a prescribed schedule. The schedule that 
GE has provided us will support the PB-08 budget schedule that 
was discussed earlier. It will support that, although that is 
not the schedule that I bid. So I have all the confidence in 
the world----
    Senator Carper. What did you say, although what?
    Mr. McQuien. I did not bid, from Lockheed Martin's 
standpoint, the same schedule that is currently in the PB-08. 
We can discuss that now or we can discuss that later. I noticed 
it on one of your charts.
    Senator Carper. OK. Can you put that chart back up? On the 
one hand, we have the President's 2008 budget and you submitted 
a bid--the $83 million flyaway cost was submitted on a 
different----
    Mr. McQuien. I submitted that on May 17.
    Senator Carper. Is it the bottom line right here?
    Mr. McQuien. Yes, sir. You were saying Lots 3 and 4. That 
is the 7 and 10. Those are below the President's budget for 
2008. Then out in fiscal year 2014, well, we are below it 
again. We then make that up in the last lot by putting nine 
airplanes into that.
    Senator Carper. Why would you use this kind of ramp-up as 
opposed to the President's budget? I presume there is a reason?
    Mr. McQuien. Well, I think given 20/20 hindsight, that is a 
good question. I have been asking myself that. We used this 
rate--first off, we matched the Air Force's proposal, as 
discussed. They did submit us an RFP for the first--they asked 
us to bid the first three lots at a rate of one, three, and 
variable quantity five to eight. They then asked us to give 
them a capped cost for producing the remainders of the Bs and 
two Cs at a TBD build rate. The Air Force did not replicate 
that PB-08 rate at that time. That had given me some concern.
    In the fall of 2006, as this was playing out, as was 
evident that the cost of this program was increasing, Lockheed 
Martin received an informal schedule from the Air Force 
suggesting we ought to look at that as a potential new way that 
would be implementable. The idea here undoubtedly, if you look 
at it, is to make sure we can stay within the future years 
defense plan before we have cost growth. We locked onto that 
informal submission and continued to use that rate in this 
submittal.
    What I am prepared to do is, based on the General Electric 
proposal or contract with us, purchase order, we are prepared 
to update our proposal if that would be of value, which would 
lower our cost by another $150 million, that we would bid the 
actual PB-08 rate. We haven't made that up today just because 
it is another number in a large morass of numbers that keep 
getting exchanged between us, but we are prepared to make that 
one change.
    Senator Carper. OK. So would that $150 million come off of 
this $1.2 billion?
    Mr. McQuien. No, that would exacerbate that difference to 
make it $1.35 billion.
    Senator Carper. All right. How can we be assured--how can 
you assure us that you can buy engines from General Electric 
over the next dozen or more years at a price that does not 
include that $1.2 or $1.35 billion? What assurance can you 
provide for us?
    Mr. McQuien. Well, again, Lockheed Martin has stepped 
forward with a firm fixed-price offer of which we were willing 
to accept that risk. Again, the question that came up earlier, 
we are accepting that risk based on the aircraft being procured 
at the specified rate. That is the same risk that General 
Electric stepped up forward to us when they provided the 
proposal which we ultimately accepted.
    I would say that General Electric pricing hasn't changed 
since late November 2006, although we just now did get the firm 
contract signed. It was an 11th hour, just before our last 
meeting, actually, with the Aeronautical Systems Center.
    Senator Carper. In your negotiations with the Air Force, 
have you been able to give them assurance that you are not 
going to be--either more material problems with the components 
that go into these engines that would cause GE to step back and 
say, we can't do it at the price that we thought we could. We 
need more money. And if that happens and you end up having to 
pay more, do you eat the cost?
    Mr. McQuien. That wouldn't be the case. If we were able to 
complete a proposal that we submitted and negotiated for a firm 
fixed price, if we were incorrect in the commitment with 
General Electric, that would be on Lockheed Martin.
