Depot Maintenance: Opportunities to Privatize Repair of Military Engines
(Chapter Report, 03/05/96, GAO/NSIAD-96-33).

In recent years, Congress has expressed continuing interest in the
Pentagon's management of its $15 billion depot maintenance program. One
area of particular interest has been the allocation of depot maintenance
workload between the public and private sectors, including various
privatization initiatives. This report addresses the depot maintenance
workload mix for an essential military commodity--gas turbine engines.
GAO discusses (1) the rationale supporting the continued need for DOD to
be able to repair engines at its own maintenance depots, (2)
opportunities to privatize additional engine workloads, and (3) the
impact that excess capacity within DOD's depot system has on the
cost-effectiveness of decisions to privatize additional workloads.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  NSIAD-96-33
     TITLE:  Depot Maintenance: Opportunities to Privatize Repair of 
             Military Engines
      DATE:  03/05/96
   SUBJECT:  Cost effectiveness analysis
             Combat readiness
             Privatization
             Military cost control
             Base closures
             Aircraft engines
             Aircraft maintenance
             Repair costs
             Base realignments
             Military downsizing
IDENTIFIER:  F-108 Engine
             TF-39 Engine
             TF-33 Engine
             F-117 Aircraft
             C-17 Aircraft
             Boeing 757 Aircraft
             F-4 Aircraft
             KC-10 Aircraft
             T-700 Engine
             T-63 Engine
             T-56 Engine
             501K Engine
             LM-2500 Engine
             CFM-56 Engine
             TF-34 Engine
             
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Cover
================================================================ COVER


Report to Congressional Committees

March 1996

DEPOT MAINTENANCE - OPPORTUNITIES
TO PRIVATIZE REPAIR OF MILITARY
ENGINES

GAO/NSIAD-96-33

Depot Maintenance

(709042, 709158)


Abbreviations
=============================================================== ABBREV

  BRAC - Base Closure and Realignment Commission
  DOD - Department of Defense
  GAO - General Accounting Office

Letter
=============================================================== LETTER


B-262225

March 5, 1996

Congressional Committees

In recent years, Congress has dealt extensively with issues related
to the cost-effectiveness of the Department of Defense's (DOD) depot
maintenance program, the mix of depot maintenance workload between
the public and private sector, and the potential for privatizing
additional depot maintenance workloads.  This report addresses the
depot maintenance workload mix for a key mission essential military
commodity--gas turbine engines. 

It discusses (1) the rationale supporting the continued need for DOD
to maintain the capability to repair engines at its own maintenance
depots, (2) opportunities to privatize additional engine workloads,
and (3) the impact excess capacity within DOD's depot system has on
the cost-effectiveness of decisions to privatize additional
workloads. 

As agreed with your staff, we are addressing this report to you
because of your Committees' interest in these issues.  We are also
sending copies to the Chairmen and Ranking Minority Members, Senate
Committee on Governmental Affairs and House Committee of Government
Reform and Oversight; the Director, Office of Management and Budget;
and the Secretaries of Defense, the Air Force, the Army, and the
Navy. 

Please contact me at (202) 512-8412 if you have any questions.  Major
contributors to this report are listed in appendix III. 

David R.  Warren
Director, Defense Management Issues

List of Committees

The Honorable Strom Thurmond
Chairman
The Honorable Sam Nunn
Ranking Minority Member
Committee on Armed Services
United States Senate

The Honorable Ted Stevens
Chairman
The Honorable Daniel K.  Inouye
Ranking Minority Member
Subcommittee on Defense
Committee on Appropriations
United States Senate

The Honorable Floyd Spence
Chairman
The Honorable Ronald Dellums
Ranking Minority Member
Committee on National Security
House of Representatives

The Honorable C.  W.  Bill Young
Chairman
The Honorable John P.  Murtha
Ranking Minority Member
Subcommittee on National Security
Committee on Appropriations
House of Representatives



EXECUTIVE SUMMARY
============================================================ Chapter 0


   PURPOSE
---------------------------------------------------------- Chapter 0:1

In recent years, the Defense authorization and appropriations
committees have had continuing interest in the Department of
Defense's (DOD) management and operations of its $15 billion depot
maintenance program.  One area of particular interest has been the
allocation of depot maintenance workload between the public and
private sectors, including various privatization initiatives.  As a
part of our continuing work on these issues, GAO looked at the
potential for privatizing depot repair of additional military engines
with commercial counterparts.  More specifically, GAO addressed the
following:  (1) the rationale supporting the continued need for DOD
to maintain the capability to repair engines at its own depots, (2)
whether there are opportunities to privatize additional engine
workloads, and (3) the impact excess capacity within DOD's depot
system has on the cost-effectiveness of decisions to privatize
additional workloads. 


   BACKGROUND
---------------------------------------------------------- Chapter 0:2

The Fiscal Year 1995 Department of Defense Appropriations Conference
Report 103-747 required DOD to report to the House and Senate
Committees on Appropriations about the potential for expanding
competition for commercial engines as well as other commercial
variants operated by the military.  In this report, GAO refers to
these engines as commercial counterparts.  The conference report
noted that DOD could realize substantial savings by expanding
competition for depot maintenance of equipment common to the military
and industry--more specifically, commercially developed airline
turbine engines.  On March 14, 1995, DOD gave the House and Senate
Appropriations Committees its report.\1

The report concluded that DOD needs maintenance capability at its own
facilities to manage risk as it relates to major regional conflict
readiness and sustainability requirements.  The report also stated
that DOD's approach for achieving this objective is the operation of
a certain level of capability in military depots--capability that DOD
refers to as "core." The main premise behind core is that DOD should
maintain a controlled source to meet readiness and sustainability
requirements of the weapon systems that are needed to support Joint
Chiefs of Staff contingency scenarios.  The report concluded that the
current mix of engine depot maintenance workload for 17 military
engines with commercial counterparts is consistent with (1) the DOD
core concept, (2) sound business practices, and (3) the title 10
U.S.C.  requirement that not more than 40 percent of depot
maintenance work be performed by other than federal government
employees. 


--------------------
\1 Maintenance of Military Turbine Engines With Civilian Engine
Counterparts. 


   RESULTS IN BRIEF
---------------------------------------------------------- Chapter 0:3

The rationale and requirement for maintaining some capability in the
public depot system derive both from statutory requirements and from
the recognition that some public depot capability is needed to
mitigate cost and readiness risks where private sector capabilities
are limited or inadequate.  DOD is reevaluating its depot capability
requirements with a view toward privatizing additional depot
maintenance workloads. 

Private sector capabilities generally make commercial counterpart
engines ideal candidates for privatization.  However, DOD has about
45 percent excess capacity for engine depot maintenance--a very
inefficient condition that increases the cost of all work done by
these depots.  Thus, additional privatizations of commercial
counterpart engines at a time of decreasing depot workload--without
first decreasing the excess capacity in DOD's depots--would increase
the per-unit repair cost of work remaining in DOD's depot system. 

The Base Closure and Realignment Commission recommendation to realign
Kelly Air Force Base and close the San Antonio Air Logistics Center,
including one of the largest DOD engine overhaul depots, offers DOD
the opportunity to reduce excess engine capacity, improve the
cost-effectiveness of remaining public sector engine repair
facilities, and privatize some additional commercial counterpart
engine work.  However, the administration's decision to keep the
depot open by privatizing its workload in place may limit or preclude
any reduction in public depot excess capacity and associated overhead
costs. 

It is not yet known how DOD plans to implement its privatization
initiatives, including the privatization-in-place of the San Antonio
depot, or how it will address statutory provisions such as the 10
U.S.C.  2469 provision requiring competitions that include public
depots before privatizing depot maintenance workload valued at $3
million or more. 


   PRINCIPAL FINDINGS
---------------------------------------------------------- Chapter 0:4


      LEGAL REQUIREMENTS CONTAIN
      BASIC RATIONALE FOR
      MAINTAINING PUBLIC DEPOTS
-------------------------------------------------------- Chapter 0:4.1

Several statutes influence DOD's allocation of depot maintenance
workloads--including engines--between the public and private sectors. 
First, 10 U.S.C.  2464 states that it is essential for DOD to
maintain a ready and controlled source for mission-essential engine
maintenance by establishing depot-level repair capability within its
own depot system.  DOD defines almost all of its engine maintenance
capability as mission essential or "core." However, the Secretary of
Defense may convert core engine workloads to contractor performance
under Office of Management and Budget Circular A-76 procedures, but
only in accordance with DOD criteria for determining that government
performance of the work is no longer required. 

Second, 10 U.S.C.  2466 prohibits the military departments from using
more than 40 percent of any fiscal year's depot-level maintenance
funds to contract workload to the private sector.  DOD reports that
only about 28 percent of its depot maintenance workload is currently
contracted out.  Accordingly, there are opportunities to privatize
additional work without breaching the 60/40 limits.  Further, since
the commercial counterpart engine workload currently maintained in
public depots represents only about 2 percent of the overall depot
maintenance workload dollars, additional privatization of this
workload would have little impact on the overall public-private
sector mix. 

Finally, 10 U.S.C.  2469 provides that DOD may not move depot-level
maintenance workload valued at $3 million or more from a public depot
to a contractor without competing the workload among public and
private entities.  It is not yet known whether DOD's plan to
privatize depot workloads at closing installations will rely on
competitive procedures that include public depots. 


      PRIVATIZATION OPPORTUNITIES
      FOR MILITARY ENGINES WITH
      COMMERCIAL COUNTERPARTS
-------------------------------------------------------- Chapter 0:4.2

GAO surveyed private sector companies to determine their interest in
repairing military engines with commercial counterparts that are
currently repaired in DOD depots and their capability to do the job. 
The survey identified interest in the maintenance workload for all 10
military commercial counterpart engines that DOD has or is
considering developing depot maintenance capability to support.  In
most cases, the private companies stated they had sufficient capacity
to absorb the military workload in their existing facilities.  The
existence of multiple private sources for much of the commercial
counterpart engine workload would mitigate cost and readiness risks
of outsourcing. 

GAO believes that seven engines--T56, 501K, F108/CFM56, T63, T700,
TF39, and LM2500--are excellent candidates for privatization.  To
determine the cost-effectiveness of privatization and comply with the
statute regarding the transfer of depot maintenance workload to the
private sector, those workloads would have to be subjected to a
public-private competition.  However, the recent decision to
privatize-in-place the San Antonio Air Logistics Center--a depot
where 60 percent of its workload is for engines and engine
components--will greatly impact the cost-effectiveness of privatizing
additional engine workloads. 

The TF39 aircraft engine and its ship propulsion version, the LM2500
engine, have high commonality in parts and repair processes. 
Currently, two military services operate separate repair facilities
for these engines.  This is the only remaining turbine engine that is
overhauled in two different military depots.  Further, three private
repair activities reported interest and capability to repair the
LM2500.  All three are repairing the LM2500 for commercial industry. 
Combined, they reported having enough reserve capacity to perform
almost six times the Navy's projected fiscal year 1997 workload. 


      EXCESS PUBLIC DEPOT CAPACITY
      AFFECTS PRIVATIZATION
      OPPORTUNITIES
-------------------------------------------------------- Chapter 0:4.3

A public sector depot with thousands of employees incurs fixed
overhead costs, including its share of base support costs, in the
range of $50 to $100 million annually.  When a military depot has
excess capacity, moving some of its workload into the private sector
can substantially increase each unit's share of overhead expense at
the depot and therefore increase the unit cost for all work done by
that facility.  Under these conditions, it is unlikely that
privatizing additional workloads would be cost-effective--without
first addressing DOD's excess capacity problem. 

