“Giving a Lift to Those in Need”

Docket Management Facility February 8, 2010 US Department of Transportation 1200 New Jersey Avenue, SE West Building Ground Floor
Room W12

- 140 Washington, DC 20590

Subject: Petition for Exemption from 14 CFR Part 21 Section 21.27(a) for Boeing Model C

- 17 Cargo Aircraft.

Pursuant to Federal Av iation Administration procedure for processing petitions for rule making (Title 14 CTR Part II Subpart A), Humanitarian Air Logistics, Inc (HAL) a proposed user of Boeing Model C

- 17 military aircraft upon any ap proval of requested exemption, hereby files subject petition for an exemption from the requirements of FAR 21.27(a) for humanitarian and commercial use of the C

- 17.

R ule f rom w hich r elief is s ought

Part 21 Section 27

-- Issue of type certificate, surpl us aircraft of the Armed Forces states in 21.27(a) that “Except as provided in paragraph (b) of this section an applicant is entitled to a type certificate for an aircraft in the normal, utility, acrobatic, commuter, or transport category that was designed and constructed in the United States, accepted for operational use, and declared surplus by, an Armed Force of the United States

, and that is shown to com p ly with applicable certification requirements in paragraph (f) of this section.”

Na ture of r elief s ought

Relief is sought to allow certification of the Boeing Model C

- 17 military cargo/transport a ircraft under 14 CFR 21.27 without the need for the aircraft to be accepted for operational use and declared surplus by the Armed Force of the United States.

Description of C

- 17 a ircraft r equested

The C

- 17 is a military cargo /transport aircraft operated by the United States Air Force. The aircraft provides the US Air Force with flexibility, s peed, room for heavy and oversize cargo , and landing capability int o short and/or austere fields. The aircraft is powered by four Pratt & Whitney F117

- PW

- 100 turbofan jet engines, essentially the same PW2000 series powerplants as certified on the Boeing Model 757 aircraft.Humanitarian Air Logistics, Inc.

US Department of Transportation Petition for Exem ption February 8, 2010 Page 2

The flight deck features two Head

- Up Displays (HUD’s) that serve as Primary Flight Displays and are designed to enhance the aircraft’s flight safety by providing primary flight information in a heads

- up environment.

Althoug h designed and utilized for military transport in the U.S. Department of Defense (DoD) operations, a much harsher operational envi ronment than is typically experienced by commercial aircraft, the C

- 17 has been used in numerous humanitarian and disaster rel ief applications around the world. The unique design features of the C

- 17 make it ideally suited to provide commercial cargo delivery capabilities not avai la ble in any other airplane type certified by the FAA.

Information provided in s upport of p etition

Airlift cap ability is critical to the Pentagon’s strategy for protecting U.S. national security interests around the world. The C

- 1 7 plays an important role in those operations, enabling the Armed Services to perform previously impossible tasks

– to tran sport oversized, heavy equipment and large quantities of material to place s where it is most needed and that in the past could not be served by large aircraft.

The C

- 17 was designed, built and tested to a rigorous set of standards specified by the USAF. I t entered operation al service in June 1993 and has a long and enviable safety record. It continues to prove its airworthiness in difficult operational c onditions for the DoD. The C

- 17 has proven to be a highly reliable aircraft, demonstrating mission

- capa ble rates exceeding the USAF’s minimum performance specification and approaching those for commercial transport category aircraft.

There is an annual debate in Congress and the Pentagon about the need for additional airlift capacity in the U.S. military and the kinds of aircraft required. Although the C

- 17 is currently in production, the FY11 DoD Budget has the program being terminated.

One of the areas a civil C

- 17 can be utilized is in the Civilian Reserve Air Fleet (CRAF) program which relies on thre e key features

.

1. The CRAF must satisfy a portion of the wartime requirement for oversize airlift, a capacity that does not currently exist in the CRAF fleet of U.S. air carriers

.

2. The oversize aircraft must be available and certified for comm ercial use.Humanitarian Air Logistics, Inc.

US Department of Transportation Petition for Exemption February 8, 2010 Page 3

3. Industry must be willing to invest in and man a ge this new U.S. Business. Industry validated studies conducted by USAF consultants provided evidence that there is a viable comm ercial oversize air cargo market for the C

- 17 aircraft

.

