Perhaps no other Private Finance Initiative has been as controversial as the Future Strategic Tanker Aircraft (FSTA) PFI. While the PFI model can make sense in some areas, providing such a complex and vital capability for RAF operations in this way was a mistake. The total PFI contract that will last for 27 years is estimated to cost around £12 billion.
The contract is not quite as simple as £12 billion for 14 aircraft because it covers everything from training and maintenance to support structures and fuel. It also includes a very healthy dose of inflation.
What we know is that the MOD is contracted to pay an average of £380 million per year for the next 27 years, and it is estimated that £80 million of this is for actual running costs. The reset of the money (£310 million) is reported to go to financing costs and profits.
Does the Contract Represent Value for Money?
Not as easy a question as you might think to answer. On the face of it £12 billion for 14 aircraft seems ridiculous. However, AirTanker will provide more than the 14 aircraft. They will also be providing 14 pilots (who must be in the reserve and able to perform military tasks) as well as 48 cabin crew (hopefully no Para’s in drag), maintenance and associated infrastructure as well as training for aircrew (both RAF and Reserve).
In addition, a major part of the payment will be amortised costs of the aircraft and infrastructure estimated at some £2.6 billion. The main reason why no one can tell if these costs represent value for money is that the MOD does not have an accurate fix on how much its current capability costs.
What it does know is that to support its current fleet (08/09) of 24 VC10’s and Tri stars it spends £105 million per year. It further spends an additional £117 million on related personnel, fuel and simulator training giving a total spend of approximately £222 million in 2008-09. This figure does not include the purchasing of the aircraft themselves or the related infrastructure.
This would appear to show that the £390 million being paid to AirTanker is simply not worth it. It seems even less worth it when we factor in the additional £60 million per year that the MOD expects to pay for fuel and personnel costs giving us a total of some £450 million per year or nearly double the current fleet running costs.
However, this £450 million per year is an average cost over 27 years of the contract and includes inflation. If we work forward the current £222 million for the Tri Star and VC 10 fleet we get an average cost of £348 million over the lifetime of the FSTA contract. This is one of the reasons why the MOD accepted this type of deal. Remember the £348 million does not include buying the aircraft. Obviously, the idea is that once the PFI runs its course the MOD will be able to start a new PFI acquiring new aircraft for no extra charge.
However, comparing the current VC10 and Tri Star Fleet with the Voyagers is not really fair. Running a fleet of old aircraft like the VC10 and Tri stars is expensive. That’s why airlines don’t do it. Modern aircraft such as the A330 are much more efficient, so by using this contract we lose the ability to essentially save more money in the future running cheaper more efficient planes. Indeed, the estimate is that it will cost an average of £140 million per year to run the Voyager fleet less than half the cost of running the current fleet when considering inflation.
We also only get a fleet of 9 Voyagers in full-time service with the ability to add an extra five when needed. This contrasts with the current fleet of 24 aircraft.
In addition to the outright costs there will also be additional hidden costs for more use of the tankers or penalties if any other type of refuelling system is used. Even using the hangars to service other RAF aircraft incurs penalties. However, if AirTanker can lease out spare capacity then costs may be reduced.
With so many defence costs increasing faster than inflation aerial refuelling is one area where we should have been looking to save money in future. The FSTA PFI takes this potential saving away and gives us a higher annual running cost than even the current old fleet.
Why was the Contract Approved?
Firstly, the main reason for approving the contract was the fact that the MOD desperately needed the aircraft and had no money to fund them. To pay for the planes the MOD estimated that it would have to have found £1 billion between its 2006 and 2010 budgets which, it simply did not have. In the spirit of optimism and can kicking it probably thought it might have more money in the next decade because Afghanistan would definitely be over and the economy would surely improve. (LoL If only they knew)
When the numbers were crunched the MOD compared the PFI purchase of the 14 A330’s with an RAF buy and conversion of 19 used 767’s. Using a discount rate of 6% it came to the conclusion that the contract was value for money. (Note 19 767’s vs. 9 full-time and 5 part-time A330’s which does not seem a fair comparison to me)
In an unrelated attempt to get a handle on the growing number of crazy PFI’s The Treasury revised the suggested discount rate used on project analysis in 2004 to 3.5%. However, as the FSTA PFI was analysed in 2003 the treasury gave an exemption and allowed the FSTA contract to go ahead at the old 6% rate. The rate of 3.5% clearly showed that the contract was bad value for money.
Now after the initial idea was approved the MOD entered negotiations with the AirTanker consortium. Negotiations took 5 years and by the end no other bidder other than AirTanker was interested in the deal. Essentially, AirTanker had the MOD over a barrel with a capability it now desperately needed and one it had even less ability to pay for. This led to the current FSTA PFI contract being signed in 2008 which I think it would be hard for anyone to say was value for money.
Who Are AirTanker?