    Senator Carper. What if the Congress, or a future Congress, 
decides not to support the President's budget, and that rarely 
happens around here, but what if it did. Is there some kind of 
protection, I guess, for the contractor? Do you have some kind 
of variable rate or quantity protection that can be built into 
a contract?
    Mr. McQuien. It could be built into. We stand ready to work 
with the Air Force to make that kind of determination, if that 
was what they would be interested in doing. We did not do that 
in our submittal of the proposal back in May. We just made it 
against a certain specified rate and said that is what we would 
go forward. Our intent in submitting the proposal was to try to 
provide a confidence in the estimate of the program against or 
close to the current baseline, demonstrating that a Nunn-
McCurdy breach might be avoidable.
    Senator Carper. In our conversations with some of the Air 
Force leadership, some of whom are in the room today, we heard 
that Lockheed Martin had failed to provide a firm contract that 
didn't have all kinds of loopholes in it, that you actually 
install these 457 engines, or 432 plus spares, that whatever 
you proposed in writing had enough loopholes in it that it was 
not of great value. Let me just ask, how do you respond to 
that?
    Mr. McQuien. Well, I am surprised by the definition of 
loopholes. I have heard this over the last few weeks 
characterized as contract reopeners. It was discussed earlier 
that there is an Economic Price Adjustment clause in the 
contract. This is a standard clause found in many contracts 
that span long periods of time. So this is not an unusual 
clause. We have accepted in our pricing the risk--we have 
proposed to accept the pricing for a certain level of 
escalation. That escalation going forward is based on published 
indices by authorities in this field. If inflation were to 
change radically over the next--between now and 2021, then we 
have asked that the clause would self-adjust what is the price 
of the program. That is not unusual. We have found that in a 
number--that is in many contracts. That is in the current F-22 
multi-year contract, as a matter of fact. So this is not a 
first time.
    I clearly agree that there is a reopener provision if the 
build rate that we propose and General Electric proposed were 
to be changed. It is not practical at this point in time for me 
to be able to assume you could build 12 in 1 year and one the 
next year and the price wouldn't change. We are going to work--
we have had some discussions at this time with the Aeronautical 
Systems Center at which this has been discussed. We just 
haven't--none of us, because of all the other priorities, had 
made this the number one item to try to solve at this time, but 
I believe we are going to. We are going to find, if we can find 
a meaningful variable quantity, we will find another price that 
we can step up to that gives the customer the kind of 
flexibility they are looking for.
    Now, I will have to say that this is not like an ongoing 
production line where the Air Force might be buying aircraft 
while we are producing them for someone else. There are only 
108 C-5s to be modernized, so it is going to be--if the 
quantity variation varies widely, if it varies from 4 to 12, 
well, the price risk is going to get shifted significantly to 
us and we will have to reflect that into a contract price. That 
came up earlier in the discussions, I know, with Ms. Wright 
here. So that is something we will just need to work with with 
the Air Force. Again, we stand ready to do that and try to find 
a reasonable accommodation to meet what the requirements are.
    Senator Carper. I want to talk a little bit about the 
second major portion of the delta, the installation and other 
labor charges, touch labor stuff that we talked about earlier, 
the sort of assumptions.
    Can we look at another couple of charts, please.
    I would like to think you could go from 145,000 man hours 
to 123,000 to 111,000. I would like to think you could go down 
to 95,000 on the fourth aircraft. But if you have had the line 
shut down for 2 years, I presume that the folks who had been 
working on these first three, some will still be around, some 
will not. You must have some assumptions as to who is still 
there and who is not. The folks, in terms of being able to do 
stuff, the idea of working together as a team, training new 
people, you have to train new supervisors. How do you go 
realistically from 111,000 after a 2-year shutdown to 95,000?
    Mr. McQuien. Well, first, there is a set-back in learning, 
and so as a result of the gap in the production line, although 
we will be able to recall a number of the people that worked on 
this program, there is a setback in learning and we have 
acknowledged that probably we would start back around the mid-
120s, 120,000 hours.