Du e to the lack of commercial over size capabilities here in the United States

-- the DoD and U.S. corporations have regularly contracted with foreign air carriers operating oversize heavy

- lift
aircr aft. For example, between FY 06 to FY 08, the DoD has used former Soviet military An

- 124 aircraft to carry out 887 flights for an estimated cost to taxpayers of $706 million and the

amount of money and number flight is growing each year. During the same ti meframe, the DoD has also contracted IL

- 76 cargo aircraft to carry out 4,967 flights for a cost to taxpayers of $294 million. ( See Exhibit 1 )

According to Boeing ( by commercial standards ) t he C

- 17 is an expensive aircraft when considering its payload and range capability. And b ased on previous estimates, strict compliance to FAR 25 would impose a severe financial burden that makes acceptance of the aircraft by the civil market problematical and likely unattainable

. In addition, w ith the relatively small nu mber of aircraft over which to spread development costs, the price to a commercial customer becomes prohibitive.

In addition, r ecent actions by the WTO make any investment in a commercial BC

- 17 highly unlikely. From in formation available, Boeing no long er has any interest or intention to create a BC

- 17. Thus, i f our nation wishes to find a way to reduce the reliance of foreign carri ers ope rating oversize aircraft and meet the demand for the ‘oversize’ short airfield market (SAM) the USAF version of the C

- 17 is the only available aircraft.

Boeing has previously stated to the FAA that u tilizing FAR 21.27 for the certification process will minimize the changes from the USAF configuration, thus reducing the develop m ent and certification costs while maintain ing substantially the same level of airworthiness. Granting this exemption will facilitate minimizing any certification cost and result in an affordable aircraft that can also fulfill the humanitarian, commercial, and CRAF role s during contingency operatio ns and provide our nations businesses with an oversize airlift capability that is currently lacking anywhere in the world.

A precedent for granting an exemption of this nature can be found in Exhibit N o. 2 with the 1964 approval by the FAA o f Lockheed ’ s r e ques t for the C

- 130E.Humanitarian Air Logistics, Inc.

US Department of Transportation Petition for Exemption February 8, 2010 Page 4

Reasons for granting an e xemption to Humanitarian Air Logistics f or u se of C

- 17

In its September 23, 2008 denial to Boeing for an exemption to 14 CFR Part 21 Section 21.27(a) for the C

- 17 ( See Exhibit No. 3 ), the FAA s tated Boeing had not provided sufficient information

to substantiate the civil use of the C

- 17/BC

- 17 aircraft required to fulfill the need for such an exemption. The FAA also stated in that denial, that they consider the following two main points in grant ing any such petition for an exemption.

1. Why granting the request would be in the public interest , and
2. The effect on safety

.
Our nonprofit company Humanitarian Air Logistics (HAL) offers the following justifications to substantiate the meeting of those t wo objectives listed above.

1. The use of a civil C

- 17 will provide continued coverage for humanitarian and disaster ‘oversize’ airli ft support both here in the United States and internationally. Under Title
10 Sec. 2561, the Department of Defense is permi tted to provide transportation for humanitarian and other assistance but only if other sources to provide such transportation are not readily available . Thus, if civil C

- 17’s were available, the DoD

must defer to the use of that aircraft before using their aircraft. If denied this exemption, the FAA would be preventing our nonprofit, non

- governmental company from meeting the public interest in providing domestic and international humanitarian and disaster transportation assistance as en visioned by Sec. 2561. ( S ee Exhibit 4 )

2. In Public L aw 110

- 417 Sec. 1037, the Congress had asked the Secretary of Defense to ‘determine’ if it is the national interest to have a civil C

- 17

. In the language from that law he is tasked to work with the Secre tary of Transportation on achieving type certification of a commercial variant of the C

- 17 under Section 21.27 of Title 14, Code of Federal Regulations. We will show that it is the public interest to allow that certification for our use of the civil C

- 17. ( See Exhibit 5 )

3. According to a FOIA document provided to us by the US AF Air Mobility Command (AMC)
i n the last three years ( FY06

- FY08) the USAF has flown over 6,400 flight hours in support of humanitarian airlift worldwide on behalf of the American people . The majority of those flights were carried out by the C

- 17. It’s unique ability to land and take

- off fromHumanitarian Air Logistics, Inc.