The Base Closure and Realignment Commission's recommendation to close
the San Antonio Air Logistics Center, including the depot, gave DOD
an opportunity to improve the cost-effectiveness of its depot
activities.  By consolidating military unique engine repair at
remaining military depots, excess capacity could be reduced,
decreasing overhead rates and reducing engine repair costs.  Based on
data provided by the Air Force, GAO estimates that consolidating
engine workload from the closing engine depot could reduce the
overhead rate for engine workload at the remaining Air Force engine
depot by as much as $10 per hour.  However, the administration's
privatization-in-place plan will likely limit the cost savings that
could otherwise be achieved. 


   MATTER FOR CONGRESSIONAL
   CONSIDERATION
---------------------------------------------------------- Chapter 0:5

Congress may wish to require DOD to report its plan for
privatizing-in-place the engine workload at the San Antonio Air
Logistics Center.  The plan should include DOD's strategy for
determining the source of repair for engine workloads currently at
the San Antonio Air Logistics Center and a discussion of the
cost-effectiveness of various repair alternatives, including
transferring the workload to other military depots and
privatization-in-place. 


   RECOMMENDATIONS
---------------------------------------------------------- Chapter 0:6

GAO recommends that the Secretary of Defense: 

  -- Require the Secretary of the Air Force to assess the
     cost-effectiveness of various alternatives for allocating engine
     workload from the San Antonio Air Logistics Center between the
     public and private sectors, including privatization-in-place and
     transferring work to other military depots. 

  -- Develop a plan for reducing excess engine capacity and improving
     the utilization of military depots not identified for closure. 
     This plan should address how DOD intends to (1) comply with the
     existing law regarding the use of competitive procedures that
     include public and private entities when changing depot
     maintenance workloads to the private sector and (2) reduce
     excess engine capacity at other DOD engine depots in light of
     planned privatization. 

  -- Require the Secretary of the Navy to conduct a public-private
     competition for the LM2500 engine workload. 


   AGENCY COMMENTS
---------------------------------------------------------- Chapter 0:7

DOD officials reviewed a draft of this report and provided official
oral comments, which have been incorporated as appropriate.  DOD
generally concurred with GAO's identification and analysis of (1)
factors influencing the allocation of depot maintenance engine
workload between the public and private sectors and (2) opportunities
for privatizing military engines with commercial counterparts.  DOD
generally concurred with GAO's recommendations.  They noted that DOD
is developing a plan to outsource additional depot maintenance
workload, including engines, and that this plan is expected to be
completed in early 1996. 

In this regard, section 311 of the Department of Defense
Authorization Act for Fiscal Year 1996, Public Law 104-106 (Feb.  10,
1996) requires DOD to develop and submit to the Senate Committee on
Armed Services and the House National Security Committee by March 31,
1996, a comprehensive policy on the performance of depot-level
maintenance and repair for the Department.  The act provides that
this policy should include DOD's identification of core depot-level
maintenance requirements in accordance with 10 U.S.C.  2464. 


INTRODUCTION
============================================================ Chapter 1

With over 54,000 engines to support its 17,400 aircraft, the
Department of Defense (DOD) is the world's largest owner of aircraft
and aircraft engines.  During fiscal years 1992 and 1993, the total
cost for maintaining these engines was about $1.1 billion of the $13
billion depot maintenance program.\1 Depot repair of engines and
engine components requires more funding than any other commodity that
is not an end-item weapon system, such as an aircraft or ship. 
Engine overhaul costs represent about 8.5 percent of the total depot
maintenance budget. 

Military engines are maintained and overhauled in an extensive
network of military service depots, private sector engine
manufacturers, and private sector repair activities, such as airlines
and independent repair service companies.  Of the 51 types of
military engines used today, 28 are generally repaired in military
depots and 23 almost exclusively by contractors.  The engines
maintained by the private sector generally have commercial as well as
military applications.  Generally, commercial counterpart engines
repaired by the private sector support fewer aircraft and require
less inventory than engines that are maintained in military depots. 
In recent years, private sector firms have sought more of the
military engine workload.  At the same time, excess capacity has also
been increasing in military depots, as both numbers of military
aircraft and engines as well as engine overhaul requirements have
declined. 

As a part of this review, we analyzed DOD's approach to allocating
engine depot repair between the public and private sectors.  Engine
maintenance has been the subject of recent congressional interest. 
Additionally, engines are DOD's largest and most costly commodity
group.  Further, one category of engines--those with commercial
counterparts--are either identical or very similar to engines used in
the private sector.  These characteristics enhance their potential
cost-effectiveness as candidates for privatization.  As a part of our
analysis, we reviewed a March 1995 DOD report to Congress on the
maintenance of military turbine engines with civilian engine
counterparts. 


--------------------
\1 This includes the cost of material and parts used in the repair
process.  Material costs for engines generally constitute a larger
share of the total repair costs than the material costs for other
commodities.  The $13 billion does not include the labor costs or the
parts and materials required to accomplish major upgrades and
modifications.  The $2 billion in labor costs associated with these
modifications and upgrades is often considered to be a part of depot
maintenance, even though the funding is covered in DOD procurement
accounts rather than operation and maintenance accounts where most
depot maintenance funding is included. 


   BACKGROUND
---------------------------------------------------------- Chapter 1:1

Depot maintenance involves repairing, overhauling, modifying, and
upgrading defense systems and equipment.  Depot maintenance also
includes limited manufacture of parts, technical support,
modifications, testing, and reclamation as well as software
maintenance.  DOD estimates that its depot repair facilities and
equipment are valued at over $50 billion.  Thousands of private
sector firms also do depot-level repair.  Appendix I provides a brief
overview of the engine depot repair process, using a flow diagram and
pictures. 

Depot-level maintenance is the third of the three maintenance levels
used by the military services.\2 Depot maintenance activities have
historically had more extensive technical capability than the lower
levels--in terms of the facilities, equipment, and trained personnel. 
However, various programs initiated in recent years by the military
have resulted in blending some maintenance activities among the
various levels.  For example, the Air Force implemented a two-level
maintenance concept that significantly reduced the second level of
maintenance at the operational unit for some systems, including
engines.  Under this concept, faulty engine components are shipped
from the unit to Air Force depots, including the two engine repair
depots.  The work done in the two-level shops is considered
depot-level repair and is performed by a combination of military,
civilian, and contractor personnel. 


--------------------
\2 The first is organizational-level maintenance, where members of
the operational military unit make functional checks and adjustments,
and faulty parts are serviced or replaced.  The second is
intermediate-level maintenance, where military personnel perform more
extensive repairs--many of which require a shop environment. 


   DOD ENGINES WITH COMMERCIAL
   COUNTERPARTS
---------------------------------------------------------- Chapter 1:2

DOD has depot-level capability to repair 28 different types of large
turbine engines.  Most of these engines are used to power DOD's fleet
of fixed- and rotary-wing aircraft.  Three exceptions are the General
Electric LM2500 ship engine, the Lycoming AGT1500 M-1 tank engine,
and the Allison 501K, which is used for electrical power generators
on ships.\3 DOD also organically repairs many smaller gas turbine
engines that provide auxiliary power to aircraft and ground support
equipment.  DOD contracts for most of the repair of 23 other engines,
which power such aircraft as the KC-10, T-38, and C-9. 

Most of the 28 engines maintained in DOD's public depots are
military-unique and not used in the commercial market place. 
Military-unique engines include the F100 engine, which powers the
F-15 and F-16 aircraft, and the F404 engine, which powers the F/A-18
and F-117A aircraft.  However, 10 of the 28 engines maintained in DOD
depots are comparable to engines used in the private sector.  In
addition, the Air Force is considering developing repair capability
for the F117 engine, which powers the C-17 aircraft and is currently
supported by the manufacturer.  It is similar to the commercial
engine that powers the Boeing 757 aircraft. 

Table 1.1 shows the 11 military engines with commercial counterparts
for which DOD has or is considering developing depot maintenance
capability. 



                               Table 1.1
                
                   Comparable Military and Commercial
                                Engines


                            Original
                            engine
Engine        Application   manufacturer  Engine        Application
------------  ------------  ------------  ------------  --------------
T56           C-130         Allison       501D          Lockheed
              E-2                                       L-100
              P-3                                       L-188
                                                        Convair
                                                        CV-580

501K          Shipboard     Allison       501K          Industrial
              electrical                                power
              power                                     supply

T63           H-58          Allison       250           Bell 206


F108/CFM56    KC-135        CFM           CFM56         Boeing
              E-6           Internationa                737
                            l

TF39          C-5A/B        General       CF6           Boeing
                            Electric                    747

T700          H-60          General       CT7           Bell 214ST
              H-64          Electric                    Saab 340

LM2500        Cruisers      General       LM2500        Industrial
              Frigates      Electric                    power
              Destroyers                                supply

TF34          A-10          General       CF34          Canadair
              S-3           Electric                    601

TF33          KC-135        Pratt &       JT3D          Boeing
              B52-H, C141   Whitney                     707

F117          C-17          Pratt &       PW2000        Boeing
                            Whitney                     757

T53           H-1           Lycoming      T-53-13B      Bell 205a

----------------------------------------------------------------------
In most cases where it repairs a military engine with a commercial
counterpart, DOD owns a significant portion of the engines in
existence.  For example, DOD has 25 percent of the F108/CFM56
engines, 54 percent of the T56, 62 percent of the TF33/JT3D, 78
percent of the TF34/CF34, and 95 percent of the T53. 


--------------------
\3 The Lycoming AGT1500 tank engine does not have a commercial
counterpart; therefore, we did not include it in our review. 


   DECLINING ENGINE DEPOT
   MAINTENANCE REQUIREMENTS
---------------------------------------------------------- Chapter 1:3

DOD depot maintenance workload requirements, including engines, have
decreased from about 202 million direct labor hours in fiscal year
1987 to about 100 million direct labor hours projected for fiscal
year 1996.  Since geopolitical tensions eased in the late 1980s,
changes in military strategy, reductions-in-force structure, and
improved engine reliability have all contributed to decreased demand
for engine repair requirements.  The change in war-planning scenarios
from a massive, protracted war in response to a Soviet invasion to
shorter duration contingency scenarios also reduced the anticipated
surge requirement for depot maintenance. 

Similarly, reductions in aircraft inventory have also reduced
maintenance requirements.  Between fiscal years 1985 and 1994, the
services reduced their aircraft inventories from about 24,500 to
17,400.  For example, the Air Force reduced its F-4 aircraft
inventory from 1,597 to 61.  Depot overhauls of the J79 engine, which
supports the F-4 aircraft, also declined from over 500,000 direct
labor hours in fiscal year 1986 to an estimated 0 for fiscal year
1997.  Further reductions in aircraft inventories and associated
engine repair requirements are expected as the services continue to
phase out older weapon systems. 

In addition, improvements in technology have increased the
reliability of turbine engines, reduced the number of depot-level
overhauls, and reduced depot-level maintenance requirements.  For
example, three different engines have powered the KC-135 tanker
aircraft.  The first KC-135s were fitted with the J57 engine, which
was later replaced with the TF33 engine.  The Air Force is now
replacing most of these engines with the F108.  The F108 engine, with
an unscheduled removal rate per
1,000 flying hours of 0.10, has 91 percent fewer unscheduled engine
removals than the J57, which has an unscheduled engine removal rate
of 1.16, and 79 percent fewer than the TF33, which has an unscheduled
removal rate of 0.48. 