AirTanker is the consortium that is tasked with delivering the FSTA PFI. It is actually two companies, AirTanker (who provide the aircraft) and AirTanker Services (who service the contract for the 27 year duration).
Both of these companies are owned by various defence contractors:
In addition, the FSTA PFI is funded by the following banks
- Bank of Scotland (Partly Owned by UK Government)
- Bayern LB (Bailed Out by German Government currently selling assets to repay)
- Lloyds TSB (Partly Owned by UK Government)
- Royal Bank of Canada
- BBVA (Spain’s second biggest bank currently experiencing severe liquidity issues)
- Calyon (Part of Credit Agricole, France)
- Fortis (49% owned by Netherlands, Belgium and Luxembourg)
Getting out of The Contract
In order for the government to exit this contract it will have to compensate the shareholders and financiers. I have no doubt that the PFI contract will be water tight and there will be no way for the government to exit without the consent of the AirTanker shareholders.
However, the list of companies involved presents significant opportunities.
Primarily the majority of the £390 million being paid per year will go to the banks. The defence contractors are more concerned with delivery and servicing the equipment.
It is likely to be worthwhile keeping the contractors in place to carry on the ongoing services continuing to pay around £80 million per year for their efforts. In addition, we could offer other benefits to ease the passing of the PFI.
My Suggestion would be to not purchase the last 5 A330’s leaving us with a total fleet of 9 Voyagers in full-time RAF service. Instead, we would purchase 8 additional A400M’s. We would further purchase refuelling pods for all of our total fleet of 30 A400M’s.
This would likely be desirable for EADS who have little issue in selling A330’s but are desperate to sell more A400M’s. Rolls-Royce who makes the Trent engines for the Voyagers also makes 28% of the Euro Prop engines on-board the A400M. Again Rolls-Royce has no problem is selling all the Trent engines they want and the fact that we would be buying 32 more Euro props as opposed to 10 Trent’s would likely be better for RR.
Thales builds the avionics for the A400M and handles our training so there would certainly be a boost for them.
Cobham builds the aerial refuelling pods for the A400M so the prospect of being able to equip our entire fleet of A400M’s is probably in their favour. Current plans for the Voyager fleet include lending it out to other EU nations who don’t have tankers so again taking this away and encouraging other EU nations to invest in AAR makes sense for Cobham.
VT Group will get little benefit from the extra A400M purchases. However, VT Group is a subsidiary of Babcock who’s the biggest customer is the MOD. It should be relatively simple for Babcock to be offered additional MOD work to compensate it. Babcock may also be keen to offload a project that is likely to cause major friction in the future with its biggest customer.
If we can get the industrial partners to agree to scrap the PFI that just leaves the banks to take care of. Fortunately, because of the credit crunch the AirTanker consortium was forced to rely on bank loans instead of bond sales. I say fortunately because since 2008 bonds have risen in value significantly and to cancel this project we would have to purchase those bonds in the market which would be prohibitively expensive.
The list of banks that financed the project looks very much like a who’s who of the credit crunch. Most are at least partly owned by national governments including our own. All are desperate to raise funding and improve their liquidity position. The A400M is a critical project for the governments of France, Germany, Spain, Belgium and Luxembourg. By offering to by an extra 8 A400M’s we could further apply pressure on the banks through their national governments and biggest share-holders.
The combination of a liquidity boost and pressure from shareholders should be quite a potent cocktail to force the banks to scrap the project.
Total funding for the project is estimated at £2,698,000,000. Assuming five aircraft are wiped of the project cost, the total amount of funds that will need to be returned are around £2 billion.
Getting the Money
The MOD entered this PFI in 2008 quite simply because it did not have the money to buy the planes outright. Its financial position since 2008 has got much worse. Put simply the MOD could not find the £2 billion to buy out of the contract, no matter how much it would save eventually.
However, it may be possible to strike a deal with The Treasury and The Government.
Firstly to put it in to context £2 billion is around 1 week of current government borrowing or just over 1 day of government spending; it’s not a lot of money. The MOD will be paying at least £390 million per year for this contract over its lifetime. Whilst the treasury is concerned about paying down debt it is even more concerned with cutting the government’s structural deficit. If the MOD offered up additional indefinite savings of £150 million per year (weighted for inflation) it may be sufficient to persuade The Treasury to part with the money.
This is not as crazy as you might think. Last year the Treasury advised Northumbria Healthcare to borrow £120 million to buy out of two PFI deals that represented bad value for money.
Ultimately, The Treasury will do what their political master’s order them to. Let’s face it the current government cares little about long term fiscal planning and even less about defence.
However, they do cry out for any opportunity they can get to beat the previous government over the head. The FSTA PFI is undoubtedly the worst of an incredibly bad list of PFI projects started by the last government. In the run-up to the next election what better opportunity could there be to highlight the failings of the Blair and Brown years than to take a one-time write-down of some £2 billion to get out of a contract costing £390 million per year. Any man in the street could see the benefit of such a plan.