US Department of Transportation Petition for Exemption February 8, 2010 Page 5

short austere runways, proven reliability and safety record prov ides the federal agencies and non

- governmental organizations (NGO’s) with a valuable tool in providing needed supplies and oversized equipment directly to the front line in a disaster as evidenced by the recent earthquake in Haiti . This ability cannot be e asily duplicated with any other aircraft. It is a capability that has benefited people the world over t ime and again and i t is in the public interest to have this capability available for our use. ( See Exhibit 6 )

4. The USAF is seriously short of flight cr ews and has recently asked retired military pilots who have not yet rea ched their 61st birthday, to re enter active duty service and fly for the USAF. This lack of flight crews can be viewed as a potential national security problem. Providing the exemption to HAL will allow us to operat e civil C

- 17’s for humanitarian flights and that i n turn, will al low the USAF to free up its flight crews. That changeover would be in the public interest because these Air Force flight crews are badly needed for the defense o f this nation. ( See Exhibit 7 )

F ull RAND report found here: http://www.rand.org/natsec_area/products/afpilot.html

5. The President, Vice President, Secretary of State, Secretary of Defen se, Chairman of the Joint Chiefs, and Chairman of the Senate and House Foreign Affairs Committees all agree that the DoD needs to shift the majority of its involvement in foreign stability operations back to non

- military organizations. That includes humanitarian relief operations back to civili an governmental agencies like USAID and non

- governmental organizations (NGO’s) like ours. In its 2009 Quadrennial Roles and Missions Review Report , the DoD speaks about this shift in policy which has been coined by the Obama Administration as ‘smart power ’ while others still use the older term of ‘soft power’. One of the shortcomings in using the military for these efforts is that it has been recognized by various NGO’s, the Congress and even Secretary Gates that the U.S. military is not always a welcome sight in humanitarian operations. In some countries, their very presence has put relief workers and the disaster victim’s very lives at risk. Because the C

- 17 is an important part of those humanitarian airlift efforts (by the DoD) removing the DoD from some of the se sit uations would mean the loss of that unique airlift capability. However, by allowing HAL to operate the C

- 17 will remedy this dilemma

.

Take the case of the U.S. military attempting to provide humanitarian support to Burma (Myanmar) after a deadly cyc lone in 2008 . The military rulers of that country were very reluctant to allow U.S. military airlift support into that country. In the end, SecretaryHumanitarian Air Logistics, Inc.

US Department of Transportation Petition for Exemption February 8, 2010 Page 6

Gates is quoted (below) as sayi ng that ‘ tens of thousands ’ needlessly died because of their (Myanmar ’ s) refusal to allow a larger and more concerted airlift. We believe that with our non

- military aircraft such as the civil C

- 17 providing airlift, that concern would likely have been avoided.

M yanmar's obstruction of international efforts to help cyclone victims cost "tens of thousands of lives," Defense Secretary Robert Gates said Saturday in his strongest condemnation to date of the military government there

. With U.S., British and French
Nav y ships off the coast of Myanmar poised to leave because they have been blocked from delivering assistance to the ravaged country, Gates said the U.S. will not forcefully bring in supplies without permission of the government, and will continue to "respect the sovereignty" of Myanmar

. (Emp hasis added

– AP a rticle b y Lolita C. Baldor linked below )

http://seattletimes.nwsource.com/html/nationworld/2004449301_webgates30.html

Ano ther example of this issue was when the DoD sent C

- 17’s into the Country of Georgia to provide humanitarian airlift during the recent conflict between Georgia and Russia. The Russian government accused the U.S. Government of using those humanitarian flight s to re

- arm the Georgians. If HAL had provided those flights, that highly charged accusation would have been rendered moot.

Finally, the ongoing humanitarian relief efforts in Haiti have caused some to call the highly visible contr ol of the airport there and ( purported ) prioritization in favor of US military aircraft a proble m. If we had use of the C

- 17, HAL would have been able to provide much of the oversize relief airlift in lieu of using the USAF ’s C

- 17’s.