Similar engine reliability improvements have been achieved through
modifications of other engines.  For example, various upgrades over a
20-year period have increased the periods of time between scheduled
overhauls for the F100 from 2 to 8 years. 


   DOWNSIZING ENGINE REPAIR DEPOTS
---------------------------------------------------------- Chapter 1:4

In response to declining requirements and criticisms for maintaining
duplicate sources of repair, the military services have decreased the
number of depots with depot engine repair capability.  For example,
the number of depots repairing turbine engines decreased from eight
to six between 1990 and 1994.  Additionally, DOD consolidated repair
activities for most engine types at only one depot.  As shown in
table 1.2, 11 engine types were maintained at two or more depots in
1990.  With only one exception, DOD now has only one organic
depot-level repair site for each military engine.  However, some
engines are repaired both by a military depot and one or more private
sector contractors. 



                               Table 1.2
                
                  Source of Depot Repair for Selected
                                Engines


Engine model      Weapon system     1990              1994
----------------  ----------------  ----------------  ----------------
T56               C-130             San Antonio Air   San Antonio Air
501K\a            E-2               Logistics         Logistics Center
                  P-3               Center,
                                    Alameda Naval
                                    Aviation Depot,
                                    and
                                    Norfolk Naval
                                    Aviation Depot

TF30              F-111             Oklahoma City     Oklahoma City
                  F-14A             Air Logistics     Air Logistics
                                    Center            Center
                                    and Norfolk
                                    Naval Aviation
                                    Depot

J79               F-4               Cherry Point      Cherry Point
                                    Naval Aviation    Naval Aviation
                                    Depot and         Depot
                                    Oklahoma City
                                    Air Logistics
                                    Center

J52               A-6               Jacksonville      Jacksonville
                  A-4               Naval Aviation    Naval Aviation
                                    Depot and         Depot
                                    Alameda Naval
                                    Aviation Depot

J57               B-52G             Oklahoma City     Phased-out
                  NC-135A           Air Logistics
                                    Center
                                    and Norfolk
                                    Naval Aviation
                                    Depot

TF41              A-7               Oklahoma City     Phased-out
                                    Air Logistics
                                    Center
                                    and Jacksonville
                                    Naval Aviation
                                    Depot

T58               H-1               Cherry Point      Cherry Point
                  H-3               Naval Aviation    Naval Aviation
                                    Depot and         Depot
                                    North Island
                                    Naval Aviation
                                    Depot

T64               H-53              Cherry Point      Cherry Point
                                    Naval Aviation    Naval Aviation
                                    Depot and         Depot
                                    North Island
                                    Naval Aviation
                                    Depot

F404              F-18              Jacksonville      Jacksonville
                                    Naval Aviation    Naval Aviation
                                    Depot and         Depot
                                    North Island
                                    Naval Aviation
                                    Depot

F110              F-15/16           Oklahoma City     Oklahoma City
                  F-14              Air Logistics     Air Logistics
                                    Center and        Center
                                    Norfolk Naval
                                    Aviation Depot

TF39              C-5A/B            San Antonio Air   San Antonio Air
LM2500\b          Cruisers          Logistics Center  Logistics Center
                                    and               and
                                    North Island      North Island
                                    Naval Aviation    Naval Aviation
                                    Depot             Depot
----------------------------------------------------------------------
\a The 501K is a shipboard generator version of the T56/501D engine. 

\b The LM2500 is a shipboard propulsion version of the TF39/CF6
engine. 

These workload consolidations began in 1990 as part of the DOD
management review process and subsequent Base Closure and Realignment
Commission (BRAC) decisions to close aviation depots.  Specifically,
Defense Management Report Decision 908 initially called for $3.9
billion in depot cost reductions over a 5-year period, but the target
savings were later increased to $6.4 billion over a 7-year period. 
Efforts to achieve savings included consolidation, interservicing,
and competitions between government depots and the private sector. 
Some of these efforts were superseded by the 1993 BRAC decision to
close Alameda Naval Aviation Depot.  For example, a single site for
handling the T56 engine core workload was to be decided by a
public-public competition between Alameda Naval Aviation Depot and
San Antonio Air Logistics Center.  Following the BRAC decision to
close Alameda, the Navy transferred its T56/501K workload to the San
Antonio Air Logistics Center. 

Despite these initiatives, DOD's engine depot repair facilities
continue to have significant excess capacity.  During the 1995 BRAC
process, DOD's Joint Cross Service Group for Depot Maintenance noted
that engines were among the five commodities with the greatest amount
of excess capacity.  We found this excess capacity to be about 5
million direct labor hours--about 45 percent of the total engine
capacity. 


   DOD REPORT TO CONGRESS ON
   REPAIR OF MILITARY ENGINES WITH
   COMMERCIAL COUNTERPARTS
---------------------------------------------------------- Chapter 1:5

The Fiscal Year 1995 Department of Defense Appropriations Conference
Report 103-747 required DOD to submit a detailed proposal for
expanding competition for depot maintenance of jet engines with
civilian counterparts to the House and Senate Committees on
Appropriations.  The report noted that DOD could save a lot by
expanding competition for depot maintenance of equipment common to
the military and industry, specifically, commercially developed
aircraft turbine (jet) engines.  On March 14, 1995, DOD provided the
House and Senate Committees on Appropriations with its report.\4

In its report, DOD concluded that the principal reason for
maintaining depot maintenance capability is to support the readiness
and sustainability in the Joint Chiefs of Staff major regional
conflict scenarios.  The report also stated that DOD's approach for
achieving this objective is to retain a certain level of capability
in military depots--capability that DOD refers to as "core." DOD also
concluded that once core capabilities\5 are established, it is
essential, from an economic perspective, to use them during
peacetime. 

In its engine report, DOD reviewed 17 military engines with
commercial counterparts--10 maintained in the private sector and 7 in
military depots.  The report concluded that, for two reasons, no
changes in workload allocation between the public and private sector
were warranted.  First, the repair assignments were consistent with
DOD's core requirements and sound business practices.  Second, they
supported the title 10 U.S.C.  requirement that not more than 40
percent of depot maintenance work dollars be performed by other than
federal government employees. 


--------------------
\4 Maintenance of Military Turbine Engines With Civilian Engine
Counterparts. 

\5 Core capabilities consist of the minimum facilities, equipment,
and skilled personnel necessary to ensure a high level of technical
expertise and combat readiness by maintaining an engine system or
component in a military depot. 


   OBJECTIVES, SCOPE, AND
   METHODOLOGY
---------------------------------------------------------- Chapter 1:6

Because of significant congressional interest in privatization of
depot maintenance workloads, and engine workloads in particular, we
addressed the following:  (1) the rationale supporting the continued
need for DOD to maintain capability to repair engines at its own
depots, (2) whether there are opportunities to privatize additional
engine workloads, and (3) the impact excess capacity within DOD's
depot system has on the cost-effectiveness of decisions to privatize
additional workloads. 

We drew from information gathered as a part of our overall review of
DOD's depot-level maintenance program, including our commodity study
of depot maintenance aircraft engine workload and capacity.  As a
part of this effort, we reviewed (1) historical workload data for
each depot that performs engine overhauls and repairs engine
components; (2) the services' fiscal year 1997 engine workload
projections for each depot in our study; and (3) capacity, core
workload, and workload projections for fiscal years 1996 through 1999
used by the services to develop recommendations for the BRAC
Commission. 

We interviewed officials and examined documents at the Office of the
Secretary of Defense and Army, Air Force, and Navy headquarters,
Washington, D.C.; Naval Aviation Depot Operations Center, Naval Air
Station, Patuxent River, Maryland; Air Force Materiel Command,
Dayton, Ohio; and Joint Depot Maintenance Analysis Group, Gentile
Station, Dayton, Ohio. 

We interviewed service officials, examined documents and visited the
facilities at the San Antonio Air Logistics Center, Kelly Air Force
Base, and Corpus Christi Army Depot, Corpus Christi Naval Air
Station, Texas; Oklahoma City Air Logistics Center, Tinker Air Force
Base, Oklahoma; Naval Aviation Depot, Cherry Point, North Carolina;
Naval Aviation Depot, Jacksonville, Florida; and Naval Aviation
Depot, North Island, California. 

To determine capacity at each depot, we obtained floor plans
identifying work positions for each maintenance shop performing
aircraft engine or engine component work.  We visited each of the
shops and reviewed the floor plans with industrial engineers and shop
supervisors to validate the work position counts.  Then we determined
capacity using the computation method defined in DOD's Depot
Maintenance Capacity and Utilization Measurement Handbook (DOD
4151.15-H), which expresses capacity in direct labor hours.  This
method calculates a product by multiplying work position counts by an
availability factor (95 percent) and by annual productive hours
(1,615), assuming a 1-shift, 40-hour workweek.  We did not include
Naval Aviation Depot, North Island, capacity data in our analysis
because at the time of our visit, the engine repair shops were being
relocated and work position counts could not be accurately
determined. 

To determine excess capacity, we compared fiscal year 1997 projected
workload requirements against our capacity calculations.  To identify
private sector interest, capability, and capacity to accomplish depot
overhaul and repair on military engines with commercial counterparts,
we surveyed 24 private repair activities identified as potential
sources of repair by DOD and original equipment manufacturer
officials.  These repair activities included 2 engine manufacturers,
5 airlines, and 17 independent repair activities.\6

The private repair activities reported their reserve capacity to
repair military engines in terms of the number of whole engines they
could overhaul annually.  To compare the reserve capacity reported by
the private sector to projected military engine workload, we
converted the number of engines reported by the private sector to
direct labor hours using the depot labor standard or the average
number of direct labor hours used to overhaul each engine at the
depot.  We used the military services' workload projection for engine
and component repair.  While our methodology has limitations, it
provides a rough order of magnitude of the capacity in the private
sector relative to the services' projected workload for military
engines with commercial counterparts. 

We conducted our overall review of DOD's depot maintenance program,
including our evaluation of the engine repair program, from January
1994 to October 1995 in accordance with generally accepted government
auditing standards. 


--------------------
\6 We contacted each of the original manufacturers of military
engines with commercial counterparts regarding their interest in
depot overhaul work.  One company said it does not do engine repairs,
except to support warranties.  It said it designates independent
repair activities as authorized maintenance overhaul centers.  As a
part of our survey, we contacted major repair centers that are
located in the continental United States. 


FACTORS INFLUENCING ALLOCATION OF
DEPOT MAINTENANCE ENGINE WORKLOAD
BETWEEN THE PUBLIC AND PRIVATE
SECTORS
============================================================ Chapter 2

According to DOD, decisions to select a public or private activity to
perform depot work must consider readiness and cost risks, as well as
statutory requirements.  Statutes require DOD to maintain a minimum
level of capability as well as limit the amount of work that can be
contracted out to the private sector.  Public and private depot
repair capabilities, capacity, and competition are key factors that
impact readiness and cost, and, therefore, influence source-of-repair
decisions.  The amount of similarity between the military and
commercial engines usually influences private sector capabilities and
capacity.  The amount of excess capacity in DOD's depot system
influences cost. 