Giving back £150 million per year to the treasury would still leave around £240 million per year in the MOD coffers. The MOD can still pay the £80 million a year support cost to the Air Tanker Service consortium to look after the planes and in addition still have £160 million left over. This £160 million per year would go to the cost of purchasing the eight additional A400M’s probably in the mid to late 2020s as well as the purchasing of the additional fuel pods for the rest of the A400M fleet. Anything left over could be put back into the rest of the defence budget.
This would leave us with our 9 dedicated A330 tankers which could hopefully be upgraded easily restoring both its own refuelling capability and possibly including the central boom for refuelling our C17’s, A330 tankers and RC135’s as well as USAF aircraft. Instead of the potential surge capability of just 5 A330’s we would now have up to 30 A400M’s to use in the AAR role, and we would not be required to pay any compensation to the consortium for their use.
The extra freight capacity of the 8 A400M’s would also offset the loss of freight capacity when the current fleet of Tri Stars retire allowing the A330’s to focus on ferrying passengers.
Other savings would also likely present themselves for instance in the Falklands where a Tanker and C130 could be replaced by a single A400M.
Summary
Obviously, this is a complicated PFI and I don’t have all the facts to make a proper analysis of it. The £450 million per year figure is an average annual cost and will factor in 27 years’ worth of inflation. The current fleet will cost around £348 million if the same inflation adjusted figures are used and this does not include buying the aircraft and infrastructure. However, even considering buying the aircraft and inflation it seems that the FSTA provides us less capacity and much higher annual costs than simply owning the aircraft outright would. Purchasing additional A400M’s and equipping the entire fleet with aerial refuelling capacity not only provides us with a better more flexible solution it may also provide us with the solution to getting out of the PFI contract.
http://www.aviationweek.com/Article.aspx?id=/article-xml/awx_07_05_2013_p0-593999.xml
What this then?
Let’s hope this means FAA aircraft based in CVF will be free from the RAF’s AAR PFI rhubarb.
Interesting pilot review video of the a400m test flight
http://www.aviationweek.com/Blogs.aspx?plckBlogId=Blog:27ec4a53-dcc8-42d0-bd3a-01329aef79a7&plckPostId=Blog%3a27ec4a53-dcc8-42d0-bd3a-01329aef79a7Post%3a26ccf0a5-2256-4879-901f-c6e060a75f5f
Jeremy
That would be correct for the USAF variant which to my recollection did not require a troop transport capability from these aircraft in its requirements and Boeing made sure any additional capability frankentanker couldn’t do was not scored favourably.
All aircraft converted for military use are unlike there civil look alikes in more ways than anyone looking at them fully appreciate especially one with a great big boom attached. It does however not alter the fact that the structural strengthening of the upper deck and fuselage for the large cargo door gives an additional weight penalty to the aircraft. If these jets are used for 25 years on pfi they will not be sold to anyone other than the breakers yard.
The mod won’t be selling them since we don’t own them. air tanker wouldn’t really be too bothered what we asked for.
@Mark
My understanding of this (and it is from a really dated conversation) is that you could use a cargo-version of the A330 but the modifications to make it a tanker basically mean it is a pure military aircraft not all that suited to eventual cargo service either. The USAF I am fairly sure was going to use the A330F as the basis for the KC-45 since that is what they were going to built in Alabama.
Because there is a weight penalty from having the upper deck configured for pallets. This affects range, performance and fuel offload capacity. It can still carry a number off pallets in the cargo areas generally sufficient for any deployment the aircraft is making with accompanying personnel, or aircraft so on balance it was deemed not required.
@Alastair
Because of the PFI. They want to be able to resell these things later and the freighter version can’t command the price a passenger version can.
Although no one really likes the PFI contract it’s what we’ve got and there’s little chance of changing the terms.
My question is why did the RAF not choose the freighter version instead of the passenger version? This can carry approx 250 people compared to 300 in the passenger version. However it can load 26 x 463L military pallets in the upper deck in lieu of passengers.
This would be a very useful capability with the planned exit from Afghanistan, especially since the A400M won’t even be in service by 2014. Post 2014 the combined C17/A330 fleet would provide great flexibility in lift capacity.
BB
The Turks have just over 200 F-16C + 100 updated F-4. The F-4s will be replaced by 30 more late model F-16C + F-35.
You would have to look up what those 300 Turkish jets are, JH, if you are to measure their worth against the RAF’s few aircraft.
The one the Syrians shot down was a Phantom. Would you swap a couple of Typhoons for three Phantoms, for the sake of a larger RAF?
I couldn’t say what the Turk’s air force consists of without wikiing, but their 300 combat jets would be less impressive if a substantial chunk were single-role or aging legacy aircraft.