These few examples show that our proposed operation of a civil C

- 17’s would mitigate political tensions and save human lives. That is clearly in the public interest because it creates goodwill and in turn assists the U.S. Govern me nts use of ‘smart power’ to reduce the threat of terrorism against thi s nation.

6. In 2007, Boeing produced an operational study justifying the use of ten (10) civil
C

- 17’s. This Boeing stu dy was derived from a 2003 report commissio ned by the USAF. That USAF report performed by the Council for Logistics Research (CLR) confirm ed there is a commercial need for these aircraft and that there is a sufficient market and income to justify the use of civil C

- 17’s. This c omprehensive study substantiated the need of this service especially in government operations and oil exploration. I t is in the publicHumanitarian Air Logistics, Inc.

US Department of Transportation Petition for Exemption February 8, 2010 Page 7

interest and this nation’s security to facilitate the exploration and development of alternate sources of energy to reduce our dependence on foreign oil. The Obama Administration has made this a key imperative. Below is an excerpt which outlines the background and conclusion of the CLR r eport

.

BACKGROUND: The November 2000 Commercial Application of Military Airlift Aircraft (CAMAA) report recommended a proposal that would allow the Department of Defense to leverage military airlift aircraft if such aircraft were available in the commercial market. The report suggested a unique military

- commercial risk

- sharing strategy to introduce a commercialized C

- 17 , or BC

- 17X, into the market for transporting heavy and/or outsize goods (the Heavy Outsiz e Market, or HOM), which is currently being served by Russian

made AN

- 124s.

CONCLUSIONS: As a follow

- up to the initial study, this Risk Reduction Report on the Short Austere Market (SAM) was commissioned to determine if there are current commercial mark ets closely aligned with unique BC

- 17X operational characteristics that might mitigate commercial market

- entry risks for potential BC

- 17X operators and thus reduce the risk of the CAMAA concept. This SAM study, completed in 2003, concludes that the SAM,

t he market for transporting heavy and/or outsize equipment and material loads to short, austere airfields, is large enough and has a yield sufficient to maintain a profitable operation for at least ten BC

- 17X aircraft, validating the commercial market premi se of the CAMAA initiative . Consequently, the previous study’s findings that the Department of Defense’s outsize airlift requirements could be fulfilled, in part, by leveraging the BC

17X in the commercial market, can be viewed as well founded and as a vi able business concept worthy of detailed implementation studies. (Executive Summary page of CL R report

– See Exhibit 8 )

In its own petition, Boeing cited t he Commission on the future of the United States Aerospace Industry Final R e port of 2002 which concludes in its first recommendation, “ the integral role aerospace plays in the United States economy

... .security

... .mobility, and....values makes global leadership in aviation and space a national imperative .” They go on to say “ It is essent ial to the United States International competitiveness in the aerospace industry (and the commercial and trade advantages that derive from that position ) that U.S. companies manufacture and operate aircraft such as the C

- 17 in commercial service. An aircraft that can penetrate relatively untapped air cargo markets of now and in the future, service the U.S. industrial base and play an important role in fostering U.S. national and public interests .” ( See Exhibit 9 )Humanitarian Air Logistics, Inc.

US Department of Transporta tion Petition for Exemption February 8, 2010 Page 8

7. Because we are an approved 501 (c) (3) nonprofit organization, we are exempt from paying federal income taxes. This provides us with a unique opportunity to use all funds generated by commercial use of the C

- 17 airc raft to offset most if not all of the operational costs associate with the humanitarian flights we plan to operate on behalf of the U.S. Government . In those same last three years we previously mentioned that the average annual amount spent on humanitarian flights by the AMC was $30 million. By operating the civil C

- 17 in commercial use, we can likely provide American taxpayers with this humanitarian service at little or no cost. That is a direct benefit to the public interest because that contribution wil l (in a small way) help to bring the nation’s budget into balance.

8. As we have shown ( in Exhibit 1 ) h undreds of millions of dollars are being spent annually

on chartering foreign operated An

- 124 heavy

- li ft aircraft for the DoD and commercial users. The U.S. De partment of Transportation routinely provides emergency exemptions to these foreign carriers for charter flights in to U.S. airspace because t here is currently no oversize air lift c apability here. ( See Exhibit 10 )

Our presence in the U.S. market with civil C

- 17’s would reduce the need for many of those foreign charter flights and in addition, allow the DoD and other federal agencies to meet the provisions of the B uy America Act. This would be in the public interest because it will provide much neede d employment opportunities here and reduce the reliance on foreign companies for DoD charter flights.

