Air Force Aircraft: Preliminary Information on Air Force Tanker  
Leasing (15-MAY-02, GAO-02-724R).				 
                                                                 
GAO addressed the Air Force's plan to replace a portion of its	 
KC-135 aerial refueling tanker fleet with leased Boeing 767	 
aircraft. Although the Air Force has a long term requirement to  
replace its aging fleet of KC-135 tankers, the urgency of the	 
need in the short term is unclear. The Air Force stated that the 
leasing arrangement would allow it to acquire new tankers three  
years earlier than through its most recent procurement plan. This
would allow the Air Force to retire old, less capable KC-135s,	 
thus saving maintenance costs on those aircraft. Because the Air 
Force is still negotiating the lease details, it could not	 
provide information on the cost effectiveness of leasing aircraft
instead of purchasing them. Although GAO has not taken a position
on the overall policy of leasing versus purchasing defense	 
equipment, it found that from a cost standpoint-- leasing is more
expensive in the long run. Because the 767 aircraft is larger	 
than the KC-135, there will be some infrastructure improvement	 
costs, such as for building or modifying hangars, taxiways, and  
runway aprons. Additional costs would likely include simulators  
and project management. The depots have undertaken some measures 
to speed up KC-135 maintenance and repair times; however, the	 
extent to which these actions are helping or whether other	 
measures could be taken is unknown.				 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-02-724R					        
    ACCNO:   A03353						        
  TITLE:     Air Force Aircraft: Preliminary Information on Air Force 
Tanker Leasing							 
     DATE:   05/15/2002 
  SUBJECT:   Military aircraft					 
	     Military procurement				 
	     Comparative analysis				 
	     Cost effectiveness analysis			 
	     Leases						 
	     Military cost control				 
	     Aircraft maintenance				 
	     Maintenance costs					 
	     Boeing 767 Aircraft				 
	     KC-135 Aircraft					 

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GAO-02-724R
     
Page 1 GAO- 02- 724R Air Force Tanker Leasing

United States General Accounting Office Washington, DC 20548

May 15, 2002 The Honorable Carl Levin Chairman The Honorable John Warner
Ranking Minority Member Committee on Armed Services United States Senate

The Honorable John McCain United States Senate

Subject: Air Force Aircraft: Preliminary Information on Air Force Tanker
Leasing In your April 10, 2002, letter, you asked us to assess the Air
Force?s plan to replace a portion of its KC- 135 aerial refueling tanker
fleet with leased Boeing 767 aircraft. You asked us to assess

* aerial refueling tanker requirements;

* the cost- effectiveness of different options (lease, purchase, modify, or
extend the service life of the fleet);

* the policy for leasing major defense acquisition programs;

* the costs associated with infrastructure improvements; and

* the depot maintenance backlog. Recognizing that the full extent of this
analysis could not be done before the terms of the lease were negotiated,
you asked that we provide the preliminary results of our efforts by May 15,
2002. We provided an oral briefing accompanied by the enclosed slide
presentation to your staff on May 2, 2002. The briefing and this letter
respond to your request for preliminary information.

In February 2002, the Air Force requested information from the Boeing
Company and from Airbus of North America on the potential for leasing tanker
aircraft. The Air Force?s request recognized that in the aftermath of the
September 11, 2001, attacks on the World Trade Center and the Pentagon,
commercial aircraft manufacturers were faced with the prospect of reduced or
cancelled orders as a result of projected declines in air passenger travel.
According to the Air Force, this situation presented a possibly unique
opportunity to accelerate Air Force tanker replacement and to address the
increasingly acute challenges of maintaining the KC- 135 as a viable,
costeffective platform. In response to this emerging opportunity, Congress
included language in section 8159 of the fiscal year 2002 Defense
Appropriations Act allowing the Air Force to establish a multiyear pilot
program for leasing Boeing 767 aircraft.

GAO- 02- 724R Air Force Tanker Leasing Page 2 Congress also required the Air
Force to submit a report to the congressional defense

committees, at least 30 days before lease arrangements may commence,
outlining plans for implementation; describing expected savings, if any; and
comparing total costs of leasing with the costs of purchasing.