Well, JH, it would all depend on what you want to do with your jets. The UK expects future ops to be conducted in a coalition, while Turkey can’t really be confident of US support, even if it somehow becomes politically acceptable to the public. This means the UK can afford to cut a few planes, while Turkey has to operate with the assumption that what they have at hand is all they would be able to field.
Another factor to consider is overall strategy. If you are using an air force for pure air defence, as opposed to air defence and CAS, less planes might actually mean more, as instead of a split force, you have all your nasty stuff doing what they do best instead of being split into 2 chunks with different jobs.
PS: Nothing wrong with “civilian” liners used as tankers, even the old standard KC-135 was actually a civilian “707” co-design. As long as it works and is cost effective.
What I also really struggle with is these airplanes don’t have any desirable in flight entertainment. Whilst that is fine for troop movement and evacuation I wonder which airlines are seeking such a heavy, long range basic fit-out?
I am quite sure at the right price there will be demand but whether clocking up the airframe miles is worth it I doubt.
Even Turkey can field 300 combat jets. It is scary that the UK chooses not to, while wasting money on foreign aid & welfare benefits for terrorists.
http://www.ainonline.com/aviation-news/ain-defense-perspective/2013-05-24/airbus-a330-tanker-finally-gets-british-ticket
We’ve gone from close to 400 fast jets to less than 200 who all have quite gd range compared to the likes of jaguar/harrier so prob why tanker numbers have gone down.
Perhaps it is only when you look at the RAAF A330, that you realise what a lousy deal the Voyager PFI deal is. TD did a good item on what is missing from the Voyagers. They are airliners in drag rather than the proper military tanker/transports that the Australians have bought. I wish the RAF had bought 14 to the same standard as the RAAF (apart from RR engines). It would have cost around £2 billion. No money in the MoD? Around the same time £375 billion was being created out of thin air to keep banker bonuses rolling. Could we really not have slipped two billion off to the A330 RAF buy? It is all political will, rather than cash.
@ Brian – You are correct of course. There was no way in the mod budget to find the money in 2008 and certainly no money. The voyagers will represent a significant improvement on many ways over the current system. My major concern is that the future budget will be unable to absorb these costs and it could have been an area for real saving in the future.
If we could turn back time I would say the MOD would have been better served with a much smaller buy of the A330’s and equipping the A400M’s for AAR role. I know it would be harder to support a fleet of say 5-7 Voyagers but we do this with the Sentinel and using civilian aircraft like this opens up the possibility to borrow from the civilian supply chain for training facilities, maintenance etc.
Could the MOD have afforded a buy of 5-7 Voyagers? Maybe Maybe not. There was also the assumption back them that they would be able to retire the Tri Stars by now which obviously has not happened and I am sure this extra cost has been added to the contingency budget which they would not have been able to do back then if they had planned to wait for the A400M’s
You may bemoan the number of aircraft that AirTanker are delivering, Martin, but if there was no PFI could we be sure of getting even 14?
The PFI contract was signed in 2008; since then we’ve had a change of government, ministerial changes, and various defence and spending reviews. AirTanker are yet to deliver all the contracted aircraft -so considering the budget ‘black hole’, the defence cuts so far, and the persisting spending squeeze- if the MoD had decided to buy outright in a regular procurement, would the cash still be there for all fourteen aircraft?
It’s not so hard to imagine an alternate, PFI-free reality where the treasury pulls the plug on the last couple of Voyagers – as with Atlas.
@ Brian Black
Interesting information Brian. We can say the MOD has guaranteed access but what do we mean? We are basically talking fines if the aircraft are unavoidable for some reason.
No doubt the A330 is a very reliable aircraft. I was referring to military aircraft in general in terms of safety and let’s just hope the enemy never gets a vote of weather or not they are war planes. my point in terms of losses was more to do with the fact we have 14 large planes instead of say 24 smaller ones. It does not leave for much attrition.
it will be interesting to see how things work out with allied refuelling in the contract.
Martin:
” The big question is do we have to pay when we use allied tankers?
Quote from the MoD:
” The RAF will still be able to refuel from allies and vice versa; beyond certain parameters AirTanker will be entitled to compensation where the RAF takes on more fuel than it gives away.”
Martin (on the MoD chartering an AirTanker flight):
” Sorry lads wars off because we have no tanker’s…”
Quotes from AirTanker:
” The flights are flown on the civilian register by an AirTanker crew and operate in a similar way to a charter aircraft but the MOD has guaranteed access and therefore greater flexibility in their usage.”
” Voyager 01, began flight operations with the RAF on 8 April 2012. From its operational start date to the end of last year it has:
Flown 385 times covering more than 1,096,500 kms
Carried more than 21,800 troops and directly supported the Afghan air-bridge
Carried in excess of 1,441,000 kgs of cargo
Clocked more the 1,300 hours
Achieved a 98 per cent plus, on time service delivery – a level of service comparable with a commercial airline.”
Hi, Martin.