I n a September 2009 r eport ( GAO 09

- 625 ) the GAO voiced their concern that the use and reliance on these foreign carriers by the DoD is a potential nationa l security problem and that it would be in the national interest to corr ect this

.

“ A d di ti onally the potential absence of sufficient oversize cargo capability could potentially jeopardize nati onal security by preventing DOD from accomplishing its miss ions due to an inability to move outsized cargo into areas of crisis within the time frames the commanders need it to arrive ”

. ( See Exhibit 11 and p g. 20 of GAO r eport )

9. The record will show that wildfires are an increasingly serious threat in the Western and Southwestern part of this nation. The civil C

- 17 can provide critic al airlift support for these efforts. For example, the aircraft can be used to fly fire trucks and their crews to the nearest suitable airport instead of having them drive hours or even days from around the country to the site of the fire. This type of ove rsize airlift support will help to mitigate the imminent threat of life and property and that is in the public interest

.Humanitarian Air Logistics, Inc.

US Department of Transportation Petition for Exemption February 8, 2010 Page 9

10. When compared to the An

- 124 , the C

- 17 has a bett er safety record . Records show that the An

- 124 has had four serious accidents resulting in over 90 fatalities to both passengers and individuals on the ground. Allowing the civil use of the C

- 17 which has over 1,000,000 h ours of flight with a better safety record is in the public interest

. ( For list of accidents s ee the web

- site below )

http://aviationsafety.net/database/dblist.php?field=typ ecode&var=04C%&cat=%1&s orteer=datekey&page=1

11. The preceding statements provide sufficient justification to approving an abbreviated certification process. The continued allowance of emergency exemptions to facilitate the use of foreign oversize heavy

- lift aircraft in American airspace increas es the risk of
its citizens and also takes much needed jobs from this troubled economy. I t is in the public interest to mitigate any possible safety risk and create new jobs as soon as practicable by allowing HAL to op erate a civil C

- 17.

12. In its denial to Boeing, the FAA stated it does “ not consider statements of positive economic impact, on the local or national scale, to be a persuasive argument in the justification that the petition is in the public interest ”. While we understand that logic as it relates to matters of aviation safety, in today’s dire economic climate, any jobs that our company provides would be in the public interest . There can be no doubt that reducing the very high levels of unemployment in this nat ion is a national priority and b oth the White House and Congress have made that their number one priority. Our operations shou ld directly employ between 250

- 3 00 people not counting those who work for directly Boeing and the C

- 17 suppliers. That increase in employ ment or retention of jobs would clear ly be in the interest of the public especially those looking for a job.

13. In 1964 the FAA granted an exemption to the Lockheed Aircraft Corporation for its Model C

- 130E
, a military transport aircraft that had not been declared surplus by the Armed Services . The justification s Lockheed apparently provided to the FAA is very similar to those stated in this petition . It is a factual matter that the technology used in the C

- 17 is mor e advanced and reliable then that av ailable in 1964. For example, in 196 4 the C

- 130E did not have Heads

- Up display, TCAS, Enhanced GPWS/ Weather Radar, GPS and other features developed over the past 45 years

. All f eatures that have markedly improved the safety of flight such as preventing con trolled flight i nto t errain (CFIT)

. Equipped with less advanced avionics, the FAA found ( in 1964 ) the C

- 130E aircraftHumanitarian Air Logistics, Inc.

US Department of Transportation Petition for Exemption February 8, 2010 Page 10

“ would not adver

sely affect safety ” and approved the exemption. It is not a stretch to say that with the newer technology that is installed o n the C

- 17 this aircraft is comparable more safe than the C

- 130E was in 1964. And that aircraft was deemed safe for an exemption.

As we stated earlier , the engines used on the C

- 17 are derivatives of those found on the Boeing Model 75 7, an aircraft which is used daily in twin

- engine ETOPS operations all over the world. Only an engine that can provide such reliability could be approved for
twin

- engine ETOPS ser vice. The C

- 17 airframe with those reliable engines and advanced avionics provides a winning combination that enhance s safety

.