As we discussed at the May 2 briefing, we want to emphasize that the
attached presentation provides preliminary information that is based on a
short period of work. We relied extensively on data provided by the Air
Force and have not verified most of the data. Importantly, because the Air
Force is still negotiating with Boeing over the terms, including cost,
length of lease, and other issues, more current, definitive information is
not yet available. Because details of the lease are not finalized, we were
not able to carry out an independent cost analysis or reach final
conclusions on many aspects of the proposed lease. For example, to make a
meaningful cost- analysis, many assumptions would have been necessary on our
part concerning, among other aspects, lease details, aircraft basing plans,
retirement schedules for the KC- 135, and potential purchase price costs and
schedules. In this regard, a preliminary report by the Congressional Budget
Office (CBO), was provided on May 7, 2002, to Senator McCain. This report,
which was based on a number of CBO assumptions since lease negotiations are
still underway, concluded that a longterm lease of tanker aircraft would be
significantly more expensive than a direct purchase of such aircraft.

Despite these limitations, we were able to obtain some information on each
of the issues raised in your request. To address tanker issues and leasing
proposals, the Air Force provided briefings and data on the KC- 135 fleet, a
general outline of leasing proposals, its rationale, and KC- 135 depot
maintenance activity. We visited Air Mobility Command officials at Scott Air
Force Base. We discussed cost- benefit analysis and leasing issues with
Office of Management and Budget and Congressional Budget Office officials
and leasing issues with Boeing representatives. We coordinated our work with
the Department of Defense Office of Inspector General. We benefited from
work we already had under way for the House Armed Services Committee on
aerial refueling tanker requirements, and we relied on our 1996 work on
tanker requirements 1 and on leasing of assets by the federal government.

Summary

The preliminary information for the five areas you requested is presented
below. Where appropriate, we raise a number of issues based on our
preliminary work.

* Requirements. Although the Air Force has a long- term requirement to
replace its aging fleet of KC- 135 tankers, the urgency of the need in the
short term is unclear. The Air Force states that the leasing arrangement
would allow it to acquire new tankers 3 years earlier than through its most
recent procurement plan. This would allow the Air Force to retire old, less
capable KC- 135s, thus saving maintenance costs on those aircraft. According
to the Air Force, KC- 135 operations have increased significantly since
September 11, with aircraft flying 45 percent more than during the same
period in the

1 U. S. General Accounting Office. U. S. Combat Airpower: Aging Refueling
Aircraft Are Costly to Maintain and Operate, GAO/ NSIAD- 96- 160
(Washington, D. C.: Aug. 8, 1996).

GAO- 02- 724R Air Force Tanker Leasing Page 3 previous year. However,
tankers had not been a high Air Force priority, and

the Air Force had not planned to begin replacing the tankers until 2009. In
fact, in responding to our 1996 report, the Air Force said that with proper
maintenance and upgrades, the aircraft could be sustainable for another 35

years.

* Cost- effectiveness. Because the Air Force is still negotiating the lease
details, it could not provide information on the cost- effectiveness of
leasing

aircraft instead of purchasing them. However, a key consideration in
comparing these two options is that the appropriations act requires that
lease agreements for the aircraft shall not exceed 10 years. This will leave
a longterm (i. e., after the 10 year lease expires) shortfall of 100
aircraft that the Air Force must somehow replace to sustain its tanker
capacity. The cost of this replacement could be substantial and should be a
factor when comparing the costs of leasing versus purchasing. In addition,
although the act requires only a comparison of leasing and purchasing, there
are other possible options for the Air Force to consider, such as
modifications and upgrades to some existing KC- 135s.

* Policy of leasing major defense items. We have not taken a position on the
overall policy of leasing versus purchasing defense equipment; and such an
analysis would have to consider many issues in addition to cost, such as the
nature of the equipment, the criticality of the need, readiness impacts, and
industrial base issues. However, when we studied past leasing proposals, we
found that- from a cost standpoint- leasing is usually more expensive in the
long run. Our most closely related work has been on Navy proposals to lease
some ships. In three reports issued over several years, 2 we consistently
reported that leases would be more expensive than outright purchases. We
have also reported that in order to make good judgments on resource
allocation, decisionmakers need accurate comparisons of the relative
longterm affects of acquisition decisions. Operating leases could obscure
those comparisons. The Air Force, as required by Section 8159, is
negotiating this lease under terms and conditions consistent with the
criteria for an operating lease as defined in OMB Circular A- 11. Under an
operating lease, the Air Force would not be required to set aside funds for
the full term of the lease (as it would for a purchase). In addition, since
leasing would most likely be paid through the operation and maintenance
budget, the lease would not have to compete for procurement funding with
other Air Force and defense priorities.