” These are warplanes and have a tendancy to crash allot more than civilian airliners. What happens if we take several loses in quick succession.”
These are not warplanes, they are indeed civilian airliners; A330-200 with a grey paint job. And some of the Airtanker aircraft will actually be civilian licenced rather than military registered planes.
Owning these aircraft outright would not help us at all if we did take several losses in quick succession, whether through accident or combat. I think your concern about aircraft loss is misplaced anyway; the A330 is not an unsafe aircraft. A quick Google reveals that of around a thousand A330 to roll off the production line, only three hull-loss air accidents have occurred. Of those three incidents, one was a test-flight simulating engine failure during a climb, which resulted in wing stall – a hazardous but deliberate test manoeuvre. Another is attributed to the flight crew. The other was the French flight that crashed in the Atlantic; the problem originating from faulty pitot tubes (no longer fitted), leading to incorrect airspeed indication, but with the response of the flight crew being a significant contributing factor.
There is no indication that these aircraft have any unique tendency to crash.
Have a look at this video of Iron Maiden Frontman and Entrepreneur Bruce Dickinson. He is speaking in Cardiff, last year at Entrepreneur Wales 2012. You will need to forward it on to about the 5 minute mark. When he was asked by Government, about the running costs of an airline compared to the cost of a 14 Aircraft fleet of similar aircraft. which I can only think it is the Voyager Contract.
http://m.youtube.com/#/watch?v=vq_jugoSV60
(If you’ve got the time to watch it all,it’s a pretty good talk.)
He also runs Aviation Wales out of RAF St. Athan,
http://www.bbc.co.uk/news/uk-wales-17906058
I should also mention he is also involved in the Heavy Lift Hybrid Air Vehicle Airship, that was tested by the US Army, not so long ago!
By the way TD, were are the Open Thread pages gone?
@ Sir H
“we are getting a capability we can be certain we will have for a fixed period of time – not one of declining returns over time.”
That’s true hopefully although I am not sure how Airtanker can guarantee this. These are warplanes and have a tendancy to crash allot more than civilian airliners. What happens if we take several loses in quick succession. Do we simply start levying fines against Airtanker in the middle of a war. Also we may be getting guaranteed availability but we are paying through the nose for it.
@ X – The contract as far as I am aware covers the MOD and not just the RAF so in your example yes we would have to pay a penalty. The big question is do we have to pay when we use allied tankers? How many USAF tanker refuelled Typhoons and Tornados in ops for Libya?
@ Mercator
In fairness to Airtanker they would have put the booms on but the MOD loves to tinker with off the shelf designs so it can have a bespoke Gucci feel. It’s kind of like buying a proven APC then spending £500 million f**king around with its gear box.
@ Alex
“We’re getting a promise that they’ll give us a refund if they don’t turn up, “
Yeah pretty much sums it up.
@ Brian Black
“While those five additional aircraft can be used for commercial charter, we have the first call. If the MoD need to charter a flight, they can take advantage of those aircraft without worrying about aircraft availability and cost within the airline open market.”
But do we really? Or can we just apply penalties when they are not available for our use. Sorry lads wars off because we have no tanker’s but don’t worry Airtanker’s going to chuck us a few quid.
Airtanker seesm to be giving up on the civilian charter market and focusing on EU militaries which will mean that just when we need them all for a coallition op so do our European Allies.
@ Mercator
That’s a fair cop TD. I’d forgotten about that one. Still, that’s a very big aircraft being filled from a very small hose. The longer he spends on the tanker, the less time he’s on station. I’m not sure you can even radiate from the E-3 when tanking.
The central drogue line on 7 of the aircraft will be a high capacity line specifically for our E3D’s. However I would still prefer the boom system for our C17’s (maybe not a big issue) RC135’s and possibly one day a P8 (very big issue)
Mercator
Adding to TD’s reply, actually the RAF’s tankers are usually the first port of call for USN and USMC aircraft when on current operations, they particularly like how 2 FJ aircraft can refuel at the same time, thus reducing time away from being on station, something unavailable with the boom or even the pods on current US aircraft.
The issue with the boom is cost, weight and space, but I agree that its better system overall, just costly. I do feel though, that even if these were direct purchases, the MoD would have oped for 100% hose and drogue.
x
USAF tankers usually shadow USN groups (much like how the C2 does) for operations, other than the rapid and totally isolated at sea ops, the usual rule is that carrier tankers can hold large ops demand for a while, until the bigger tankers can arrive (ditto again with the C2).
Mercator, the RAF E3D’s have refuelling probes
That’s a fair cop TD. I’d forgotten about that one. Still, that’s a very big aircraft being filled from a very small hose. The longer he spends on the tanker, the less time he’s on station. I’m not sure you can even radiate from the E-3 when tanking.
The boom provides three times the flow rate of a hose and drogue. There is definite utility from it, and had it not been a desire to keep these aircraft available for civilian use, I would have been amazed if the RAF had not chosen the centre line boom configuration as well.