    But we have, though, demonstrated that we changed the scope 
of the work. The work that was done on the first three 
airplanes was custom, I will say sort of by hand--it will all 
be by hand, but they were one-of-a-kind changes. As we move 
forward, under the development program, we have now redesigned 
the pylon installation that significantly changes the scope of 
the program. That is the 20,000 hours that you mentioned 
earlier on one of your charts.
    So we have showed a change in the scope of the program that 
we believe will reduce the man hours to produce this aircraft 
by 20,000 hours. That would make an immediate----
    Senator Carper. Is this what you are talking about?
    Mr. McQuien. Yes, sir.
    Senator Carper. And is this 19,000, is that the difference 
between, say, Aircraft 3 and Aircraft 4?
    Mr. McQuien. No. We made a setback. Loss of learning took 
us back--I'd have to look, I want to say it is about 124,000 
hours. Perhaps I have a piece of data here. What we said is the 
fourth airplane may cost us as much as 124,000 hours if we 
performed on the same type of work we were doing on the first 
three. However, because of the problems encountered on the 
first three on doing it one-of-a-kind, that wasn't a very 
effective way to do a production program where we would be 
doing up to 12 a year, so we redesigned that work. In 
redesigning it, we identified at least 19,600 hours of 
improvements. Most of these improvements get implemented once 
we go under contract.
    Senator Carper. So is what you are saying you have made an 
adjustment and you have assumed that this 111,000, because you 
lost people, retraining, that sort of thing, the 111,000 
normally would be, what did you say, it would be 124,000?
    Mr. McQuien. A hundred-and-twenty-four, I want to believe 
is the number.
    Senator Carper. Would you come back to us----
    Mr. McQuien. I will come back and update you.
    Senator Carper. But it must be--this 19,000 or 20,000, if 
you add 20,000 to 95,000, you are up to 115,000. Would that be 
your readjusted----
    Mr. McQuien. What we did is we looked carefully at the work 
to try to decide, what is it going to take to do it, and we 
walked down that carefully with the customer to show how we 
would step back the learning, but then we would realize this 
savings of the 20,000 hours that would take us down to 104,000 
hours. There is another 8,000 hours of additional savings we 
identified that could be applied to this program--or would be 
applied to this program, in our estimate. So we walked down 
that very carefully.
    Senator Carper. Seven thousand on top of the 19,600?
    Mr. McQuien. In the case of the first three airplanes, they 
did not go to the depot before they were delivered to Lockheed 
Martin. As a result of that, there was a significant amount of 
over and above work at the beginning of the program.
    Senator Carper. OK.
    Mr. McQuien. So we have assumed that the aircraft in the 
production program would go to the depot before they come to us 
and that there is probably 10 percent of that first learning 
set, 10 percent of those hours were attributable, in our 
judgment, to this over and above work that we had to do on 
these airplanes which we won't experience if the airplanes have 
gone to the depot ahead of time. So that is another, in this 
case, 11,000 hours almost that would have come out, adjusted. 
There are several adjustments.
    Senator Carper. Let me follow up while you are on this 
point. Is it realistic or unrealistic to assume that, 
particularly with a production ramp-up one, three, five, seven, 
nine aircraft, is it realistic to assume that in that kind of 
schedule you can--the Air Force has the flexibility to schedule 
an aircraft, the first aircraft, or the fourth lot, I guess, 
but the first aircraft in the depot, get it to RERP, and the 
next three through depot into RERP? Is that a realistic 
assumption? And I would ask the Air Force to answer that one on 
the record, if you would.
    Mr. McQuien. Well, I would have to say that I think this is 
one that General Schwartz might answer as the operator of the 
aircraft. To me that would be reasonable, but I am not the 
operator.