* Infrastructure improvement costs. Because the 767 aircraft is larger than
the KC- 135, there will be some infrastructure improvement costs, such as
for building or modifying hangars, taxiways, and runway aprons. Additional
costs would likely include simulators and project management. The only
available estimate of such costs, provided by the Office of Management and
Budget in December 2001, involved one- time costs estimated at about $1.7
billion. In

2 U. S. General Accounting Office. Build and Charter Program for Nine Tanker
Ships, B- 174839 (Washington, D. C.: Aug. 15, 1973); Improved Analyses
Needed to Evaluate DOD?s Proposed Long- Term Leases of Capital Equipment ,
GAO/ PLRD- 83- 84 (June 28, 1983); and Defense Acquisitions: Historical
Analyses of Navy Ship Leases , GAO/ NSIAD- 99- 125 (June 25, 1999).

GAO- 02- 724R Air Force Tanker Leasing Page 4 recent discussions, Air Force
officials told us that the December estimate was

outdated and probably overstated but that they could not provide more recent
estimates. They said these costs will largely depend on where the new
aircraft would be based and the condition of those facilities. Basing
decisions have not yet been made.

* Depot maintenance backlog. We have only limited information on depot
maintenance issues. The oldest models of the KC- 135s are clearly expensive
to maintain and operate. Their mission capable rates are lower than those of
the rest of the fleet, and they spend increasingly long periods undergoing
periodic depot maintenance. The depots have undertaken some measures to
speed up their maintenance and repair times, but we do not know the extent
to which these actions are helping or whether other measures could be taken.

Additional Work We Will Carry Out

The Air Force is required to submit a report to the congressional defense
committees, at least 30 days before lease arrangements may commence,
outlining its plans for the lease and comparing the total costs of
purchasing versus leasing. As discussed with your staff on May 2, 2002, our
future work will focus on the adequacy of the case presented by the Air
Force to either lease tanker aircraft or take another approach. We will
provide our analysis of the Air Force?s study and will examine other options
for meeting the Air Force?s needs.

We met with Air Force officials to discuss the results of our work. They
subsequently provided the letter reproduced in Enclosure II, and we have
incorporated their comments in this letter and the enclosed slide
presentation where appropriate.

- - - - - - - We will send copies of this letter to the chairmen and ranking
minority members of the Committee on Armed Services, House of
Representatives, and the Defense Subcommittees of the Senate and House
Committees on Appropriations. We will also send a copy to the Chairman,
Subcommittee on Readiness, House Committee on Armed Services for whom we are
conducting a broader body of work in this area. This letter will also be
available at no charge on the GAO Web site at http:// www. gao. gov.

We appreciate this opportunity to be of assistance. If you or your staff
have any questions regarding the briefing or this letter, please contact me
at (202) 512- 4914 or William C. Meredith, Assistant Director, at (202) 512-
4275. Other key contributors to this review were Christine E. Bonham, Joseph
J. Faley, Kenneth W. Newell, Kenneth E. Patton, and Charles W. Perdue.

Neal P. Curtin, Director Defense Capabilities and Management

Enclosures

Enclosure I

Page 5 GAO- 02- 724R Air Force Tanker Leasing

Briefing for Senate Armed Services Committee, May 2002

1

Preliminary Information on AF Tanker Leasing Issues

Briefing for Senate Armed Services Committee May 2002

Enclosure I

Page 6 GAO- 02- 724R Air Force Tanker Leasing

2

Five Areas Highlighted in Committee Request

* Aerial refueling tanker requirements  Cost- effectiveness of acquisition
options