   STATUTES INFLUENCE SOURCE OF
   REPAIR DECISIONS
---------------------------------------------------------- Chapter 2:1

Several statutes limit the amount of depot maintenance that can be
contracted out to the private sector.  In addition, they also require
competition between the public and private sectors before contracting
out work valued at over $3 million. 


      RETAINING DOD CORE DEPOT
      MAINTENANCE CAPABILITY
-------------------------------------------------------- Chapter 2:1.1

Title 10 U.S.C.  2464 provides that DOD activities should maintain a
logistics capability sufficient to ensure technical competence and
resources necessary for an effective and timely response to a
mobilization or other national defense emergency.  It also requires
that the Secretary of Defense identify specific logistics activities
necessary to maintain the core capability described by that
provision.  However, 10 U.S.C.  2464 also provides that core
logistics activities may be contracted out using the procedures of
Office of Management and Budget Circular A-76 if certain requirements
are met. 

For depot maintenance, DOD has defined core as the capability
maintained within organic defense depots to meet readiness and
sustainability requirements of the weapon systems that support the
Joint Chiefs of Staff contingency scenarios.  Core exists to minimize
operational risks and to guarantee required readiness for these
weapon systems.  Core depot maintenance capabilities will comprise
only the minimum facilities, equipment, and skilled personnel
necessary to ensure a ready and controlled source of required
technical competence.  Depot maintenance for the designated weapon
systems will be the primary workloads assigned to DOD depots to
support core depot maintenance capabilities. 

Under the core concept, military requirements are driven by
contingency scenarios developed by the Joint Chiefs of Staff.  The
services must identify what weapon systems and equipment are
necessary to meet these requirements as well as the level of depot
maintenance that is required to support these systems.  Where the
services are certain that they must maintain control of depot support
to minimize risk to combat commanders, capabilities are established
and retained in organic maintenance depots. 

In November 1993, the Deputy Under Secretary of Defense issued a
policy memorandum that directed the services to quantify and report
their depot maintenance core requirements by January 1994.  The
Secretary provided the services a methodology to follow in computing
their core requirements.  In defining core, DOD policy emphasized
that core depot maintenance capability comprises only the minimum
level of capability needed to support mission-essential weapon
systems. 

Since core is the capability to support rather than the maintenance
of specific weapon systems, this requirement does not apply to
workload for specific systems.  Thus, depot maintenance for some core
engines could be privatized since the capability to repair the
engines is similar to the same capability used to repair other core
engines in the public depot. 

In addition, the policy memorandum stated that it is not core policy
that all mission-essential hardware be maintained in a DOD depot. 
Private industry may maintain mission-essential weapon systems, if a
service is satisfied that reliable sources of repair exist in the
private sector to negate risk to the weapon system.  For example,
even though the KC-10 aircraft is a high priority mission-essential
system required early in major regional conflicts, DOD contracted out
the maintenance for the life of the aircraft.  The KC-10 has a high
degree of similarity with its commercial counterpart, the DC-10,
which DOD believes mitigates the risk of contracting out the
aircraft's maintenance. 

We asked depot officials to specify how much of their workload for
military engines with commercial counterparts they considered to be
core.  Their responses, which are presented in table 2.1, indicate
that most of the 1997 workload requirements for commercial derivative
engines is defined as core.  It is not clear to what extent this core
workload should be conducted in military depots. 



                               Table 2.1
                
                    Comparison of Core and Non-Core
                          Workloads by Engine

                   ((Workload in direct labor hours))

                                        Fiscal      Fiscal
                                     year 1997   year 1997
                                         total        core  Above core
Engine model                          workload    workload    workload
----------------------------------  ----------  ----------  ----------
TF39                                   528,788     444,030   84,758.00
TF33                                   875,740     875,740        0.00
T700                                   241,030     241,030        0.00
T63                                      2,975       2,975        0.00
T56/501K                               648,732     432,695  216,037.00
F108/CFM56                             101,984     101,984        0.00
LM2500                                  86,938      83,787    3,151.00
TF34                                    60,286       8,748   51,538.00
----------------------------------------------------------------------
The recently published Report of the Commission on Roles and Missions
of the Armed Forces challenged the validity of the core concept.\1
According to the report, the services set core requirements that are
actually greater than they need and this practice artificially
supports the depots' current capacity.  The report recommended a
time-phased plan to privatize essentially all existing depot-level
maintenance. 

In his August 24, 1995, comments to the Senate Armed Services
Committee regarding the report of the Commission on Roles and
Missions, the Secretary of Defense stated that DOD agrees with the
Commission's recommendation to outsource a significant portion of
DOD's depot maintenance work, including outsourcing depot maintenance
activities for new systems.  At the same time, he said DOD believes
it must retain a limited organic core depot maintenance capability to
meet essential wartime surge demands, promote competition, and
sustain institutional expertise.  The military services are currently
reviewing their core requirements. 


--------------------
\1 Section 951 et.seq.  of the National Defense Authorization Act for
Fiscal Year 1994 (P.L.  103-160,
Nov.  30, 1993) provided for the establishment of the Commission.  It
was tasked with reviewing the military services' current allocations
of roles, missions, and functions and making appropriate
recommendations.  The Commission's report, Directions for Defense,
was published on May 24, 1995. 


      LIMITATION ON THE AMOUNT OF
      DEPOT MAINTENANCE THAT CAN
      BE PRIVATIZED
-------------------------------------------------------- Chapter 2:1.2

As early as 1974, Congress established legislative requirements
regarding the allocation of depot workload between the public and
private sectors.  The Defense Appropriations Act of 1974 provided
that, of the total amount of the appropriation made available for the
alteration, overhaul, and repair of naval vessels, not less than
$851,672,000 million should be conducted in naval shipyards and not
less than $359,919,000 million in private shipyards.  In addition,
prior to 1982, DOD Directive 4151.1, "Use of Contractor and DOD
Resources for Maintenance of Materiel," instructed the services that
they should limit their depots to do a maximum of 70 percent of their
maintenance workload in order to maintain a private sector industrial
base.  Revisions to this directive in 1982 continued this
requirement.  It also stated that, to the extent possible, a
competitive industrial base for depot maintenance should be
established.  More specifically, it provided that contractor support
should be considered when it would (1) improve the industrial base,
(2) improve peacetime readiness and combat sustainability, (3) be
cost-effective, or (4) promote contract incentives for reliability
and maintainability.  This directive was superseded by a 1992
amendment to 10 U.S.C.  2466 that prohibited the military departments
from contracting out more than 40 percent of their depot-level
maintenance workload funds to the private sector. 

In January 1995, DOD reported that about 28 percent of its
maintenance expenditures goes to private contractors and 72 percent
goes to in-house work.  However, we reported in 1994 that the private
sector's share is actually much larger--over half of DOD's depot
maintenance expenditures go to the private sector when the costs of
repair parts or various technical or repair services the depots
purchase from the private sector are included.\2

Although current statutes limit the amount of overall depot workload
dollars that can be used to contract with the private sector, neither
the statute nor DOD regulations specify how the aircraft engine
workload should be allocated.  DOD recently reported that it paid
about 38 percent, or $164 million, of the $435 million spent on
maintaining commercial counterpart engines to the private sector. 
The remaining $271 million spent on maintaining these engines in the
public depots is less than 2 percent of the total depot maintenance
budget.  Therefore, increasing the private sector's share of DOD's
expenditures for repair of this commodity is not likely to
significantly impact the overall limitation on commercial repair. 


--------------------
\2 Depot Maintenance:  Issues in Allocating Workload Between the
Public and Private Sectors (GAO/T-NSIAD-94-161, Apr.  12, 1994). 


      GUIDANCE RELATED TO MOVING
      DEPOT WORKLOAD
-------------------------------------------------------- Chapter 2:1.3

Title 10 U.S.C.  2469 provides that depot-level maintenance or repair
work with a value of at least $3 million is not to be changed to
performance by a contractor unless the change is made using
competitive procedures among private and public sector entities. 
This provision, which focuses on the transfer of individual units of
work, is designed to ensure that workload transfers are
cost-effective. 

DOD officials gave differing views regarding the applicability of
this statute to workloads at depots closing from BRAC decisions. 
Although DOD officials stated that they hoped Congress would repeal
the provision during the fiscal year 1996 authorization cycle, this
did not happen. 


   FUTURE USE OF PUBLIC-PRIVATE
   COMPETITIONS TO DETERMINE SOME
   ALLOCATION DECISIONS IS
   UNCERTAIN
---------------------------------------------------------- Chapter 2:2

Public-private competition is one procedure the services have used to
consider the cost-effectiveness of privatizing specific depot
maintenance work.  It was first used by the Navy in 1985 for its ship
repair program.  After demonstrating that it helped cut costs, the
program spread to naval aviation and then the Army, the Air Force,
and the Marine Corps.  Although the competition program is credited
with significant savings, private contractors generally do not
believe the program is fair.  They cite as support the fact that Air
Force depots won a high percentage of its competed workloads.  Noting
the Air Force's success, private sector companies--particularly
original equipment manufacturers--believed the Air Force depots were
not including all of their costs.  Private sector firms urged DOD to
eliminate public-private competition since they believed the program
was inherently unfair. 

Nonetheless, the services reported substantial savings from the
competitions as depots were forced to reengineer work processes and
streamline maintenance organizations.  Having traditionally focused
on readiness and customer responsiveness, military depots were forced
to focus on cost and competitiveness issues.  DOD published a cost
comparability handbook and undertook various initiatives designed to
make the competition program fair.  Despite the services' claimed
savings, we and DOD audit agencies found that DOD could not verify
the results because of weaknesses in its accounting system and
internal controls. 

The future of competition between public and private entities is
questionable and remains uncertain.  In April 1994, a
government-industry task force on depot maintenance recommended to
DOD that the public-private competition program be eliminated.\3 It
reported that the inadequacy of DOD's financial management systems to
accumulate actual costs for specific workloads in the depots
precluded DOD from creating a level basis for public and private
competition.  A month later, DOD canceled the public-private
competition program, directing the services to look primarily to the
private sector as a source for major weapon systems modifications and
upgrades. 

In its report on the fiscal year 1995 DOD appropriations bill, the
conference committee disagreed with DOD's announced policy and
directed DOD to reinstate public-private competition.  The Fiscal
Year 1995 DOD Appropriations Conference Report 103-747 required that
DOD report back to the committees on this subject by January 15,
1995.  In its report to the House and Senate Appropriations
Committees, DOD stated that its financial systems and databases are
not capable of supporting the determination of actual cost of
specific workloads.  The DOD report also noted that while the
Department is developing policies, procedures, and automated systems
that will permit actual cost accounting for specific workloads
accomplished in organic depots, substantial changes are required that
will be time-consuming to complete and implement. 

In reviewing DOD's public-private competition program, we found that
many of the criticisms of the program involved internal control
weaknesses that can be addressed at the local level.  Some
improvements had already been undertaken when the competition program
was terminated, although the momentum for change was lost when the
competition program was canceled.  Further, some recent initiatives
have demonstrated the potential for implementing required
improvements. 

Recognizing that privatization of depot maintenance workloads only
makes sense when it is cost-effective, and that current law precludes
privatization without a competitive procedure, we have recommended
that the Secretary of Defense (1) reinstitute public-private
competition for depot maintenance workloads as quickly as possible;
(2) develop and issue guidelines regarding the conditions, framework,
policies, procedures, and milestones for reinstituting public-private
competition; and (3) require the Defense Contract Audit Agency to
review internal controls and accounting policies and procedures of
DOD depots to ensure they are adequate for identifying, allocating,
and tracking costs of depot maintenance programs and to ensure proper
costs are identified and considered as part of the bids by DOD
depots.\4


--------------------
\3 Report of the Defense Science Board Task Force on Depot
Maintenance Management, Office of the Under Secretary of Defense for
Acquisition and Technology, Apr.  1994. 