    Senator Carper. We are just asking. I appreciate the fact 
that General Schwartz and Secretary Payton are still here. Let 
me just ask you to answer that one for the record. How 
realistic is that assumption? If it is not a realistic 
assumption, then maybe the 11,000 are illusory. It would seem 
to me we ought to be smart enough to be able to do that with 
108 aircraft out there.
    The second half of this part of the delta, part of it is 
where do you start with aircraft No. 4, and the second part is 
the learning curve, the slope of the learning curve, and 
whether it--do we have a chart that shows that again? We are 
just trying to figure out who is right. Is it 85 percent, as 
Lockheed Martin suggests? Is it 90 percent? Is it somewhere in 
between? We had a chart that we tried to do apples and apples 
and the one example we had was the AMP, the AMP process for the 
first 26 aircraft which showed a learning curve of about 84 
percent.
    In the middle, we are looking at--is there another chart on 
this particular issue, that maybe compares the 90 percent 
versus the 85 percent?
    Where do you come up with this idea of 85 percent? What is 
the basis of it? It is one thing if you are building a new 
aircraft. Maybe when you first built the C-5s, maybe 90 percent 
was realistic. Is it realistic for a modernization process for 
an old airplane, an older airplane?
    Mr. McQuien. In my opinion, it is realistic that we could 
achieve the 85 percent curve. We have looked at that from our 
manufacturing experts and we believe at Lockheed Martin that 
you can achieve that. In fact, the data that we brought to the 
table to try to demonstrate that is what you have put on the 
table here that says as we perform the AMP contract, we are 
beating 85 percent.
    In fact, the data that you have is a composite of the Dover 
line and the Travis line. You can see on that chart, you see a 
spike in there on set No. 6. That shows what the setback in 
learning was when you stood up a new production facility on the 
West Coast at Travis when we had been doing all----
    Senator Carper. Those folks out at Travis were bringing us 
down in Dover, weren't they?
    Mr. McQuien. No. They were working along, but there is 
always that setback. But they achieved an 84 percent across two 
sides. We certainly believe we are going to be able to achieve 
85 percent.
    But this doesn't seem to Lockheed Martin to be 
unreasonable. We are achieving something along 80 percent, or 
we have been arguing routinely that we should be able to 
achieve better than 80 percent on an F-22 in aircraft 
production. So in our minds, this is something that is doable.
    Senator Carper. OK. Dr. Coburn.
    Senator Coburn. Contracting with the Air Force isn't new to 
Lockheed Martin, is it? It is not new.
    Mr. McQuien. Oh, no.
    Senator Coburn. You all have lots of contracts with the Air 
Force?
    Mr. McQuien. Absolutely.
    Senator Coburn. In how many other contracts for aircraft or 
similar defense items have you encountered a Nunn-Lugar breach? 
I mean, Nunn-McCurdy breach?
    Mr. McQuien. I personally have not encountered it before, 
so I am not aware of whether or not Lockheed Martin overall has 
experienced this.
    Senator Coburn. OK.
    Mr. McQuien. Actually, we have experienced it at 
Aeronautics. There was a breach, I believe, on the F-35.
    Senator Coburn. OK. I guess the thing I am having trouble 
getting around is where I have seen this type of overhaul 
before, which is in Oklahoma City on the KC-135s. We know those 
hours, we know those costs, and we have seen tremendous 
improvement from the start of that program, even with variation 
in aircraft age and model and everything else, what we have 
seen is that.
    How is it that we get to the point that you built the 
airplane and you are the ones that did the mods and now you are 
bringing forth information and the experts are saying you are 
way off and we think we are obligated under law to say you are 
way off? How is it that those assumptions got so far apart?
    Mr. McQuien. I don't think I could answer that. I would say 
the Air Force has a tremendous amount more data than Lockheed 
Martin, so they are applying their estimating methodology and 
coming to this conclusion. I am applying mine and coming to 
this conclusion.