 Leasing arrangement  Purchase  Modification or service life extension of
existing fleet  Policy of leasing major defense acquisition programs  Cost
of infrastructure improvements and other

associated costs  Depot maintenance backlog

Enclosure I

Page 7 GAO- 02- 724R Air Force Tanker Leasing

3

Scope and Methodology

 Air Force (AF) officials provided us briefings and data  Current KC- 135
fleet statistics  General outline of leasing proposal and AF rationale for
leasing  Depot maintenance issues  There was not time to verify most data
provided by AF  Looked at completed and on- going GAO work related to these
issues

 Had work underway for House Armed Services Committee on tanker
requirements

 Visited Air Mobility Command at Scott Air Force Base  Met with officials
of Office of Management and Budget and Congressional

Budget Office to discuss cost- benefit analysis and leasing issues  Met
with Boeing representatives  Coordinated with Department of Defense
Inspector General office

Enclosure I

Page 8 GAO- 02- 724R Air Force Tanker Leasing

4

Scope and Methodology Limitations

 We were unable to do independent cost analysis or reach conclusions on
many aspects of the proposed lease, because

 Details of lease not finalized  Basing details not finalized  Would have
to make many assumptions - lease

costs and provisions, basing plan, retirement schedule for KC- 135s,
potential purchase price, costs and schedule

Enclosure I

Page 9 GAO- 02- 724R Air Force Tanker Leasing

5

Tanker Requirements

Enclosure I

Page 10 GAO- 02- 724R Air Force Tanker Leasing

6

Requirements AF Has 545 KC- 135 Tankers

Source: Air Force Photo E Models - 134

R Models - 411

Enclosure I

Page 11 GAO- 02- 724R Air Force Tanker Leasing

7

Requirements AF Leasing Proposal

 Lease 100 Boeing 767 Tanker/ Transport aircraft to replace 127 E Models of
KC- 135

 Boeing has developed this Tanker/ Transport version of 767 and marketed it
to militaries world- wide

 Italy and Japan have committed to acquire tanker  Deliveries would begin
to AF in FY 2006  AF is negotiating lease arrangement so that it will
conform to

legislation or will ask for legislative changes if it would make the leasing
arrangement more advantageous to the government

 Still in negotiation; details not known  Lease amount and leasing agent 
Provisions of lease  Maintenance arrangements

Enclosure I

Page 12 GAO- 02- 724R Air Force Tanker Leasing

8

Requirements AF Reasons for Leasing Arrangement

 ?Kick starts? recapitalization of tanker fleet  Leasing arrangement
allows replacement to start at

least 3 years sooner than purchase and acquire 100 aircraft about 6 years
sooner than purchase based on current AF procurement plans

 KC- 135 aircraft are old, need to be replaced  KC- 135E models are least
capable, most in need of

replacement  Replacement would avoid future maintenance costs

on KC- 135Es  Flying hours increased 45% in FY 02 compared to same

period in FY 01 (CONUS- based aircraft)

Enclosure I

Page 13 GAO- 02- 724R Air Force Tanker Leasing

9

Requirements KC- 135 Fleet Data

 134 E Models in inventory as of April 2002  All E Models are in reserve
component; active AF has more

capable R Models  First acquired - 1957  Average age - 41 years  AF
projects lifetime flying hours limit of 36, 000 hours for E

Models (39,000 for R Models)  AF says only a few KC- 135s would reach this
limit before

2040  As of 1995, majority of the fleet had between 12, 000 and

14, 000 flight hours  Fleet averaging about 300 hours per year since then

(CONUS- based aircraft)

Enclosure I

Page 14 GAO- 02- 724R Air Force Tanker Leasing

10

Requirements KC- 135 Fleet Data

 Mission Capable rates (FY 02 through March)  Active - 85%  Reserve R
Models - 77. 9%  National Guard R Models - 77. 8%  Reserve E Models - 70.
4%  National Guard E Models - 75. 5%  AF says it has not requested funds
for re- engining since 1993;

Defense Department and Congress have added funds to upgrade approximately 2
E Models per year to R Models at cost of about $29 million per aircraft

 AF estimates it will have 127 E Models to replace when leased 767s become
available; according to AF, this should provide similar refueling capacity