We must remember from where the decision to privatise rail (and how it was privatised) came………
It’s a bit simplistic and misleading to compare the costs of the existing and replacement fleets against aircraft numbers alone. That doesn’t take into account any difference in reliability & availability between the two fleets, and the flying hours that each can deliver; nor does it take into account any difference in capability between the aircraft – for example, compared with the VC10, the A330 can carry about twice as many passengers and at 1000nm can offload 60t of fuel against 35t.
Allowing Airtanker to use some of the new aircraft under a civilian licence means that we won’t be stuck with the problem of peacetime over-capacity – ie. carrying the full cost of holding underused aircraft and crews, and then finding that in 50 years time we’re back to today’s situation of fielding an increasingly obsolescent and inefficient tanker fleet whilst unable to find a large wad of cash out of any one year’s equipment budget for their replacement.
While those five additional aircraft can be used for commercial charter, we have the first call. If the MoD need to charter a flight, they can take advantage of those aircraft without worrying about aircraft availability and cost within the airline open market.
There are apparently caps on excessive profits within the Airtanker contract -or so the MoD claim- so we should be able to sleep soundly without worrying about the capitalists fleecing us.
The aircraft have a fully functioning das system installed as contracted for. The requirement for afghan has changed since contract signature and the aircraft are being modified.
The requirement is for 9 aircraft hence why 14 were acquired redundancy.
The boom always comes up. Pretty much all the major European airforces and the us navy use the probe and drogue. USAF and f16 operators use the boom maybe they should change. Since we’ve had the c17 have we ever air to air refuelled them. If we buy a big strategic aircraft we simply ask for the drogue option if the manufacture can’t provide one buy a competitors product.
I’m sort of with you on that Alex.
The cost of a rail ticket I think we all believe is extortionate. Every time I use the tube or a train it feels like daylight robbery. We are told this is for two reasons 1. lack of previous investment and 2. because actually it is expensive to run these things.
Well having worked in the rail industry I can inform you all it is expensive for precisely those two reasons but that very little is being done to tackle the latter. Drivers earning £45k basic is outrageous, and their militancy is something else as well. The train operating companies, and no doubt the leasing companies are under no pressure to reduce costs. The train infrastructure company I worked at appeared to be more sensible, but I expect they had exactly the same issues.
A point well made Alex.
We also don’t know if the payments escalate as the aircraft age, just sayin
unlike the last days of the fleet where serivcability became a major problem, the RAF is buying guranteed availability for 30 years. This is important to understand – we are getting a capability we can be certain we will have for a fixed period of time
Magically, Airtanker will be able to ensure their a/c never break down? Balls. We’re getting a promise that they’ll give us a refund if they don’t turn up, if they can’t wriggle out of it and if there is any money in Airtanker. That’s what the guarantee consists of. This might be meaningful if there were more airframes over and above the requirement, to guarantee the availability through redundancy, but as you know Bob the deal is also meant to be delivering the capability with fewer airframes because fewer-but-better and chartering out any that aren’t needed literally now. So there is no reserve, no redundancy. Just a promise (a PFI-merchant’s promise at that) that when they don’t show up, they’ll give us a refund from next year’s bill subject to negotiation between them and HMT (don’t spend it ’til the cheque clears is my advice).
Also, as for the “oh, it seems a lot but they threw in everything down to the last sheet of toilet paper” stuff, this is just the hard sell, like a guy in Tottenham Court Road offering to chuck in a laptop bag and a mouse if you take the pricier option. They have a monopoly of providing the toilet paper, etc, and there is no way for MOD to control the costs, so guess where the margin is?
It’s typical economist bollocks. Everything can be fixed with enough contractual penalty clauses. What it reminds me of most of all is Railtrack, and this sort of stuff broke down horribly there.
Mercator, the RAF E3D’s have refuelling probes
What gets me is you have the world’s biggest tanker with shitloads of fuel to potentially offload but no capacity beyond the pissy little hose and drogue system available. Your tankers cannot refuel other tankers, C-17s, P-8s, Rivet Joint, any flavour of AWACS, nor any of the other U.S Air Force fighters and bombers. It seems like an enormous waste of capability and, to me, worth getting out of the contract just say you can rectify that alone.
I think you are stuck. The only option you really have would to use default or failure to perform to nibble at the edges.
I think the project is well late now but it seems to be HMG that is still making concessions like funding extensions to the existing tankers. Why you haven’t demanded a quid pro quo like allowing the A400’s in the unmentionable isles to carry refueling pods I don’t know.
Still government purchasing offices are usually well trained to give in to contractor’s!
It isn’t just the contract per se that is the problem it is the exclusivity clause and resultant penalties.