    What we tried to do when we submitted our proposal was to 
take that off the table by submitting a firm fixed-price 
proposal assuming the risk. If we were wrong, we would assume 
that risk. As was discussed, we have submitted the proposal for 
Lots 1 through 3 and we are in the process of negotiating that 
and hope to have that under contract by the end of February.
    Currently, the Air Force is accepting the fact that we will 
assume the risk for the difference between that 95,000 hours 
and their assumed 116,000.
    Senator Carper. Would you say that last sentence again?
    Mr. McQuien. We are currently proceeding to negotiate the 
contract for Lots 1 through 3, which we have premised our 
pricing on the 95,000 hours. The Air Force is negotiating with 
us on the basis that they will let us assume that risk, even 
though they disagree, they believe that the cost should be 
higher. If Lockheed Martin is willing to accept that risk, they 
are willing to let us.
    Senator Coburn. So is that something different than what 
you originally bid in terms of your assumption? In other words, 
we are not going to have an opener here for the basis on these 
hours? Is that what you are saying to us?
    Mr. McQuien. Yes. We are not going to have----
    Senator Coburn. Given the dispute over the hours, the Air 
Force is willing to negotiate with saying, OK, you take the 
hours, but if you do, then you eat it?
    Mr. McQuien. That is right.
    Senator Coburn. OK. So what about the other areas that are 
in dispute?
    Mr. McQuien. The engine? The engine, we would assume the 
same risk.
    Senator Coburn. Has the Air Force agreed to do that, as 
well?
    Mr. McQuien. For the first three lots, yes.
    Senator Coburn. Yes, but not forward?
    Mr. McQuien. Not forward on.
    Senator Coburn. OK.
    Mr. McQuien. Now let me say on the Air Force's behalf, we 
have been discussing this. We projected Lot 4 and on pricing 
based on the first three lots. At this stage of the game, we 
have not provided them the level of data that they have been 
looking for to enter into a contract. However, estimating the 
cost of the program from a prediction standpoint is different 
than what data is required to do a contract. We stand ready to 
go collect that data and provide it to the Air Force if they 
are willing to receive it.
    Senator Coburn. Well, as Ms. Wright said, if Lockheed 
Martin comes with a firm fixed-price offer with variable build-
outs and the Air Force gets to pick one, then the Truth-in-
Accountability and all the other rules that apply to the 
contracting go out the window because you are assuming risk, 
right?
    Mr. McQuien. I would agree. Yes.
    Senator Coburn. Yes. What is Lockheed Martin's position on 
that right now?
    Mr. McQuien. We stand ready, willing, and able to work with 
our customer to define those rates and go out and----
    Senator Coburn. Generate that----
    Mr. McQuien [continuing]. On a firm fixed----
    Senator Coburn. Here is the deal, guys. You can buy 20 over 
the next 3 years and 24 after that and 36 after that and here 
is the price, or you can buy two, two, two, two, two, 20, 20, 
20, and here is the price, or you can buy 24, 24, 24 with a 
ramp-up to that and here is the price, right?
    Mr. McQuien. We are prepared to deal with whatever the 
quantities are.
    Senator Coburn. Thank you.
    Senator Carper. I listened to what Dr. Coburn was asking 
and I listened to your answer. I just want to make sure we have 
this right. Is there some way you can wiggle out of this?
    Mr. McQuien. There is no way that I can get out of this at 
this point.
    Senator Carper. Let me ask you, did I hear you say that you 
are in a position to say, we believe it is 85 percent slope, 
this learning curve. We believe in 95,000 hours for the 
aircraft. And if we are wrong on Lots 1 through 3, we eat the 
price? We eat the cost?
    Mr. McQuien. Yes.
    Senator Carper. But on Lots 4 and beyond, what did you say?
    Mr. McQuien. We were supposed to do the same for Lots 4 and 
beyond, although without the supporting data, the Air Force has 
discounted that proposal and is assuming their projections for 
Lots 4 and beyond as opposed to our projections.