\4 Navy Maintenance:  Assessment of the Public-Private Competition
Program for Aviation Maintenance (GAO/NSIAD-96-30, Jan.  22, 1996). 


   DEGREE OF SIMILARITY INFLUENCES
   SOURCE OF REPAIR
---------------------------------------------------------- Chapter 2:3

The more similarity there is between military systems and equipment
and commercially available items, the greater the likelihood that
private repair sources may be cost-effective as depot maintenance
sources of repair.  Factors that influence the degree of similarity
between engines are the commonality of engineering designs,
interchangeability of parts, and likeness of repair processes. 
Similarity affects the availability of spare and repair parts as well
as repair facilities, equipment, and trained personnel.  The degree
of similarity between military and commercial engines can range from
30 percent to 100 percent. 

Ten military engines with commercial counterparts are now fully or
predominantly maintained in the private sector because they are very
similar to their commercial counterparts and because depot overhaul
and maintenance in the private sector was determined to be the most
cost-effective option.  According to DOD officials, the time to make
such decisions is before the military invests in establishing its own
depot maintenance capability. 

Our limited review indicates that organic repair of military-unique
engines is generally more cost-effective than noncompetitive awards
to the private sector.  In the cases we reviewed, we found that
repair sources for military-unique engines were limited to one
commercial repair source--the original equipment
manufacturer--whereas two or more private sector repair sources were
generally available for commercial counterpart engines.  Competition
for a particular product or service significantly reduces the
government's costs for products or services. 

Limited data available regarding contract maintenance costs for
military-unique engines indicate that private sector repair is more
costly than organic repair.  For example, both the Air Force and a
public accounting firm recently compared the cost-effectiveness of
public versus private depot maintenance for the F404 engine, which
powers the F-117 aircraft, and the F118 engine, which powers the B-2
aircraft.  In both cases, the public depots were found to be a more
cost-effective source of repair than the original engine
manufacturers.  In the case of the F404, the analysis resulted in the
Defense Depot Maintenance Council transferring the engine workload to
the Navy depot at Jacksonville, Florida, where the work will be done
under an interservice agreement with the Air Force.  The accounting
firm's analysis of the F118 confirmed the Air Force's original source
selection of the Oklahoma City depot.  These examples indicate that
privatization of repair for military-unique engines would likely be
more costly than organic repair.\5

The key reason is that this workload is awarded on a sole-source
basis to the original equipment manufacturer.  We have found that
most of DOD's contract depot maintenance is awarded on a
noncompetitive basis and that it is difficult to control costs under
these conditions. 


--------------------
\5 F404-GE-F1D2 Engine Repair Analysis, Coopers and Lybrand, L.L.P.,
Nov.  1994.  Assessment B-2 Support, Coopers and Lybrand, L.L.P.,
Nov.  1994. 


   EXCESS CAPACITY CAN INFLUENCE
   SOURCE OF REPAIR
---------------------------------------------------------- Chapter 2:4

The large amount of excess capacity in DOD's depot maintenance system
is another factor affecting the cost-effectiveness of contracting out
maintenance work.  In previous years, war-planning scenarios
emphasized a large-scale, full mobilization, but current scenarios
emphasize smaller, regional conflicts.  This change, combined with
reductions-in-force structure, has created significant excess
capacity.  As a part of DOD's 1995 base closure and realignment
process, the Joint Cross Service Group on Depot Maintenance analyzed
the capacity of 24 facilities to maintain and repair 16 commodities. 
It found that DOD's depots have over 3 million direct labor hours in
excess engine repair capacity.  The engine commodity group was
identified as being among the five commodities having the greatest
excess capacity. 

Our assessment of engine capacity in military depots identified about
5.1 million direct labor hours--or about 45 percent--excess capacity. 
Table 2.2 shows our assessment of excess engine capacity in the DOD
depot system.  As indicated, we found the greatest percent of excess
engine capacity at the Corpus Christi Army Depot and Cherry Point
Naval Aviation Depot and the smallest percent at the Jacksonville
Naval Aviation Depot.  The excess capacity in the two Air Force
engine depots averages about 42 percent. 



                               Table 2.2
                
                Analysis of Engine Excess Capacity\a at
                          DOD Aviation Depots

                   ((Workload in direct labor hours))

                                                Fiscal
                                                  year
                                                  1997
                                                progra
                                                     m  Excess
                                        Capaci  worklo  capaci  Percen
Depot                                       ty      ad      ty       t
--------------------------------------  ------  ------  ------  ------
Navy\b
Cherry Point                            679,26  253,94  425,31      63
                                             0       5       5
Jacksonville                            656,03  447,96  208,07      32
                                             6       2       4
======================================================================
Subtotal                                1,335,  701,90  633,38      47
                                           296       7       9
Air Force
Oklahoma City                           4,012,  2,283,  1,729,      43
                                           772     661     112
San Antonio                             4,657,  2,769,  1,887,      41
                                           251     594     657
======================================================================
Subtotal                                8,670,  5,053,  3,616,      42
                                           023     255     768
Army
Corpus Christi                          1,138,  327,62  811,01      71
                                           644       5       9
======================================================================
Total                                   11,143  6,082,  5,061,      45
                                          ,963     787     176
----------------------------------------------------------------------
\a All capacity calculated by us from service data. 

\b Navy data do not include capacity or workload figures for Navy
Aviation Depot North Island, which was relocating its engine repair
shops at the time of our review.  DOD BRAC data indicated the
capacity at North Island to be about 131,000 direct labor hours and
programmed workload to be about 87,000 direct labor hours. 

Actions that increase excess capacity and decrease the utilization of
existing depots diminish their cost-effectiveness.  For example, an
organic depot with several thousand employees may incur fixed
overhead costs, including the depot's share of base support costs,
exceeding $100 million annually.  When a military depot has excess
capacity, moving workload out of this facility and into the private
sector will result in increasing the share of overhead expense that
all the remaining workload must support--increasing the unit cost for
all the units produced by that facility.  Thus, moving workload from
the military depots to the private sector at a time when the depot
system already has large amounts of excess capacity only increases
the fixed cost that must be recovered by each direct labor hour of
work still done in the public depot. 

However, despite the existing excess capacity, consolidating the Air
Force engine workload at one depot would result in a capacity
shortfall.  For example, Oklahoma City Air Logistics Center, with a
capacity of 4 million direct labor hours, can absorb all but 1
million direct labor hours of the engine workload currently repaired
in the San Antonio Air Logistics Center.  However, the difference
could be managed by making better use of available building space,
adding some additional shifts, transferring some engine workloads to
the Jacksonville Naval Aviation Depot, which repairs engines for the
Navy; or, as discussed in chapter 3 of this report, contracting out
additional engine maintenance workload to the private sector. 


   CONCLUSIONS
---------------------------------------------------------- Chapter 2:5

Based on DOD's calculations, all commercial counterpart engine
workloads could be privatized without breaching the 60/40 legislative
restriction on contracting out depot maintenance to the private
sector.  Public-private competitions would be required before
privatizing each engine workload, since the value of each engine's
workload exceeds the $3 million threshold provision of 10 U.S.C. 
2469.  Following this provision should help ensure that privatization
would only be undertaken when it is cost-effective to do so.  A
further consideration should also be the overall cost of operating
DOD's entire depot maintenance system.  This is particularly the case
in light of the extensive excess capacity for engine repair and
overhaul currently existing.  It is essential that DOD take each of
these factors into consideration to ensure that any privatization
initiative meets readiness and cost-effectiveness goals. 


   AGENCY COMMENTS
---------------------------------------------------------- Chapter 2:6

DOD generally concurred with our analysis of factors influencing the
allocation of engine depot maintenance workload between the public
and private sectors.  However, in commenting on this, and other
recently issued reports addressing issues related to public-private
competition for depot maintenance work, DOD only partially concurred
with our positions regarding future use of public-private
competition.  DOD officials stated that a November 1994 memorandum
from the Deputy Under Secretary of Defense notified depot activities
that they can compete for workloads if certain conditions were met. 
DOD also stated that it will comply with all applicable legislation
when making source-of-repair decisions--including the 10 U.S.C.  2469
requirement that prohibits changing workloads valued at $3 million or
more from a public depot without using competitive procedures that
include both public and private entities.  However, DOD also cited
its policy that only core workloads should be performed in its depots
and noted that it plans to seek legislative relief from the 10 U.S.C. 
2469 requirement. 

DOD actions show that in practice it has not reinstituted
public-private competitions.  DOD has not conducted a public-private
competition since it terminated the program in 1994 and it has not
provided guidance to the services for reinstituting public-private
competitions.  Furthermore, we believe the November 1994 memorandum
provided guidance to the services regarding the conditions under
which DOD depots could compete for complementary workloads of non-DOD
agencies, such as the Federal Aviation Administration's ground
communications equipment. 

In these circumstances, we continue to believe that DOD has not
effectively reinstituted the public-private competition program.  Our
report\6 includes a recommendation that DOD reinstitute the program
and issue guidance regarding the conditions, framework, policies, and
procedures for restarting public-private competitions, including the
requirement to review the adequacy of the depots to identify and
track costs. 


--------------------
\6 Navy Maintenance:  Assessment of the Public-Private Competition
Program for Aviation Maintenance (GAO/NSIAD-96-30, Jan.  22, 1996). 


PRIVATIZATION OPPORTUNITIES AND
IMPACT OF EXCESS CAPACITY
============================================================ Chapter 3

Since the end of the Cold War and the reduction in new procurements,
commercial contractors have aggressively sought more of DOD's
maintenance work.  Traditionally, contractors were not interested in
military maintenance because it was characterized by sporadic
requirements, limited quantities, and other considerations such as
proprietary data and older technologies.  But, because procurement
budgets have begun to decline and relatively few new systems are
predicted in the future, the private sector's interest has begun to
increase. 

DOD has seven engines with civilian counterparts that are good
candidates for exploring whether to contract out their maintenance
and overhaul.  The opportunity appears to be most promising when two
factors are present:  (1) the military engine has a high degree of
similarity with its civilian counterpart and (2) multiple repair
(both public and private) sources are able to compete.  We did not do
a cost analysis to determine whether a private or public source of
repair for commercial counterpart engines would be more
cost-effective.  Rather, we studied these engines to determine if
each had the characteristics to make it a good candidate for
public-private competition. 

Excess capacity in the public depots may reduce the
cost-effectiveness of privatizing commercial counterpart engine
workloads.  Prior to the decision to privatize-in-place the San
Antonio Air Logistics Center, the closure of one of the largest
organic engine overhaul facilities would have allowed DOD to reduce
excess capacity, improve the cost-effectiveness of remaining public
sector engine repair facilities, and create opportunities to
privatize repair of some commercial counterpart engines.  Because the
planned privatization-in-place will not reduce excess capacity at the
remaining engine repair depots, it may not be cost-effective to
contract out to the private sector additional engine maintenance,
except in limited cases where it would eliminate redundant or
duplicate repair capability. 


