Monday, July 7, 2008

Tanker Decision: Predictably Irrational

Air Force procurement actions have a lot of us asking, "Why?"

As in, why did the Air Force select the KC-30 in a process that the Government Accountability Office ruled was conducted in a most biased and seemingly irrational way.

In our continuing search for answers, we believe we may have found something in the book Predictably Irrational by Dr. Dan Ariely.

When people make decisions they think they're in control, making rational choices, but as Dr. Ariely shows, often they are not. In an entertaining and surprising way, he unmasks the subtle but powerful tricks that our minds play on us.

We think that Dr. Ariely's research on the Power of FREE relates strongly to the tanker contract selection. FREE is a magical price, one that people don't evaluate in the same way as other prices. It is guaranteed to make us do strange things and go crazy with desire. FREE tricks our minds into thinking there is no downside, even though there may be hidden costs or the product is not what we really need. Here is a link to a video on the Power of FREE. Also, here is an article that explores the allure of something for nothing.

A variation on the Power of FREE is where people will agree to a bad deal because it appears to offer something extra for free. If you remember back to that fateful February 29th, during the KC-X contract announcement press conference when General Lichte had this to say about the reason the Air Force chose the bigger Northrop/EADS tanker over Boeing's tanker:
Well, I -- from a warfighter's perspective, and I know the team looked at a whole number of things, but from my perspective, I can sum it up in one word: more.

More passengers, more cargo, more fuel to offload, more patients that we can carry...
Many of the statements out of the Air Force since have echoed this more is better mantra. It almost seems as though the Air Force fell for the old marketing trick of advertising a product as getting 20% more free? In this case it would be closer to 18% more fuel hauling capacity free. (Remember this was before the Air Force figured out that the KC-30 was more expensive.)

We have begun to wonder if we should similarly advertise to increase our blog readership. So, we had TAnchorman, who has just returned from vacation, make us a new marketing slogan and label (on right) to put on Tanker War Blog. We are not sold on the idea, but we bet at least a couple of people in DoD will be.

They should not be too hard on themselves though. We wrote Dr. Ariely to ask about his thoughts on our More for Free Tanker Theory. He said that the situation was, "very sad but we all fall for this trap....".


Anonymous said...

Defense procurement is use to more with Boeing. Boeing Screwed Up, Give us $500 Mil. By 2005 – after $10 billion on FIA, including about $4 or $5 billion in cost overruns. The government finally had enough, taking the project away from Boeing, and giving it to Lockheed. When procurement can actually get more - they get more even.

Anonymous said...

In aviation, unlike most other endeavours, you NEVER get something for nothing. Consider the Boeing 707 versus the Douglas DC-8. Both planes were extremely well built but the DC-8 was overbuilt in the traditional Douglas manner. This can be seen in the number of DC-8 still flying in comparison to the 707 and is due to the fact that the skin of the DC-8, being significantly thicker than the 707, can take far more cycles (takeoffs and landing). I am not sure of the exact number but it is something like 18,000 cycles for the 707 versus 32,000 for the DC-8. Sounds great, you are getting something for nothing. One major problem, the DC-8 to have that stronger skin has 8,000 lbs of structural weight more than the 707. As a result, the 707 out sold the DC-8 because it was significantly less expensive to operate. In aviation every extra ounce above the weight needed to perform the needed task results in extra fuel burned to get the extra weight airborne. If extra capacity that “could” be used were worth something, you would see airlines flying larger aircraft on routes. They do not because capacity they routinely do not need is just extra dead weight that costs extra fuel to get airborne. The Air Force has always looked at the ‘worst case’ scenario in their thinking. But when one considers the life cycle cost of an aircraft, the cost of getting UNUSED EXCESS capacity into the air MUST be considered. Unless the Air Force is going to routinely load and off load (in flight) the extra capacity the A330 provides, which from the original requirements does not look to be the case, then the Air Force in selecting the A330 will in fact be paying a premium for the A330 rather than getting something for nothing! Bigger is not better if costs more and when considers the cost of fuel today, every unused ounce linked to unused capacity is a liability.

Anonymous said...

There is a great article up refuting the "more is better" argument. I'd recommend it to all readers.

The author is a former AMC and Transcom commander who retired in 2005.

Anyone seriously interested in understanding this issue should read it.

Anonymous said...

Anonymous Blogger 2 is obviously an intelligent person that took the time to consider the constant weight concerns in the aerospace industry. All of these people that jabber on about "More fuel, More cargo, Right Choice," are falling into the exact trap that the author of this blog is getting at. Saying something like that is exactly the reason that NONE of the regional carriers buy or use an A380. Because you cannot make any money by flying around empty seats. Who needs 853 seats to fly from Spokane, WA to Portland, OR? If the airforce wanted the best bang for their buck, they would have bought the 767 because it carries a more APPROPRIATE amount of fuel for an AVERAGE refuel sorte. This means that they are not carrying half their total available offload back to the ground.