    Senator Carper. Between now and the end of the year, will 
you be working with the Air Force to firm up what you can do on 
Lots 4 through, whatever it is, 12?
    Mr. McQuien. I am certainly standing ready to do that.
    Senator Carper. Well, I would hope you would. OK.
    Mr. McQuien, just stand at ease for a moment if you will 
and I will turn back to Mr. Bolkcom and ask, we have been 
grilling Mr. McQuien here. You have been good enough to stay 
here. Do you have any observations, any thoughts on what you 
have heard in this back and forth?
    Mr. Bolkcom. I think that there is a lot of devil in the 
details of the actual negotiation. What Mr. McQuien is saying 
is encouraging, but it really comes down to how that contract 
is really negotiated on the specifics of the EPA, for instance. 
I agree from my very limited experience that is a standard sort 
of clause, but depending on how it is written, how restrictive, 
and the consequences, it could be an opener, as they say, or it 
could not. It really depends on the very detailed 
deliberations.
    I don't know as I understood Senator Coburn's questions 
about the variable rates because the way I understand the 
concerns about risk is that if we agree to any rate, and I 
think we need to agree on a rate, that there is not a lot of 
confidence in that because, of course, the Air Force doesn't 
have total control over its budget. And the concern is if, and 
pick a lot, the rate deviates from the agreement, that would 
provide Lockheed Martin a legitimate reason to renegotiate and 
that is when the Air Force and the taxpayer could get stuck 
with the risk of the delta between the----
    Senator Carper. Let me just ask, is it possible if in a 
year when the President's budget called for nine aircraft being 
RERP-ed and we ended up providing enough money to do six or 
seven, is there a way to lock in ahead of time with Lockheed 
Martin like a ``what if'' clause? This is, well, what if we 
only do six or seven, what is the price going to be, and to be 
able to do that with some certainty?
    Mr. Bolkcom. Certainly, anything can be negotiated. I would 
come back to the point I tried to make earlier, which is this 
is not a multi-year procurement contract, and I think I heard 
Mr. McQuien really emphasize it in his verbal statement. These 
are options that the government can exercise or pass on. So it 
seems to me, based on that understanding, that there isn't a 
lot of risk in the worst-case scenario.
    Senator Carper. All right. I think we are mercifully coming 
to the end. Mr. McQuien, I want to thank you and others that 
are here, Mr. Schultz and others who are here on behalf of 
Lockheed Martin. You have made a number of assertions here 
today, your willingness to commit--commitments to be willing to 
negotiate in order to reduce these deltas and to make 
assurances and assuming costs if things don't work out as maybe 
anticipated that are encouraging.
    As far as I know, you are honorable people and I am 
presuming you mean what you say and you are not trying to be 
deceitful or misleading in any way. But in order for us to have 
some comfort that these assurances are real, we need to be able 
to negotiate it out and the Air Force needs to be able to 
negotiate it out in a way that provides them comfort and, 
frankly coverage for when we come back on them for messing up, 
if there is a problem along the way.
    I came here from a markup in another committee, the 
Commerce Committee. Among the bills that we were marking up 
there was a bill on an obscure issue of ballast cleaning. When 
the ships empty out their ballast, something we do a little bit 
in the Navy, ships empty out their ballast and the kind of 
pollution problems that can cause, especially on coastal 
waters. We had some folks who were in favor of the bill that 
was before us. There was an alterative.
    I am sorry to say the two sides didn't spend nearly enough 
time working out their differences and we ended up with a blow-
up at the markup. Instead of being able to report out with 
unanimity legislation to address an environmental issue that 
needs to be addressed, we ended up reporting out something and 
maybe leaving some bad feelings, but not that we didn't do good 
public policy. We just didn't communicate well, and we are 
going to go to work between now and the time the bill comes to 
the floor to make sure that doesn't happen again.