   SIMILARITY OF COMMERCIAL
   COUNTERPART ENGINES MAKE GOOD
   CANDIDATES FOR PRIVATIZATION
---------------------------------------------------------- Chapter 3:1

Seven engines--T56, 501K, F108/CFM56, T63, T700, TF39, and
LM2500--appear to be good candidates for evaluating the
cost-effectiveness of privatization by conducting public-private
competitions.  These engines are very similar to their civilian
counterparts and multiple contractors expressed an interest in
maintaining or overhauling them.  A discussion of each engine is
provided in appendix II. 

The degree of similarity between military and commercial engines can
range from 30 percent to 100 percent.  For example, the
interchangeability of parts between the TF33 and its commercial
counterpart can range from 40 to 70 percent, depending on the model
being compared.  These engine types have a high degree of commonality
in their engineering design and require the same repair processes,
equipment, and skills to overhaul.  For other engine types--T56,
501K, T63, LM2500, T700, F108/CFM56, and F117--the military and
commercial versions are nearly identical. 

According to DOD, there is a logical correlation between the size of
the DOD engine fleet relative to the commercial engine fleet and
selection of source of depot repair.  Where commercial carriers have
a significantly larger engine inventory than DOD, there is viable
broad-based private sector support available that mitigates risk and
affords the opportunity to reduce costs.  The competitive environment
that exists for these engines allows DOD to benefit from "sharing"
fixed-overhead costs with the private sector customers who have
substantially larger numbers of engines being serviced.  Commercial
carriers have significantly larger engine inventory for 5 of the 10
engines--TF39, T63, F108/CFM56, 501K, and F117--than does DOD, as
shown in table 3.1. 



                               Table 3.1
                
                 DOD and Commercial Counterpart Engine
                              Inventories

                                                                Commer
                                                           DOD    cial
                                                        engine  engine
                  Commercial                            invent  invent
DOD engine        engine            Manufacturer           ory     ory
----------------  ----------------  ------------------  ------  ------
TF39              CF6               General Electric       665   4,300

T63               250               Allison              2,400  18,900

F108/CFM56        CFM56             General Electric     1,600   4,000

501K              501K              Allison                255   1,378

F117              PW2000            Pratt & Whitney         51     679

TF33              JT3D              Pratt & Whitney      3,600   2,200

T56               501D              Allison              6,700  \a5,80
                                                                     0

LM2500            LM2500            General Electric       543     509

T700              CT7               General Electric     5,000   2,100

TF34              CF34              General Electric     2,000     570
----------------------------------------------------------------------
\a Includes foreign operators of military configured T56 engines. 

Commercial carriers have less than 50 percent of the inventory for
three types of engines--the T56, LM2500, and T700--which still appear
to be good candidates for public-private competition.  These engines
have multiple sources of repair in the private sector, and DOD in the
past has contracted with the private sector for repair of some of
these engines.  For reasons previously mentioned, the TF33 and TF34
engines do not appear to be good candidates for competition. 


   MULTIPLE PRIVATE SOURCES ABLE
   TO COMPETE
---------------------------------------------------------- Chapter 3:2

To determine if private repair facilities would be interested in and
capable of maintaining and overhauling military engines with
commercial counterparts, we surveyed 24 private companies with
turbine engine repair capability.  These companies included 2 engine
manufacturers,
5 airlines, and 17 independent repair activities.  Of these 24, 18
were interested, and 10 of these either were repairing or had
repaired the military engine or its commercial counterpart. 

The contractors we surveyed were interested in working on nine
commercial counterpart engines.  In most cases, they had sufficient
capacity to absorb the additional work.  The survey showed the
following: 

  -- Of the 24 repair activities we contacted, 18 were interested in
     repairing
     1 or more of the 10 military engines with commercial
     equivalents.  The other six contractors were either not
     interested in repairing military engines or did not have the
     capability to repair whole engines.  The interested companies
     have repaired or are repairing commercial counterparts. 

  -- All of the 18 repair activities already repair military engines
     or their commercial counterpart for the military services,
     foreign countries, or commercial carriers. 

  -- Seven of the 10 military engines have commercial sources of
     repair.  These are the T56, 501K, LM2500, T63, T700, F117, and
     CFM56 engines. 

  -- The other three--TF33, TF39, and TF34--have repair sources for
     their commercial counterparts--the JT3D, CF6, and CF34 engine. 

We compared the capacity reported by the private sector to the
services' projected workload for fiscal year 1997.  Table 3.2
provides the results of our survey.  When compared to the services'
projected fiscal year 1997 workload, the contractors had more than
enough reserve capacity to overhaul 6 of the 10 engines. 



                                    Table 3.2
                     
                        Private Sector Reserve Capacity to
                             Repair Military Engines

                        ((Workload in direct labor hours))


Mi
li
ta
ry
en
gi
ne
mo  Private repair         Reserve    Direct labor         Reserve       FY 1997
de      activities     capacity in       hours per  private sector       defense
l       responding         engines          engine        capacity      workload
--  --------------  --------------  --------------  --------------  ------------
TF               3             470           7,529       3,538,630       528,758
 39
TF               3             750           2,376       1,782,000       875,740
 33
T6               8           1,476             334         492,984         2,975
 3
T5               3             485           1,005         487,425       648,773
 6
LM               3             131           3,775         494,525        86,938
 2
 5
 0
 0
F1               4             660             646         426,360       101,984
 0
 8
 /
 C
 F
 M
 5
 6
T7               3             345             512         176,640       241,030
 00
50               2             108             690          74,520        20,010
 1K
TF               1              10             631           6,310        60,286
 34
F1               3             296
 1
 7
 \
 a
--------------------------------------------------------------------------------
\a No depot labor standard or projected workload was available for
the F117 engine. 

The private repair activities reported sufficient reserve capacity to
accomplish all of the projected depot workloads for six military
engines:  TF39, TF33, T63, F108/CFM56, 501K, and LM2500.  They
reported sufficient reserve capacity to perform 75 percent of the
military's T56 workload and 73 percent of its T700 engine workload. 
However, they reported little interest or available capacity to
repair the TF34 engine.  Private firms also reported sufficient
capacity to handle the military F117 engine workload.  The C-17
aircraft and its F117 engine are currently under commercial depot
contract until 1997.  Because of the absence of interest in the TF34
engine, it does not appear to be a good candidate for privatization. 
Additionally, because of declining use in the commercial market as
well as declining repair sources, the TF33 also does not appear to be
a good candidate. 


   LM2500 OFFERS A PRIVATIZATION
   OPPORTUNITY
---------------------------------------------------------- Chapter 3:3

The LM2500, a ship propulsion version of the TF39 engine, is used to
power Navy cruisers, frigates, and destroyers.\1 With the exception
of the TF39 high bypass fan section, the two engines are very
similar--with about 35 percent of the LM2500 parts interchangeable
with TF39 parts.  Other parts and components, although not
interchangeable, are similar in design and require the same types of
maintenance equipment and artisan skills to repair.  Currently, both
engines are repaired in public depots.  The TF39 is repaired by the
San Antonio Air Logistics Center, and the LM2500 is repaired by North
Island Naval Aviation Depot.  In addition, three private repair
activities, including General Electric, reported interest and
capability to repair the LM2500 engine.  All three sources are
repairing the LM2500 for commercial industry, and they have a reserve
capacity capable of performing almost six times the projected fiscal
year 1997 workload. 

As early as 1978, we reported that consolidating the LM2500 with the
TF39 workload at the San Antonio Air Logistics Center would result in
savings.\2 We found that the Navy's decision to equip the North
Island Naval Aviation Depot to repair the LM2500 reflected the
services' reluctance to share depot maintenance, even though such
actions created duplicate maintenance capability.  Since then,
however, North Island has lost all of its turbine engine workload
except the LM2500, and as a result, the repair costs of the LM2500
have steadily increased from $443,678 in 1990 to $925,200 in 1995. 
Naval Sea Systems Command officials believe the costs have increased
because the LM2500 is a relatively small workload and is the only
turbine engine North Island currently repairs. 


--------------------
\1 The LM2500 engine is used throughout the oil and gas industry to
supply mechanical power for pumps, compressors, and generators. 

\2 Aircraft Depot Maintenance:  A Single Manager Is Needed to Stop
Waste (LCD-78-406, July 12, 1978). 


   IMPACT OF
   PRIVATIZATION-IN-PLACE ON
   EXCESS CAPACITY
---------------------------------------------------------- Chapter 3:4

The 1995 BRAC Commission added the San Antonio Air Logistics Center
to the list of depots to be considered for closure and realignment. 
The Air Force initially recommended downsizing all five Air Force
depots by mothballing excess space and did not recommend closing any
maintenance depots.  However, the Commission found that the
significant excess capacity and infrastructure in the Air Force depot
system required the closure of the San Antonio center.  The
Commission's recommendation provided that DOD should consolidate the
center's maintenance workloads at other DOD depots or contract them
out to private contractors as determined by the Defense Depot
Maintenance Council.  The Commission estimated savings from the
implementation of this recommendation at $178.5 million annually. 

The closure of the San Antonio depot would create the need for
reassigning the source of repair for the T56, 501K, and TF39
commercial counterpart engines as well as the military-unique F100
engine workloads maintained at this depot.  The closure of the depot,
along with the ready availability of commercial repair sources, would
have made the T56, 501K, and TF39 engines potential candidates for
privatization through public-private competition. 

However, in approving the BRAC recommendations President Clinton
directed that the workload of the San Antonio Air Logistic Center be
privatized-in-place or in the local community.  According to DOD
officials, they are developing plans to privatize
workloads--including engines--in San Antonio, as part of a plan to
retain over 16,000 jobs in that city. 

Until the administration decided to privatize the workload in San
Antonio, the BRAC's recommendation to close the San Antonio Air
Logistics Center offered potential opportunities to improve the
cost-effectiveness of DOD's depot activities by consolidating engine
repair at other DOD depots.  Based on data provided by the Air Force,
consolidating San Antonio's engine workload could have reduced the
overhead rate for engine workload at the remaining depot by as much
as $10 per hour.  Moreover, the remaining Air Force repair depot
could not absorb all of the San Antonio engine workload, which would
have created opportunities to privatize some commercial counterpart
engine workloads.  The Air Force could have also considered
outsourcing commercial counterpart engines at its remaining engine
depot, such as the CFM56 and TF33 engine, to free up capacity to
repair military-unique or more mission-essential engines, such as the
F100 or TF39 engines. 

Under the administration's proposed plan to privatize-in-place, the
Air Force may not be able to move any work from San Antonio to other
engine depots or allow private contractors to bid for workloads that
they could have otherwise moved to facilities located outside the San
Antonio area.  Consequently, the plan will have little impact on
reducing the excess capacity and improving the cost-effectiveness of
remaining depots. 

Since the remaining depots will continue to be burdened with excess
capacity, moving additional engine workloads from these facilities to
the private sector would only increase the fixed costs that must be
recovered by each direct labor hour of work still done in the public
depot.  Therefore, the potential for cost-effective privatization of
additional engine workloads may be limited to situations where DOD is
maintaining redundant or duplicative depot capabilities for the same
or similar engines with commercial counterparts.  Such is the case
with the LM2500 engine. 


   CONCLUSIONS
---------------------------------------------------------- Chapter 3:5

Whether or not to maintain DOD facilities for depot maintenance of
military systems and equipment, such as engines, is a policy decision
that must be made by Congress and DOD.  The current policy is to
maintain core capabilities in the military depot maintenance system. 
We agree that there are valid arguments to support that policy. 
However, it is not clear how much core capability is required or to
what extent cost-effectiveness should be a consideration in the
decision-making process.  Nonetheless, we believe cost-effectiveness
should be a key part of this decision-making process. 