 AF estimates that by 2005, average number of non- available aircraft will
reach 206 of 545 KC- 135s

Enclosure I

Page 15 GAO- 02- 724R Air Force Tanker Leasing

11

Requirements Observations on Requirements

 There is an overall tanker capacity shortfall for 2 MTW (Major Theater
Wars) strategy, but shortfall not known for new strategy

 AF does not have current study of long- term tanker needs  Leasing would
replace, not add to capacity  Average age is high, but hours of use
relatively low - Air

National Guard plans only 270 flying hours per aircraft in FY 03; active AF
plans 349 flying hours

 E Models have old engines, less capacity, higher maintenance cost than R
Models

 Kosovo and Afghanistan operations supported with current fleet, but AF
worries about increasing risk of fleet- wide grounding as aircraft age

Enclosure I

Page 16 GAO- 02- 724R Air Force Tanker Leasing

12

Requirements Prior AF Plans for Replacing KC- 135s

 Urgency of replacement is not clear; AF says Sept 11 increased their
concern about age of fleet

 At the time of 1996 GAO report, AF planned to begin replacing KC- 135s
with new tankers in 2013

 In 2001, AF officials said start of replacement was moved up to 2009 with
some ?seed? money appearing in the budget beginning in 2005

 Limited funds requested in 2002 President?s budget to study replacements
alternatives; replacement tanker was not on the AF?s unfunded requirements
list until March 2002

 If need for improved capability is urgent, quickest solution may be to re-
engine and upgrade to R Models (approx. 2 year leadtime); AF says upgrade
does not address underlying issue of the aging aircraft fleet

Enclosure I

Page 17 GAO- 02- 724R Air Force Tanker Leasing

13

Requirements DOD Response to 1996 GAO Report

 Letter dated July 1, 1996, Office of the Secretary of Defense response to
draft of GAO/ NSIAD- 96- 160:

?? While the KC- 135 is an average of 35 years old, its airframe hours and
cycles are relatively low. With proper maintenance and upgrades, we believe
the aircraft may be sustainable for another 35 years.?

Enclosure I

Page 18 GAO- 02- 724R Air Force Tanker Leasing

14

Requirements Options for KC- 135E Modernization

 Re- engine and other modifications to upgrade E Models to R Models  AF
estimates cost to be $29 million per aircraft Are E Models worth investing
more money?  Purchase new tanker aircraft to replace E Models

 Cost unknown (for example, Boeing web page cites cost range for the 767
Tanker/ Transport of $150- 225 million, based on quantities, features, etc.)

Enclosure I

Page 19 GAO- 02- 724R Air Force Tanker Leasing

15

Requirements Options for KC- 135E Modernization

 Purchase used aircraft and convert to tankers  Cost and availability
unknown  Contract for refueling services to replace some

organic capability  Navy using contractor on small scale  Not clear
whether wider use of contractors is

feasible  Lease tanker aircraft as proposed

Enclosure I

Page 20 GAO- 02- 724R Air Force Tanker Leasing

16

Cost Effectiveness Analysis

Enclosure I

Page 21 GAO- 02- 724R Air Force Tanker Leasing

17

Need Detailed Data to Compare Cost Effectiveness Options

 Data not available yet; negotiations still on- going with Boeing

 Therefore, we have not done a cost- effectiveness analysis; however, CBO
provided an analysis to Sen. McCain in a May 7, 2002, letter showing
purchase to be the least expensive option

 AF must report to Congress before committing to lease  AF report required
to describe the terms and

conditions of proposed contracts and expected savings, if any, compared to
purchase

 AF can proceed with lease after Congress has its report for at least 30
days

Enclosure I

Page 22 GAO- 02- 724R Air Force Tanker Leasing

18

Requirements Sec. 8159 Changed Required Report

 Exempts AF from 10 U. S. C. 2401 and 2401a  Sec. 2401 generally requires
Secretary of a military department

to notify Congress of a lease of an aircraft or vessel with a term 5 years
or longer

 Sec. 2401 also requires DOD to provide a detailed description of the terms
of the lease and to justify entering into the lease rather than a contract
to purchase the aircraft or vessel

 Sec. 2401a requires a written determination that a lease of vehicles,
equipment, vessels, or aircraft for longer than 18 months is in the best
interest of the Government

 Section 8159, on the other hand, requires a report describing the terms
and conditions of proposed leasing contracts and expected savings, if any,
compared to purchase

Enclosure I

Page 23 GAO- 02- 724R Air Force Tanker Leasing

19

Cost Effectiveness Key Cost Considerations

 Independent analysis by GAO not possible without details of lease
arrangement, but there are several key considerations in cost effectiveness
analysis:

 How are 100 leased aircraft replaced at expiration, since AF has long-
term need for aerial refueling tankers?