14. We compared the number of air

- carrier accidents with the number of departures from
1970

- 2004. The data shows a continuing and posit ive trend

- line of decreasing accidents while the number of flights grows. This continuing improvement can be attributed in part to advancing technology being used in both commercial (and military) aircraft. ( See Exhibit 1 2 )

15. In its denia l to Boeing for it s exemption, the FAA stated that Boeing failed to provide “ an affirmative statement from any arm of the Department of Defense supporting this claim nor have these agencies supported Boeing’s position ”

. In a F ebruary 26, 2008 letter from the Assista nt Secr etary of Defense for Homeland Security to HAL, his principal deputy stated the following:

You are 100 percent correct in your conclusion that the U.S. Government should seek a more efficient and effective means of providing humanitarian support in
respons e to catastrophic international and domestic disasters. ( See Exhibit 1 3 )

Next i n a June 12, 2009 letter , the Commander of the U.S. Pacific Command stated the following:

H umanitarian Air Logistics could potentially add to existing capabilities and provide greater flexibility in choices for U STC to support these assistance and relief operations. ( See Exhibit 1 4 )

As we shared with the DoD and others , o ne of the key capabilities to achieve this

“ efficient and effective means ” is to have the use of oversize heavy

- lift capable aircraft such as the C

- 17 available for our use.Humanitarian Air Logistics, Inc.

US Department of Transportation Petition for Exemption February 8, 2010 Page 11

The type c ertification of the Boeing model C

- 17 under FAR 21.27 prior to it being declared

s u rplus is in the public interest

As we have shown in the preceding statements, some in the Department of Defense have agreed there is a need for more improvements to the way humanitarian disaster and relief efforts are carried out . Those two letters from the DoD show that HAL can contribute a key portion of that change. To meet that challenge we have a critical need for the C

- 17 as it can provide the unique means in which to transport helicopters (without breaking them down for shipment and thus saving time to get the m into service and begin saving lives ) , large support type vehicles

, and other critical logistical equipment that cannot be carried in standard transport aircraft.

Just recently, the FAA had to charter an An

- 124 to fly i ts mobile control tower from the U. S. to Haiti simply because there was no U.S. carrier able to do so. If we had a civil C

- 17, we would have likely provided that humanitarian service.

With the additional C

- 17’s that will be produced f or our use in the humanitarian and commercial over sized air cargo market

, l ong

- term well paying U.S. jobs will be created by HAL along with the other jobs preserved by the aircraft’s manufacturer and suppliers. The revenue we hope to generate from the oversize heavy lift market will be used to offset the $30 million annual cost of humanitarian airlift operations currently conducted by the DoD. No longer having to fund this amount will help to balance the U.S. budget.

In a recently publicized meeting with U.S. Senate Democrats, President Obama pointed out tha t all efforts

-- even those that save just a few million dollars must be pursued by Congress to help eliminate the deficit. We would be proud to be able to help in this effort once this exemption is granted. The C

- 17’s we propose to operate will benefit th e public by providing a safe alternative for transport of heavy and outsized cargo while facilitating operations into two to three times as many airports due to its short and austere airfield capability.

Both (Lockheed) and Boeing stated in their exemptio n petitions that production and sale of additional C

- 17 and (C

- 130E) aircraft would be a direct financial advantage to the U.S. Government either as an offset in a USAF C

- 17 recapitalization program or as a reduction in the acquisition cost of new C

- 17’s d ue to the economic advantage associated with a C

- 17 production rate that includes additional C

- 17’s. The U.S. taxpayer is the ultimate bene ficiary and even the FAA agreed with that assessment in its approval of the C

- 130E exemption from
1964.Humanitarian Air Logistics, Inc.

US Departmen t of Transportation Petition for Exemption February 8, 2010 Page 12

Boeing also stated it will be able t o provide more effectively

, solu tions to any pro blems posed by operational serv ices because of the availability of technical and production competence for an airplane that is used in both military and commercial service.