Generally, commercial counterpart engines are excellent candidates
for privatization, particularly those with high degrees of
commonality in parts and repair processes and those where the private
sector has a significant share of the total engine population.  The
existence of multiple sources of repair provides increased
opportunity for competitive outsourcing of repair while lessening the
operational risk inherent when only a single private source of repair
is available.  Our review of DOD's commercial counterpart engine
repair program supports the potential for privatizing much of this
work. 

However, while the potential exists to privatize additional
commercial counterpart engine workloads, it may not be cost-effective
to do so without reducing the large excess capacity and overhead that
already exists in DOD's engine depot maintenance structure. 
Privatization of additional engine work would further exacerbate the
severe engine excess capacity problem and the cost of maintaining
engines at the remaining military depots.  Without a reduction in
excess capacity, it is not likely that planned savings from
privatization can be achieved. 

Prior to the administration's decision to privatize the workload,
recommended closure of one of the two major Air Force engine depots
offered the potential to improve the efficiency of the remaining
engine depots as well as to evaluate the cost-effectiveness of
privatizing additional commercial counterpart engine workloads
through public-private competitions.  If core military-unique
workloads from a closing activity are transferred to another public
depot with proven capability to perform the work, DOD could not only
save costs from the elimination of unneeded infrastructure, but also
from the economies resulting from the consolidation of engine
workloads and improved utilization of remaining engine facilities. 

Because the administration plans to privatize-in-place the San
Antonio engine workload, the remaining engine depots will continue to
have severe excess capacity and any additional privatization of their
commercial counterpart work would increase the per-unit cost of
remaining engine work in those depots.  Thus, with the exception of
the LM2500 engine, we believe it may not be cost-effective to
privatize commercial counterpart engine workloads from other engine
depots at this time. 

It does not appear to be cost-effective to maintain only one engine
line at the North Island Naval Aviation depot, particularly since
another engine in the same family of engines is maintained at another
DOD depot.  The LM2500 workload can probably be performed more
cost-effectively by the private sector or through consolidation with
the TF39.  A public-private competition would be a good choice for
determining the most cost-effective source of repair for this engine. 


   MATTER FOR CONGRESSIONAL
   CONSIDERATION
---------------------------------------------------------- Chapter 3:6

Congress may wish to consider requiring DOD to report its plan for
privatizing-in-place the engine workload at the San Antonio Air
Logistics Center.  The plan should include DOD's strategy for
determining the source of repair for engine workloads currently at
the San Antonio Air Logistics Center and a discussion of the
cost-effectiveness of the various repair alternatives, including
transferring the workload to other military depots and
privatization-in-place. 


   RECOMMENDATIONS
---------------------------------------------------------- Chapter 3:7

We recommend that the Secretary of Defense: 

  -- Require the Secretary of the Air Force to assess the
     cost-effectiveness of various alternatives for allocating engine
     workload from the San Antonio Air Logistics Center between the
     public and private sectors, including privatization-in-place and
     transferring engine workloads to other military depots. 

  -- Develop a plan for reducing excess engine capacity and improving
     the utilization of military depots not identified for closure. 
     This plan should address how DOD intends to (1) comply with the
     existing law regarding the use of competitive procedures that
     include public and private entities when changing depot
     maintenance workloads to the private sector and (2) reduce
     excess engine capacity at other DOD engine depots in light of
     planned privatization. 

  -- Require the Secretary of the Navy to conduct a public-private
     competition for the LM2500 engine workload. 


   AGENCY COMMENTS
---------------------------------------------------------- Chapter 3:8

DOD officials generally concurred with our analysis, conclusions, and
recommendations regarding privatization opportunities for commercial
counterpart engines.  Air Force officials said that they plan to
assess the cost-effectiveness of various alternatives for allocating
engine workload from the San Antonio depot among the public and
private sector prior to deciding what engine workloads will be
privatized-in-place.  The Air Force plans to compute its core
maintenance requirements by January 1996 using a methodology that
includes a privatization risk assessment.  If existing commercial
capabilities are an acceptable risk, then the core requirements will
be reduced accordingly.  However, workloads necessary to sustain the
Air Force's core logistics engine maintenance capability will be
transferred to the remaining DOD depots. 

Air Force officials stated that they believe competitive private
sector sources (potentially including privatization-in-place) will
likely provide the best alternative for cost-effective accomplishment
of above-core engine workloads.  We noted that the Air Force
explanation did not consider the impact of a privatization-in-place
decision on the cost of other engine workloads repaired in remaining
military depots and did not address the need to conduct competitive
procedures that include remaining public depots. 

DOD concurred with our recommendation to develop a plan for reducing
excess capacity and improving the utilization of military depots not
identified for closure.  DOD officials stated that they recognize
additional privatization will aggravate the already serious excess
capacity problems at the remaining engine depots and that there is a
need for developing a plan for dealing with this problem. 

DOD officials agreed to reassess the source-of-repair of the LM2500
engine but did not say they would conduct a public-private
competition.  These officials noted that the Navy has already
undertaken a study to evaluate the cost-effectiveness of outsourcing
the LM2500 engine versus continuing to repair the engine at North
Island Naval Aviation depot.  That study will consider engine repair
costs, repair cycle times, and the potential impact of the Navy's
emerging regional maintenance concept.  While the study's approach
may provide some useful information to Navy business planners, it
does not replace the need to comply with the requirement to conduct
competitive procedures that include public depots before privatizing
the North Island LM2500 workload. 


OVERVIEW OF ENGINE DEPOT
MAINTENANCE PROCESS
=========================================================== Appendix I

Depot engine repair includes repairing whole engines, engine modules,
and engine components.  The engine depot-level repair process is
outlined in figure I.1.  Engines are disassembled into components and
parts and then are visually inspected.  Parts are cleaned and
inspected using nondestructive test techniques that include
florescent penetrate, eddy current, ultrasound, and magnetic particle
inspections.  Parts are condemned if they cannot be economically
repaired.  Repairable parts are routed to repair shops or held in
storage until the engine is reassembled.  Once reassembled, engines
are sent to the engine test cell to certify that they comply with
performance standards. 

   Figure I.1:  Engine Depot
   Maintenance Process

   (See figure in printed
   edition.)

The facilities and equipment required to support the depot-level
maintenance process are extensive and costly.  DOD estimates that the
five depots capable of repairing turbine engines have engine repair
equipment and facilities with an estimated replacement value of $1.8
billion.  Figure I.2 depicts some of the industrial processes and
equipment used in the depot-level repair of turbine engines. 

   Figure I.2:  Industrial
   Processes and Equipment Used in
   the Depot-Level Repair of
   Turbine Engines

   (See figure in printed
   edition.)



   (See figure in printed
   edition.)


ANALYSIS OF MILITARY TURBINE
ENGINES WITH COMMERCIAL
COUNTERPARTS
========================================================== Appendix II

Our survey of engine manufacturers and private repair contractors
identified seven engines--T56, 501K, F108/CFM56, T63, T700, TF39, and
LM2500--that are good candidates for privatization through a
public-private competition because (1) the military engine has a high
degree of similarity with its civilian counterpart and (2) multiple
contractors expressed an interest in maintaining or overhauling them. 
For the same reasons, the Department of Defense (DOD) may choose to
rely on the private sector to maintain the F117 engine.  While
several contractors expressed interest in the TF33 engine, it does
not appear to be as good a candidate for privatization because of
declining usage of it in the private sector and declining repair
sources. 


      T56 AND 501K ENGINES
------------------------------------------------------ Appendix II:0.1

The T56 and 501K engines are manufactured by Allison.  DOD has 50
percent of the 14,130 engine population.  The T56 engine powers the
Air Force C-130 and Navy P-3 and E-2 aircraft.  The Navy also uses a
marine equivalent of the T56, the 501K engine, to generate electrical
power for its destroyer-class ships.  Prior to the 1993 Base
Realignment and Closure Commission (BRAC) decision, the Navy repaired
its T56 and 501K engines at the Alameda Naval Aviation Depot.  The
commercial equivalent of T56 is the 501D, which powers the Lockheed
Electra and Convair 580 commercial aircraft.  The 501K is a
commercial engine used in several applications in the oil and gas
industry.  There is a worldwide network of commercial support for
this engine group.  During fiscal years 1993 through 1995, 27 percent
of DOD's T56 and 501K workload was commercially repaired. 

In response to our survey, two private repair activities reported
interest in the 501K and three private repair activities, which are
currently repairing the T56 engine for foreign countries, reported
interest in repairing the T56/501K.  However, their current reserve
capacity is less than the services' projected workload for 1997,
which would require them to develop more capacity.  However, they
believe that adding the capacity would simply require hiring more
personnel since they already have the tools, fixtures, and equipment
to repair the T56 engine.  Furthermore, they believe government could
provide its equipment as government-furnished equipment. 

Although our survey included only engine repair firms based in the
continental United States, we noted there are nine Allison authorized
T56 repair activities located overseas.  According to Air Force
Materiel Command and Allison Aircraft officials, dividing the T56
engine workload among multiple repair activities, including those
located in the Pacific and European theaters could reduce pipeline
cost and reduce the risks of losing private repair sources. 


      TF33 ENGINE
------------------------------------------------------ Appendix II:0.2

The TF33 is a derivative of the commercial JT3D engine, which powers
the commercial Boeing 707, 720, and DC-8 aircraft.  Both engines are
manufactured by Pratt and Whitney, and they have a high degree of
similar parts--between 40 percent and 70 percent, depending on the
model or version of the engine.  The TF33 engine powers the C-141
transport, E-3 early warning, C-135 tanker/transport, and B-52H
bomber aircraft, and is repaired by the Oklahoma City Air Logistics
Center.  DOD has 60 percent of the 5,800 engine population. 

The original manufacturer, Pratt and Whitney, and two independent
repair activities--Aviall and Greenwich Air Services--reported more
than double the reserve capacity needed to handle the total TF33
engine workload.  However, only Greenwich Air Services is currently
repairing the JT3D.  Although Pratt and Whitney and Aviall previously
repaired the JT3D, they closed these repair operations because of the
declining commercial market and because the JT3D represents older
technology.  They did, however, express interest in the TF33 military
workload. 

DOD has an inventory of 3,600 TF33 engines--the largest of any
military turbofan engine with a commercial counterpart.  The TF33
also has the largest workload of commercially derived engines in
DOD's depots, with an expected workload of 0.9 million direct labor
hours for fiscal year 1997.  Outsourcing the TF33 workload could free
up capacity to absorb the repair of military-unique engines such as
the F100, for which there is not a competitive repair market. 
However, if the Air Force privatizes-in-place the San Antonio engine
workload, this would not likely be a valid observation. 


      F108/CFM56 ENGINE
------------------------------------------------------ Appendix II:0.3

DOD considers the F108\1 to be part of a family of engines whose
combined in-house support provides important synergy of expertise,
equipment, and facilities for the DOD core capability.  Thus, in the
past DOD has concluded that the F108 should be maintained in DOD
facilities.\2 According to the DOD report to Congress on commercial
counterpart engines, the F108 is most like a commercial model that
does not have a large inventory.  However, according to General
Electric engineers, CFM56-2 and CFM56-3 engines are very similar and
the F108 shares the same repair process as some other engines. 

