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Letter from Dan Crippen, Director Congressional Budget office to John McCain re: alternatives for modernizing the Air Force's fleet of tanker aircraft 1 (May 2002)

handle is hein.congrec/cbo9852 and id is 1 raw text is: CONGRESSIONAL BUDGT OFFICE Dan L. Crippen, D, U.S. Congress bashinton, DC 20515 May 7, 2002 Honorable John McCain United States Senate Washington, DC 20510 Dear Senator: As you requested in your letter of April 17, 2002, the Congressional Budget Office has analyzed several alternatives for modernizing the Air Force's fleet of tanker aircraft. We compared the cost of purchasing Boeing 767 tankers to a variety of possible arrangements for leasing Boeing 767s for use as tankers. The estimates provided here should be considered preliminary because CBO did not have access to the details of ongoing negotiations between Boeing and the Air Force regarding a potential lease. Nonetheless, under a variety of assumptions, a long-term lease of tanker aircraft would be significantly more expensive than a direct purchase of such aircraft. That result is not surprising. CBO's analysis is similar to the type of cost analysis that agencies are required to perform when they are considering leasing any major asset that is built for the express purpose of being leased to the government. Factors that tend to make the lease of such assets by the government more costly than a direct purchase include the lessor's cost of financing (which is higher than the cost of Treasury borrowing), the need to set lease payments high enough to compensate the lessor for the risk he incurs by producing an asset for which there is a limited market, and any increased administrative costs associated with a lease rather than an outright purchase. Further, in this case, the need for tanker capability will presumably not expire with the lease term-something must be purchased or leased to replace it. Therefore, we have included an estimate of the cost to purchase these tankers at the end of the lease term-the most likely option to preserve tanker capability. Leases have a greater potential to be cost-effective if the government does not have a long-term requirement for the asset. That does not appear to be the case here. Cost-effective leases also require the existence of a substantial market (by scoring rules, a private market) into which to sell assets at the end of the lease. While there is no private market for tankers, even the public, government market is not likely to absorb more than a few of the 100 tankers.

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