 Will have to be re- leased, purchased at residual value, or replaced with
new aircraft

 How is that cost estimated?  Without replacing leased aircraft, impact on
tanker fleet is

considerable  Chart on next slide illustrates that tanker fleet would
shrink

starting in 2015 as leased tankers are returned, unless AF takes further
action

Enclosure I

Page 24 GAO- 02- 724R Air Force Tanker Leasing

20

Impact on AF Tanker Fleet When 767s Are Returned at End of Lease Period

0 100

200 300

400 500

600 700

2005 2006

2007 2008

2009 2010

20 11

2012 20

13 2014

2015 2016

2017 20

18 2019

2020 20

21 2022

B- 767 KC- 135 KC- 10

Shortfall as leases expire starting in 2015 Based on notional 767 leasing
plan and KC- 135E retirement plan; no AF plan available E Models are retired
as 767s

are delivered

Enclosure I

Page 25 GAO- 02- 724R Air Force Tanker Leasing

21

Cost Effectiveness Additional Cost Considerations

 What is useful life of a 767 Tanker?  Current tanker fleet used for 40+
years  What does AF use as purchase cost for comparison?

 Boeing information indicates purchase price of $150 to $225 million

 Price used would greatly impact comparison  Converting E Models to R
Models (which AF says is

feasible for about 100 of the 127 aircraft) at $29 million per aircraft
could probably be accomplished sooner than leasing aircraft

 Sec. 8159 does not require AF to consider this option

Enclosure I

Page 26 GAO- 02- 724R Air Force Tanker Leasing

22

Cost Effectiveness Some Cost Data

 OMB analysis based on December 2001 data from AF

 Total cost over life of program estimated at $26 billion in ?then- year?
dollars, not present value

 About $1. 7 billion of that amount would be incurred whether purchase or
lease (infrastructure, etc.)

 AF says these figures are outdated and overstated, but it will not have
more current data until negotiations and its analysis are done

Enclosure I

Page 27 GAO- 02- 724R Air Force Tanker Leasing

23

Cost Effectiveness Benefits to Consider

 Cost avoidance - difference between 767 operation and support costs and
KC- 135E projected costs

 No AF estimate available  Applies to lease or purchase  Having more
capable tankers in the fleet sooner

 Mission Capable rates would likely be higher  E Models replaced about 3-
6 years sooner than

purchase, within current budget projections  767s would have ability to
refuel AF, Navy, and

allied aircraft on same mission

Enclosure I

Page 28 GAO- 02- 724R Air Force Tanker Leasing

24

Policy of Leasing Major Equipment Items

Enclosure I

Page 29 GAO- 02- 724R Air Force Tanker Leasing

25

Policy Some Policy Considerations For Leasing

 GAO has not taken a position on the policy of leasing defense major
acquisitions

 We have looked at several proposals by the Navy to lease auxiliary ships
or acquire them with "incremental" funding

 In these Navy ship cases, we found leasing more expensive than purchase
when there was a long- term need for the asset

 In addition to costs, there are other issues that would have to be
considered in assessing policy (see next slide)

Enclosure I

Page 30 GAO- 02- 724R Air Force Tanker Leasing

26

Policy Other Issues In Leasing Defense Assets

 In addition to cost, there are many considerations involved in policy of
leasing major defense equipment, such as:

 Nature of equipment  Criticality of need  Timing and duration of need 
Operational and readiness issues  Industrial base issues

Enclosure I

Page 31 GAO- 02- 724R Air Force Tanker Leasing

27

Policy Criteria for Operating Leases

 OMB has specified budget scorekeeping criteria for using operating leases
(see next slide)