    There is a lot riding on this, and it is not just the money 
that is involved, although that is important. We are fighting a 
couple of wars, and as you all know, we have people whose lives 
are at risk over there. We just had in Delaware this past week 
the mother of one of our Iraq victims who took her own life in 
despair. So the victims aren't entirely those that fall in Iraq 
or Afghanistan or other places around the world. It is their 
families who take the loss in some cases in deeply personal 
ways. So there is a whole lot here.
    The money that we waste on RERP-ing aircraft is money that 
we could spend buying MRAPs and getting them where they need to 
be. So there is a lot more than just the dollars to help us 
meet our needs around the globe. I am mindful of that and my 
colleagues are certainly mindful of that.
    We need big aircraft and we need them now and we need them 
to be dependable. As much as I like those Russians, I am not 
sure that I want to be depending on them for a long period of 
time to continue to provide these aircraft at anything 
approaching a reasonable rate.
    I will go back to what I said at the beginning. I came into 
this hearing thinking that if you can modernize C-5s, if you 
can actually build them at at least a 75 percent mission 
capable rate, and looking back at Secretary Payton's testimony, 
she seemed to think--and I think we are actually lifting the 
language from her--she indicated that there is nothing so far 
in the first three aircraft that have been RERP-ed that would 
suggest that they can't be at least 75 percent mission capable. 
But if you can deliver 108 aircraft at at least a 75 percent 
mission capable rate and you can do it with an assurance that 
the price will be along the lines that we talked about here, we 
would be foolish not to do that.
    There are two things we need. We need for you to be able to 
hit the 75 percent or higher mission capable rate, and we need 
to be able to bring them in at the cost that you say that you 
can and to assume risk that you are certain that you are 
willing to do that in ways that provide us comfort and provide 
the Air Force comfort.
    It is not all on you. It is not all on Lockheed Martin. A 
good deal of it is on the Air Force, as well.
    I would just say to the Air Force, I would say to Lockheed 
Martin, we are pleased that you have come here today. I know 
for Lockheed Martin this was not something you wanted to do and 
you do so really at some risk. I said to our Air Force folks 
before, Dr. Coburn, as well, if we have any hint of retribution 
because they showed up today and said what they did, there will 
be hell to pay. I just hope that is locker room talk that has 
nothing, no validity to it.
    We need to do this right and we need to get on with it, and 
I hope that whatever we have not been doing well the first part 
of this year, that we have learned from that and we learn maybe 
from some of the exchange that we have had in recent days, 
including today, that will enable us to get our act together 
and do what we need to do, what is in the best interest of our 
country.
    General Schwartz, I saw you had your hand up there and I 
don't know if you want to give the benediction or not, but----
    General Schwartz. Would you allow me--I know it is not the 
norm----
    Senator Carper. Please. I would ask you to be fairly brief, 
but go ahead.
    General Schwartz. Sir, I would only like to make a final 
comment to put in your and Senator Coburn's calculus and the 
others here on the Hill, that another piece of comfort is the 
fundamental question about what happens to C-17 production. 
This is the other issue that we didn't have a chance to 
address, and all I will say is that I am hopeful, as you are, 
that we get the outcome we all desire. That will be good. What 
do we do with C-17 production, and my concern is that bit of 
insurance might expire if we don't deal with that issue 
properly.
    Senator Carper. All right. We chose to focus on the need 
for big aircraft to provide strategic airlift. As I said 
earlier, I am a big fan of the C-17. That is not what this is 
about. The question is, can these folks from Lockheed Martin 
deliver what they said they will deliver, their kind of 
quality, dependability, and their price that they assert that 
they can. I am not from Missouri, but you guys show me. My hope 
is that you can and that you will have that opportunity.
    That having been said, this hearing is adjourned. Thank you 
all.
    [Whereupon, at 6:15 p.m., the Subcommittee was adjourned.]


                            A P P E N D I X

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