Can a FAA tanker refuel an FAA F35b both flying from CVF in the middle of the Indian Ocean without the MoD having to pay AirPirates, sorry AirTanker a stipend? That’s the question. I only ever see reference to the RAF never some catch all term for all UK warplanes. Yes it is a hypothetical. but only as outlandish as something somebody here, can’t remember who, suggested that CVF air groups rely on a Voyager if such a capability was needed. **
** Another parting thought. Just because we don’t do it now doesn’t mean we won’t want to do it future.
Sir Humprey
I guess that is a good improvement, but it makes me wonder whether they previously accounted for ‘every last piece of loo roll’ accordingly. If they didn’t then producing such a budget and extrapolating that over thirty years is going to be a skill similar to guess work.
Secondly it is the lack of boom and UARRSI not to mention DAS which leaves me with so little confidence.
The problem is that firstly buying out the contract causes major headaches for provision of not just aircraft, but manpower, training and so on. The cost is for the entire life cycle of the capability down to the last sheet of toilet paper. We’re still going to have to find thatm oney somehow, but it will be absorbed into other budgets which will need to be cut to make room.
Also worth noting that based on the availability of the fleet, the 14 A330s are designed to provide through life availability equivalent to the fleet of Tristar / VC10s – e.g. unlike the last days of the fleet where serivcability became a major problem, the RAF is buying guranteed availability for 30 years. This is important to understand – we are getting a capability we can be certain we will have for a fixed period of time – not one of declining returns over time.
that’ll be my friend Hammond, I fear that a contract has been signed and although the A400M is a solution there are no quick and easy answers.
Who said this
I think this is a topic we all largely agree on. The financing is the bit which causes the most anguish. The maintenance and support (service aspect) some continue to believe could be provided by the private sector.
A lender will have in place a facility agreement which will have penalty clauses for early repayment and drawdown facilities will be specified. Despite the government largely owning some of the banks in question all shareholders would need to be treated equally. As such the agreement to lend money to Airtanker Finance Limited would need to be terminated or renegotiated on commercial arms length terms.
In a perfect market the valuation of the Government’s shares would of course reflect the margins of the business, reducing the outgoings of the MOD would be good for Mr Hammond, but the treasury may find the net effect is not quite so glowing. The treasury is full of economists and will not be easily fooled by the accountants. Mr Hammond is one of our better ministers at getting to grips with finances. I think he falls more into the accountant than economist mould and he has apparently been looking at the contract (11 May 2012 he told BBC Newsnight that “I will go back to the MoD and look personally at what is being done around this PFI contract.”)
Having worked for a specialist PFI/BPO company, and one that very nearly went under whilst I was in the thick of it, I observed that contracts are contracts to make a loss as well as a profit. Although clauses can be added to prevent excess profits, as a negotiating stance I imagine they need to be tied to a specifc point and would usually have a cap and collar (upper and lower) kick in. In short you need to negotiate a good contract in the first place. We failed to do that.
In terms of financing the government, despite its fiscal issues, is able to borrow very cheaply. Certainly cheaper than Airtanker Finance Limited is going to have agreed to borrow at. However some companys are actually paying less to borrow than their governments. The real issue I have with PFI type contracts is that it effectively monetarises assets.
For years we have been taught that monetarising assets is a good thing yeah? Well maybe for underutilised stuff where there are tax benefits of incurring an expense. This simply isn’t the case for governments. It is political window dressing – making money appear in a puff of smoke but leaving nothing but future expense in return. This of course is one of the problems with the ‘structural deficit’ – our structural bit has grown as well as the deficit bit.
I’ve been a bit defeatist above, coming up with reasons why we will have problems renegotiating etc. I absolutely believe we need to get to grips with this contract. It is absolutely ridiculous and could easily be blamed on Gordon Brown. We perhaps need someone to steamroll the extraction through rather like GB did with the signing. Mr Hammond is not that guy he takes the considered approach.
So when to do this? and at what cost of money and future credibility to PFI as a concept? As I don’t agree with PFI I care not about the credibility but Mr Hammond is smart enough to go through the numbers and consider the risks. Presumably he has concluded the timing is not right. I suspect he feels a delivered fleet amounts to a substantially reduced risk; at the expense of a mismatched capability though, in my view.
Maybe he subscribes to leading the cow through the door rather than pushing it. These 5 planes aren’t going to lease for much, if they hang around on tarmac AT will be gladly offload them cheaply. Of course we don’t know he believes the contract is rubbish but I hope the planes are more capable than proposed.
@ El Sid
I agree that 14 A330’s would be a match for 19 767’s but we are not getting 14 only 9 with the ability to use 6 more if needed. This will come at extra cost.
@ Ace Rimmer
I am guessing AirTanker will have a clause to allow it to repay the the financing when it chooses but I don’t know it for a fact. Either way it should be possible to get out.
@ Jeremy M H –
I would doubt the bankers would be that opposed. Split between multiple banks its a relatively small project for them and most of them are keen to offload debt to build more liquidity.