The F108/CFM56 is manufactured by CFM International, a consortium of
General Electric and the French company, Snecma.  The F108/CFM56
powers the Air Force KC-135 tanker and Navy E-6 airborne
communications aircraft.  This engine is repaired by the Air Force at
the Oklahoma City Air Logistics Center.  The CFM56 has three general
configurations:  the CFM56-2, CFM56-3, and CFM56-5.  The Air Force
and the Navy aircraft use the CFM56-2 configuration, which also
powers re-engined DC-8 aircraft used by the commercial aviation
industry.  The CFM56-3 and CFM56-5 configurations power the Boeing
737 and various models of the European Airbus.  DOD has 25 percent of
the 6,300 engine population. 

The military is by far the largest user of the CFM56-2 engine
configuration.  However, General Electric engineers consider the
CFM56-2 and the CFM56-3 to have 80 percent commonality, excluding the
fan module.  The military owns 1,600 CFM56-2 engines, while the
private sector has 3,944 CFM56-2 and CFM56-3 engines. 

Four private repair activities, including the manufacturer--General
Electric, were interested in repairing the military CFM56 engine, and
they had enough reserve capacity to perform four times the military's
projected fiscal year 1997 workload. 

Further, as the DOD report noted, the F108 is part of a family of
engines that includes military-unique fighter and bomber engines
maintained as DOD's turbine engine core.  Other engines in this
family also power the F-14, F-15, F-16, B-1, and B-2 aircraft. 
According to General Electric officials, although some engine parts
are not interchangeable within the group of engines, the repair
processes are the same.  Thus, the same types of equipment, such as
vertical turret lathes, metal plasma machines, grinders, as well as
the same artisan skills are used to repair all engines within the
group.  This commonality also gives the Air Force the flexibility to
privatize the F108 workload while maintaining its core capability to
repair the other military engines in the same family--the F110, F101,
and F118 engine. 


--------------------
\1 The F108 is the Air Force designation for the commercial CFM56
engine. 

\2 In 1991, we reported that although the Air Force had decided to
use in-house repair for the CFM56 engine, it might be able to reduce
engine maintenance cost by using commercial facilities to repair the
F108/CFM56, Commercial Practices:  Opportunities Exist to Reduce
Aircraft Engine Support Costs (GAO/NSIAD-91-240, June 28, 1991). 


      T700 ENGINE
------------------------------------------------------ Appendix II:0.4

The T700 engine, which powers the H-60 and H-64 helicopters, is
organically repaired by the Army at the Corpus Christi Army Depot. 
It is similar to the CT7 commercial engine that powers the Bell 214ST
and Saab 340 aircraft used in commercial aviation.  Both engines are
manufactured by General Electric.  Approximately 70 percent of the
T700 workload is performed in the depot; 30 percent is done on
contract. 

Three private repair activities, including General Electric,
expressed an interest in the military T700 engine workload.  Of the
three, however, only General Electric currently repairs the
commercial CT7 engine.  The other two contractors have previously
repaired the T700 engine on contract with the Army.  According to one
repair activity, General Electric has not yet certified an
independent source of repair for the CT7 commercial engine.  While
private repair activities have proven that they are capable of
repairing the T700, they reported less capacity than the Army's
projected T700 workload requirements for fiscal year 1997.  Were DOD
to privatize T700 depot maintenance, given current capacity levels,
some portion of the workload would still have to be done in the
public depot.  DOD owns approximately 70 percent, or 5,000 of the
7,100, of the inventory of T700/CT7 engines in military and
commercial markets.  Therefore, the short fall of capacity in the
private sector may improve should General Electric certify
independent repair activities to repair the commercial
CT7 engine. 


      T63 ENGINE
------------------------------------------------------ Appendix II:0.5

The T63 is manufactured by Allison and is similar to the commercial
250 Allison engine, which powers several commercial aircraft,
including the Bell 206 and 487 helicopters.  DOD has 11 percent of
the 21,000 engine population.  The T63 engine powers the H-58 and H-6
helicopters--both of which are being significantly downsized.  The
Army does 84 percent of its T63 depot workload at its Corpus Christi
Army Depot, with the remaining workload contracted out to the private
sector.  Our survey identified eight potential sources of repair for
this engine--three having previous T63 experience and the remaining
having experience with the Allison 250. 

More commercial turbine engine helicopters are powered by the Allison
250 engines than any other engine.  While the Allison 250 engine has
widespread commercial use, the military's workload is declining. 
There are about 18,900 Allison 250 engines in the commercial market
compared with only about 2,400 military engines.  Projected T63
workload at Corpus Christi Army Depot is expected to decline from
32,920 direct labor hours in 1993 to about 3,000 direct labor hours
in 1997.  Even though Corpus Christi has extensive excess engine
repair capacity and repairing small quantities of T63 workload
recovers some fixed overhead costs, continuing to maintain the T63
repair line in-house is probably not cost-effective. 


      TF39 AND LM2500 ENGINES
------------------------------------------------------ Appendix II:0.6

Although DOD has not identified the TF39 and LM2500 as commercial
engine counterparts, the engine manufacturer and other sources of
repair did.  The TF39, which powers the C5A&B cargo aircraft, is
closely related to the CF6 commercial family of engines and the
LM2500 engine.  All three are manufactured by General Electric.  The
LM2500, a ship propulsion version of the TF39 engine, is used to
power Navy cruisers, frigates, and destroyers.\3


--------------------
\3 The LM2500 engine is used throughout the oil and gas industry to
supply mechanical power for pumps, compressors, and generators. 


         LM2500
---------------------------------------------------- Appendix II:0.6.1

The LM2500 is actually a marine/industrial version of the military
TF39 aircraft engine.  With exception of the TF39 high bypass fan
section, the two engines are very similar--with about 35 percent of
the LM2500 parts interchangeable with TF39 parts.  Other parts and
components, although not interchangeable, are similar in design and
require the same types of maintenance equipment and artisan skills to
repair. 

As early as 1978, we reported that consolidating the LM2500 with the
TF39 workload at the San Antonio Air Logistics Center would result in
savings.\4 We found that the Navy's decision to equip the North
Island Naval Aviation Depot to repair the LM2500 reflected the
services' reluctance to share depot maintenance, even though such
actions created duplicate maintenance capability.  Since then,
however, North Island has lost all of its turbine engine workload
except the LM2500, and as a result, the repair costs have steadily
increased from $443,678 in 1990 to $925,200 in 1995.  Naval Sea
Systems Command officials believe the costs have increased because
the LM2500 is a relatively small workload and has to carry all
overhead and indirect costs associated with engine repair, which was
previously spread among several engine workloads. 

Three private repair activities, including General Electric, reported
interest and capability to repair the LM2500 engine.  All three
sources are repairing the LM2500 for commercial industry; they have a
reserve capacity capable of performing almost six times the projected
fiscal year 1997 workload. 


--------------------
\4 Aircraft Depot Maintenance:  A Single Manager Is Needed to Stop
Waste (LCD-78-406, July 12, 1978). 


         TF39 ENGINE
---------------------------------------------------- Appendix II:0.6.2

The TF39 engine manufacturer, General Electric, and other sources of
repair stated that the CF6 family of engines are derivatives of the
military TF39 engine.  The CF6 engine powers the DC-10, Boeing 747,
and MD-11 aircraft.  According to the General Electric TF39 program
manager, there are approximately 400 CF6-6 engines, 4,000 CF6-50
engines, and 1,000 CF6-80 engines in commercial aviation.  He noted
that the CF6-6 engine was the first commercial derivative of the
military TF39 engine and is most like the military engine.  There are
currently 665 TF39 engines in DOD's inventory. 

According to General Electric and the Air Force TF39 program manager,
the major difference in the two engines is in their bypass fans.  The
TF39 engine uses a two-stage bypass fan and the CF6-6 a single-stage
fan.  Except for the bypass fans, the other sections of the engine
are very similar.  While the compressor/rotor is the only identical
section in both engines, according to the manufacturer, the engines
share an overall 30 percent commonality among parts in the
compressor, high pressure turbine, and low pressure turbine sections. 
Further, the repair processes and artisan skills necessary to repair
the TF39 and CF6 engines are the same.  For example, metal spraying,
grinding and vertical turret lay work are required in the overhaul of
both engines. 

General Electric, Aviall, and Greenwich Air Services said that little
new equipment would be needed to adapt a commercial CF6 repair line
to repair the TF39 engine.  The greatest expense would be for the
adapters and harnesses necessary to run the TF39 engine in a CF6
engine test cell.  Additional tools and fixtures also would be needed
for disassembly, assembly, and balancing different parts of the
engine, including the larger TF39 bypass fan.  The current repair
facilities estimated it would cost between $5 million and $7 million
to establish a TF39 repair line.  However, they noted that the
government could reduce one-time conversion costs by providing the
successful contractor with its tools and fixtures as
government-furnished equipment. 

The field of competition may be limited to the original manufacturer
and one independent repair activity.  General Electric and two
independent repair activities, Aviall and Greenwich Air Services,
expressed interest in repairing the TF39 engine.  All three companies
currently repair CF6 engines for commercial carriers.  However, only
General Electric and Greenwich Air Services have CF6 repair
facilities located in the continental United States.  Aviall's CF6
repair facility is located in Prestwick, Scotland.  Previously, TF39
exchangeable component workload has been restricted to repair
facilities within the continental United States and Canada. 

According to the Air Force, AFLCR 66-48 allows the Air Force to
exclude bids from overseas facilities to ensure access to the parts
in time of national emergency.\5 Such a restriction could reduce the
number of potential bidders, and, thereby, lessen the price
competition. 


--------------------
\5 The Air Force denied Aviall the opportunity to bid on the repair
of TF39 combustion liners in 1993 because the company planned to
repair the liners in Scotland.  In addition, a proposal from the Air
Force and the Navy for the T56 engine in 1993 restricted the use of
overseas facilities.  Israeli Aircraft Industries protested the
restriction, but the protest was never resolved. 


      F117 ENGINE
------------------------------------------------------ Appendix II:0.7

According to its report, DOD has not yet decided on the source of
repair for the F117 engine, which powers the C-17 aircraft.  The F117
is manufactured by Pratt and Whitney and is the military counterpart
of the PW2000, which powers the Boeing 757 aircraft. 

The Air Force did not project depot workload requirements for the
F117 engine for fiscal year 1997 since the engine will be maintained
under an interim contractor support agreement through 1997.  In
addition to the engine manufacturer, three airlines currently have
repair capability for the PW2000, which the manufacturer estimates is
90 percent similar to the F117.  The equipment manufacturer and two
of the airlines were interested in future F117 engine overhaul
workload. 

The approved C-17 program calls for a fleet of 40 aircraft, or 4
engines per aircraft and 27 spare engines authorized for fleet
support, a total of
187 engines.  Private repair activities reported capacity to overhaul
296 F117 engines annually.  The Air Force is seeking congressional
approval for a C-17 fleet of 120 aircraft, with 58 spares. 


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================= Appendix III


   NATIONAL SECURITY AND
   INTERNATIONAL AFFAIRS DIVISION,
   WASHINGTON, D.C. 
------------------------------------------------------- Appendix III:1

Julia Denman, Assistant Director


   DALLAS OFFICE
------------------------------------------------------- Appendix III:2

Larry Junek, Evaluator-in-Charge
Cleofas Zapata, Jr., Evaluator
Enemencio Sanchez, Evaluator
John Strong, Evaluator


*** End of document. ***