 Appropriations Act Sec. 8159, which establishes the leasing program, laid
out requirements which are consistent with OMB criteria

 OMB will have to decide whether AF leasing agreement with Boeing meets the
criteria

Enclosure I

Page 32 GAO- 02- 724R Air Force Tanker Leasing

28

OMB Criteria for Operating Lease

 Ownership of the asset remains with the lessor during the lease period,
and is not transferred to the government at or shortly after the end of the
lease period

 Lease does not contain a bargain- price purchase option  Lease term does
not exceed 75 percent of the estimated

economic lifetime of the asset  Present value of the minimum lease payments
over the life of

the lease does not exceed 90 percent of the fair market value of the asset
at inception

 Asset is a general purpose asset rather than being for a special purpose
of the government and is not built to unique specification for the
Government as lessee

 There is a private sector market for the asset

Enclosure I

Page 33 GAO- 02- 724R Air Force Tanker Leasing

29

Policy DOD Leasing Review Panel

 Established November 2001; headed jointly by Undersecretary for
Acquisition and Comptroller

 Reportedly, Panel was established to act like the Defense Acquisition
Board (DAB) on leasing proposals

 AF has met with Panel representatives to discuss leasing proposal

 AF must present its decision and supporting study to Panel before going
forward

 We were told the only leases now under consideration are for Boeing 767s
and 737s (737s were included in same provision of Appropriation Act)

Enclosure I

Page 34 GAO- 02- 724R Air Force Tanker Leasing

30

Associated Costs

Enclosure I

Page 35 GAO- 02- 724R Air Force Tanker Leasing

31

Associated Costs Not Much Data Available Yet

 Specifics on infrastructure costs depend on AF basing plans, which AF has
not completed

 Only source is OMB December 2001 estimate  Military Construction - $1. 1
billion  Other Costs (spare parts, simulators, and program

management costs) - $610 million  These costs would be incurred for lease
or purchase,

but not for modification of current fleet

Enclosure I

Page 36 GAO- 02- 724R Air Force Tanker Leasing

32

Associated Costs Other Potential Associated Costs

 Other costs that AF says it is considering in its analysis:

 Training - no estimate currently available  Personnel - AF says 767 crew
size is same as for

KC- 135; personnel costs could be a ?wash?  Disposal of KC- 135Es

Enclosure I

Page 37 GAO- 02- 724R Air Force Tanker Leasing

33

Depot Maintenance

Enclosure I

Page 38 GAO- 02- 724R Air Force Tanker Leasing

34

Depot Maintenance KC- 135s Are High Maintenance

 AF study reported total costs to operate and maintain a KC- 135E was $4. 6
million in FY 2001, vs. $3. 6 million for R Models per aircraft

 Average days in depot increased  Fleet- wide increased from 158 days in
?91 to about

400 days in FY ?01  E Models averaged 428 days in FY ?01  Depot ?work
package? doubled from 1991 to 2000 -

from 16, 000 labor hours to 32, 000  AF recently reported over 100 KC- 135s
in depot

simultaneously

Enclosure I

Page 39 GAO- 02- 724R Air Force Tanker Leasing

35

Depot Maintenance KC- 135s Maintained at Three Depots

 Tinker AFB in Oklahoma City, private contractors in Birmingham, AL and San
Antonio, TX perform depot maintenance

 AF told us that Oklahoma City is working two shifts and two contractor
facilities are each working three shifts

 We do not know how long these facilities have worked multiple shifts or
whether these extra shifts are fully staffed

Enclosure I

Page 40 GAO- 02- 724R Air Force Tanker Leasing

36

Depot Maintenance AF Efforts to Reduce Depot Time

 AF told us that depots have made some improvements that should reduce
depot time in the short run; for example,

 Increased labor at all sites  Increased number of major structural
repairs

done concurrently during depot work  Reflowed critical path  In long run,
AF believes aging planes will require

more depot time

GAO- 02- 724R Air Force Tanker Leasing Page 41

Enclosure II

Air Force Response to GAO Preliminary Analysis

GAO- 02- 724R Air Force Tanker Leasing Page 42

Enclosure II (350166)
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