The Pentagon's Inspector General and the Senate Commerce Committee are also investigating the case, and the Pentagon recently expanded its probe to other major Boeing defense contracts, going back to 2000, in which Druyun was involved. At Commerce hearings Senator McCain led in September, the Arizona Republican, an early critic of the leasing deal, said that documents Boeing provided to the committee investigation "provide a troubling view of the extent to which the company, and not the military, controlled the acquisition." He said the committee's review showed "an extremely aggressive sales pitch not only by a company whose mission is to protect its shareholders and to make profitable deals, but by the United States Air Force whose mission is very different."
A Senate staffer familiar with the case says that questions about BCC "reflect a degree of granularity that the senator hasn't focused on." But, the staffer notes, Boeing Capital emerges as a player over and over in the various Boeing investigations.
Beyond Finance
When Boeing chief executive Phil Condit resigned on December 1, a week after Sears's ouster, media attention quickly moved beyond the "unethical conduct" that Boeing alleged Sears had engaged in. Recently, the quality of Condit's leadership through a range of Boeing ethical lapses and the lost airliner competitions to Airbus, has taken center stage. Even before news of the Sears-Druyun case broke, the company had become embroiled in a scandal involving a competition with Lockheed Martin Corp.
Condit was replaced as CEO by Boeing director Harry Stonecipher, a former company president who came out of retirement to take the job. Stonecipher, as it turns out, had much to do with the creation of Boeing Capital after he joined Boeing in the 1997 merger with McDonnell Douglas Corp., which he had headed. A General Electric Corp. executive before going to McDonnell, he was familiar with the success GE had had with GE Capital Corp.
While Boeing had been shy about aggressively providing customer finance, McDonnell Douglas had its own MD Financial Services unit. Boeing's newly hired CFO, General Motors veteran Deborah Hopkins, was placed in charge of Boeing Capital in 1998. BCC then went about making financial arrangements to help customers, especially airlines in need of fleet replacements or expansions.
When Hopkins left for Lucent Technologies and Michael Sears replaced her in 2000, he was given the chairmanship of Boeing Capital, and the aggressive lending continued. Little is known about how Boeing developed its specific plan to offer the Air Force an attractive deal to replace old airborne tankers with brand new KC-767s. But Boeing Capital pops up in many of the early E-mails that the Commerce Committee has collected from Boeing. They reveal the pitch being made to the Air Force.
"Boeing knew that the Air Force wasn't going to be able to get anybody to spend $2 billion - $3 billion for tankers right away," says aerospace industry analyst Paul Nisbet of JSA Research in Newport, Rhode Island. There was no money for tankers in the defense budget, so a leasing arrangement "was the only way to get the deal done," Nisbet says.
From Boeing's standpoint, with commercial sales sharply off and production rates for 767s in particular trouble, an immediate tanker deal was a lifesaver to pump up the assembly line. Such a transaction would obviously mean a huge amount for the embattled company "It's one of the biggest deals ever for them," according to Nisbet. The 100 tankers, he says, represent only a start toward multiyear Air Force replacement of a large fleet of hundreds of aging airborne tankers. The Air Force says that eventually it must replace its 544 KC-135s, which share Boeing's four-engine 707 design. They have an average age now of 44 years.
From McCain's perspective, expressed in his September hearings into the matter of the tanker lease, the Air Force proposal did not go through normal processes. Rather, the request for a 100-plane Boeing deal popped up as a rider on the 2002 Defense Appropriations Bill — which the senator notes was written a few months after global airliner demand was devastated by the events of 9/11. The deal also emerged after Boeing had lost its bid for the Joint Strike Fighter program, which Lockheed Martin Corp. won, McCain noted.
The E-mails eventually provided to McCain's committee by Boeing throw some light on the process that was going on between Boeing and the Air Force, Senate staffers suggest. In one E-mail to Michael Sears, written October 21, 2001, Gerald Daniels, president of the Boeing Military Aircraft and Missile Systems unit, describes a Boeing meeting with Darleen Druyun: "USAF wants us [Boeing] to support their language for an operating lease. Darleen will make the actual contract favorable and is willing to go to the financial market with us to stress the low risk in such a lease with the USAF. I think we should support her plan."
Two months later, an internal BCC E-mail from Robert W. Gordon, vice president, space and defense financial services for Boeing Capital, said: "The USAF clearly does not understand financing and has asked for our help to educate them [in layman's terms.]" He added, "Bottom line: We need to prepare a plainly worded explanation of pricing."
Limiting the Partnership
The added cost that the leasing conditions created for taxpayers clearly irked McCain, who at one point described the SPE as "Enron-esque." While Enron used SPE's to obscure the amount of debt being incurred, in the Air Force's case it would be the taxpayers, not shareholders, for whom the financial realities are obscured, however. "Boeing has been very clear and careful about limiting the amount of its participation in the SPE," says a senate staffer. "They're acutely aware of the accounting rules." He adds: "Boeing did a good job of maximizing the interests of its shareholders. It crafted a transaction around an SPE" so the entity would have to consolidate the debt issued for the acquisition and construction of the tankers. "Clearly, Boeing had no interest in having this deal come up in its own financials," the staffer says.
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