Boeing, ULA Wrangle with Air Force Over Delta 4 Launch Contract Prices

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PARIS — Boeing and United Launch Alliance (ULA), a joint venture in which Boeing owns 50 percent, have filed a second complaint to a U.S. government contract-appeals body to get the U.S. Air Force to reprice three Delta 4 rocket launch contracts that expose the hazards of Air Force contracting practices, industry officials said.

The contracts also lay bare what industry officials agreed is a hard-to-explain loophole that Boeing allowed the Air Force and which may turn out to be costly for the company.

In an April 27 filing with the U.S. Securities and Exchange Commission (SEC), Chicago-based Boeing said ULA in March filed a complaint with the Armed Services Board of Contract Appeals to compel the Air Force to adjust the prices of three Delta 4 launch contracts signed in the late 1990s.

Based in Fairfax, Va., the board is an independent forum created to settle contract disputes between industry and the Department of Defense, NASA, the CIA and other U.S. government agencies. It is the second time in two years that Denver-based ULA, acting on Boeing’s behalf, has filed basically the same complaint — the first time for two Delta 4 contracts, and the more recent complaint adding a third launch.

Boeing said in the SEC filing that if it cannot win a price adjustment on the three launches, it could book a pretax loss of $285 million — $95 million per launch. With the low-end versions of the Delta 4 generally costing no more than around $200 million, it would appear that Boeing signed firm, fixed-price contracts with the Air Force that were 40 percent or more below cost.

The Air Force has already refused to accept a price adjustment, in effect saying that a contract is a contract.

Industry officials say that is only part of the story.

When the three contracts were signed — originally it was four, but the Air Force let an option for the fourth launch expire — Boeing was gearing up Delta 4 rocket production for what it thought would be an exploding global commercial satellite-launch market. The company prepared for this commercial market, which collapsed at the end of the 1990s, by starting construction on a large number of Delta 4 rockets.

It made a huge order for RL10 upper-stage Delta 4 engines from Pratt & Whitney Rocketdyne of Canoga Park, Calif. While Boeing subsequently canceled part of that order, a decade later Pratt & Whitney still has an excess inventory of Delta 4-version RL10 engines. Pratt & Whitney has since won Air Force financing to convert some of these engines to enable their use aboard ULA-built Atlas 5 rockets.

Given the high fixed costs of the business of building and launching rockets, the “cost” of an individual vehicle can move sharply up or down depending on how many models can be sold. Thinking that what appeared at the time to be a booming commercial market, coupled with the ongoing U.S. government demand, would provide significant economies of scale and drive down unit costs, Boeing sold its Delta 4 rockets to the Air Force in 1998 at prices that, in hindsight, were far below cost.

The Air Force policy of ordering vehicles years before they are to be built and launched only worsened the problem, industry officials said.

“Look, you can say Boeing was drinking its own Kool-Aid in agreeing to prices based on a market that never materialized,” said one industry official whose company is not involved with Delta 4. “But you have to sympathize with them to the extent that their customer asked them to commit eight to 10 years in advance. This is a problem with the Air Force that ultimately leads to higher prices, because no one wants to make the same mistake Boeing did back then.”

If the Boeing contract prices can be excused because they were based on demand forecasts that proved off base, a second aspect of the contract is harder to explain.

The launches in question were eventually assigned to carry Air Force GPS-2F navigation satellites. The Delta 4s slated to perform the missions were the lightest and least-expensive versions of the vehicle, without strap-on boosters.

But as the launch dates approached, it became clear that the low-end Delta 4 would not be powerful enough to carry the GPS-2F spacecraft to medium Earth orbit. The GPS-2F spacecraft, like many other satellites, had picked up weight as it moved from design to production. The decision was made to add two strap-on boosters to each vehicle for the missions.

In a normal contract, that would be called a customer-ordered change of specification, which would automatically trigger a price renegotiation. For reasons that remain unclear, that was not the case in the Boeing Delta 4 contracts. Boeing remained on the hook for the original launch price, much as if it had agreed to launch unspecified “fruit,” and instead of an orange, was presented with a mango.

Adding two strap-on boosters could add around $20 million to the cost of each of the rockets.

Industry officials said it was unclear whether the specific history of the GPS-2F satellite — the series is built by Boeing — played a role in the Air Force’s decision to hold Boeing to the original contract terms.

Roger A. Krone, president of Boeing Network and Space Systems, declined to discuss the elements of contracts that, after more than a decade, are still providing work for Boeing’s legal counsel. In an April 13 interview during the National Space Symposium in Colorado Springs, Colo., Krone said: “We will work our way through our REA [Request for Equitable Adjustment], and it will likely take a third party to sort it out.”