The Air Force KC-767 Lease Proposal: Key Issues for Congress

Publication Date: September 2003

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Military and defense

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Abstract:

The Air Force wishes to replace its KC-135E aircraft by leasing 100 new Boeing KC-767 tankers. The Air Force indicates that leasing is preferred because it will result in faster deliveries than outright purchasing. Air Force leaders argue that a lease will allow them to husband scarce procurement dollars by making a small down payment. Although Congress authorized the proposed lease in the FY2002 DOD Appropriations Act, it stipulated that the defense oversight committees must approve the lease only the Senate Armed Services Committee has yet to approve. The lease proposal has been controversial and issues raised thus far include:

Whether there is an urgent need to replace the KC-135 fleet. The Air Force states that replacing the KC-135 is urgent, citing high costs, aircraft vulnerability to catastrophic problems, and the imminent closing of the 767 production line. Opponents of the lease state that operating costs are controllable and will be far lower than the overall costs of leasing the 767; that the vulnerability is no more than depicted in a 2-year old study which the Air Force found acceptable; and that the 767 production line is viable until 2006-2008.

Whether the KC-767 is the right airplane. If acquired, the KC-767 may be in DOD's inventory for 50 years. The Air Force says that the KC-767 is much more capable than the KC-135. Opponents say that other aircraft are even better than the KC-767 in meeting the Air Force's requirements. The Air Force opposes re-engining KC-135Es, but opponents say it merits attention, as does outsourcing aerial refueling.

Whether the Air Force cost comparison is authoritative. The Air Force's report to Congress calculates that a 767 lease would cost $150 million more than a purchase on a net present value basis. This calculation, however, is sensitive to many assumptions. CRS analysis shows that several assumptions built into the calculation, if treated differently than in the Air Force report, could change the calculation by hundreds of millions of dollars each. Although some could change the calculation to favor either the lease or the purchase, others such as the discount rate used to calculate net present value and whether to use multi-year procurement for the purchase option could be more likely to alter the comparison more in favor of the purchase option.

Whether this lease has implications for congressional budget oversight. The proposed lease appears to be an unprecedented method of funding a major new defense procurement. Critics point out that this approach is coupled with exemptions from longstanding laws on budgeting and defense procurement. The proposed lease raises policy issues regarding the visibility of full costs for DoD programs in the congressional oversight process, including questions concerning locking in budgetary resources when costs are uncertain, appropriateness of using an operating lease for this proposal, the impact of a Special Purpose Entity, and the potential for deviation from full-funding of the government's contractual liability.

This report will not be updated.