@ Mark – I hope all the european tanker deals go through and that they purchase a good number of the pods for their A400M’s however EU governments have failed to invest in this capability for a long time and budgets are being slashed all the time. Equipping our A400M’s for AAR would be relatively cost effective and would give us one of the major capabilities required to form a coalition. Maybe 30 sets is too many there will obviously be aircraft unavailable even in a surge but I think being bale to filed a total of nearly 30 tankers 8/9 A330’s and 20+ A400M’s is a worth while goal to have.
It’s perfectly fair to compare 19 used planes versus 14 new ones. You’re buying hours, not airframes. Say your new planes have 19,000-hour lives and your used ones have an average 5,000 hours on the clock. If you want to buy 266,000 hours of airframe life, you can either buy 14 new planes that can do 19,000 hours, or 19 planes that can do 14,000 hours.
Obviously it’s more complicated than that as the two will be different in maintenance costs – and that’s before you get on to the fact that the 330 can carry more fuel than a 767, and they will have different availabilities. But you get the idea.
The big news recently is that the MAA cleared Voyager for fueling last week, albeit with the old drogues, and the first operational sortie as a tanker happened on Monday. It’s been a long time coming, but it’s a big landmark.
As for buying out the contract – it’s possible, depends a bit on the letter of the contracts. One of Hammond’s big things has been getting the Treasury to be a bit more flexible about moving stuff between years if it reduces the TCO – it’s easier given the low cost of borrowing at the moment, particularly for governments vs corporates. Buying the Rivers is a small example of him preferring to buy outright.
I have long been a critic of this ghastly PFI.
In May 2002, it was reported that post 9/11 many 2nd hand aircraft values had slumped. For example , near new MD11s had dropped from $46 million to $39 million. Several airlines got rid of their entire 15 strong MD11 fleets all with the same engines/avionics. IF the Treasury had been awake we could have bought 15 MD11 from the same airline all to the same spec for under $600 million. The Dutch had no problem turning older DC-10s into tankers. Even with conversion & infrastructure costs, the whole bill for 15 (not 14) would have been under £1.5 billion.
I think there is a good case for a new Unfair Contracts Act that covers PFIs.
If we keep the 9 three point A330s, I would look at adding a flying boom to the 5 two point A330s. Once we have bought them out of course. With the weight of refuelling gear, no charter airline is going to use them for passengers without fat subsidies. That daft idea needs to be knocked on the head for good.
Martin
While all aircraft are pre wired to take pods you wouldn’t need more than half a dozen to 8 aar kits available, you are never going to assign all your a400ms to the aar tasking. Think Libya was closer to 50 tankers but that was a coalition operation and Europe will receive over 150 a400m and about 30-40 dedicated tanker aircraft in the coming years we only need to make a contribution not do it all ourselves.
I certainly hope that the UK is able to get out of this deal but I am dubious about politicians finding the political will to try if the banks are opposed to it.
I do agree with Mark, you could get by with something like 8-12 sets of refueling pods for the A400m. You don’t need a set for every aircraft. I think the USAF is buying around 40-50 sets of drouge pods for the first 150ish 767 based tankers.
@ Mark
“Interesting article but the chances of getting 2b in the budget now to do his without cancelling something is imo zero or even less.”
Agreed, As I said the money would have to come from the treasury rather than the MOD budget. The alternative would be to change the rules and allow the MOD to borrow it as with the Northumbria NHS Trust. If the NHS can borrow I don’t see why the MOD can’t.
I’m guessing there isn’t a clause in the contract that prevents Airtanker from going out into the market place (when the markets improve) and getting their finance at a better rate. The difference between this and the original rate is then pure profit in addition to the agreed profit, this is a common trait practiced by PFI consortium’s. If the MOD had had their wits about them they would’ve seen this in advance and popped a clause in to cover it.
@ Mark – I agree its a balance but a mixed fleet of 9 A330’s with a reserve of 30 A400M’s would give us a very flexible fleet. The 330’s offering the strategic capability and the 400’s giving us the depth. In Libya around 30 tankers were required. A fleet such as this should permit us to carry out a similar operation without USAF support if need be.
@ Chris B –
“There was something about a get out clause, as long as the MoD paid something like £75 million per plane. It’s in the NAO report on air tanker.”
That’s interesting. I did not read it in the NAO report but I will go and have a look.
There was something about a get out clause, as long as the MoD paid something like £75 million per plane. It’s in the NAO report on air tanker.
Interesting article but the chances of getting 2b in the budget now to do his without cancelling something is imo zero or even less.
You don’t need 30 tanker kits for a400m. While it can function as a tanker or a transport, it has limited capability to do both at the same time over any distance, it is a tactical tanker aircraft. A330 is a strategic tanker aircraft with significant fuel off load capability while having the capacity to carry a reasonable amount of cargo for long trails or refuelling planes further from base. The conundrum is do you want more fuel offload capacity or more hoses in the sky.