Summary of HAL p etition

This petition addresse s the requirements of FAR 21.27, Section 21.27(a). It requests that the model C

- 17 be exempt from the requirement for the aircraft to be accepted for operational use and declared surplus by an Armed Forces of the United States. As shown in j ustification N o. 13,

a precedent exists for granting such an exemption. The C

- 17 aircraft has demonstrated, un der severe operating condit ions an outstan ding safety record and w e have shown t hat granting of this exemption will be in the public interest because :

1. I t will not adv ersely affect flight safety.

2. W ill facilitate the most cost effective use of the C

- 17 for humanitarian and commercial
service

.

3. A dd ress any national security concerns over the use of foreign aircraft for ‘overs ize’ charter flights by the DoD as expressed by the GAO and shared with Congress.

4. C ontribute to the enhancement of the CRAF program

.

5. Fulfill the ‘Sense of Congress’ (found in PL. 110

- 417 Sec. 1037) whereby the Secretary of Transportation was encouraged to consider providing such an exemption under 21.27(a).

6. R educe the dependence on USAF pilots for humanitarian flights and help to mitigate any shortages of said pilots

.

7. Take advantage of the advanced technology in the C

- 17 to increase the level of flight safety found in the U.S. airspace over that of older less advanced airframes found with foreign operators utilizing U.S. airspace

.Humanitarian Air Logistics, Inc.

US Department of Transportation Petition for Exemption February 8, 2010 Page 13

Due to the ongoing humanitarian and disaster efforts in Haiti and nationwid e effort here in our country ( and this company ) to create jobs, we respectfully request an expedited review and approval of our petition including the bypassing of the comment period. In Boeing’s petition, the FAA stated that it received 84 comments all in favo r of the petit i on

. It seems likely that the public would see this project in a similarly positive way and thus taking additional time to wait for those comments would be unnecessary

.
Accordingly, pursuant to the pro visions of 14 CFR, Part 11, Subpart A, Humanitarian Air logistics , Inc. hereby petitions for an exemption from the requirement for the Boeing Model
C

- 17 Cargo /Transport Aircraft to be accepted for operational use and declared surplus, prior to being eligible for certification under 14 CFR 21.27. The exemption would be for domestic and international use of the aircraft.

If you have any questions please contact me at 650.855.4332.

Sincerely,

Paul D. Asmus President & Founder

Attach ments : Petition Exhibits

Contact Information

Paul D. Asmus Humanitarian Air Logistics, Inc. PO Box 61088 Palo Alto, CA 94306

Ph : 650.855.4332
Fax : 650.326.2070“Giving a Lift to Those in Need”



### S UMMARY FOR FEDERAL REGISTER

Subject: Petition for Exemption from 14 CFR Part 21 Section 21.27(a) for Boeing Model C

- 17 Transport/ Cargo Aircraft.

Brief Description of Exemption Request: Humanitarian Air Logistics, Inc a proposed user of Boeing Model C

- 17 military aircraft upon any ap proval of requested exemption, hereby files subject petition for an exemption from the requirements of FAR 21.27(a) for humanitarian and commercial use of the C

- 17.

Argument for Request:

1. Approval of exemption will not adv ersely affect flight safety.

2. W ill facilitate the most cost effective and efficient use of the C

- 17 for humanitarian and commercial service currently not avai la ble

.

3. A dd ress any national security concerns over the use of foreign aircraft for ‘overs ize’ charter flights by the DoD as expressed by the GAO and shared with Congress.

4. C ontribute to the enhancement of the CRAF program

.

5. Fulfill the ‘Sense of Congress’ (found in PL. 110

- 417 Sec. 1037) whereby the Secretary of Defense an d Secretary of Transportation were encouraged to consider providing such an exemption under 21.27(a).

6. R educe the dependence on USAF pilots for humanitarian flights and help to mitigate any shortages of said pilots

.

7. Take advantage of the advanced technology in the C

- 17 to increase the level of flight safety found in the U.S. airspace over that of older less advanced airframes found with foreign charter operators util izing the same airspace

.

8. All these preceding justifications are in the public interest.

PO Box 61088

· Palo Alto, CA 94306

· Ph: 650.855.4332

· Fax: 650.326.2070

# Exhibit s Cover Sheet

For e xhibits click on B ookmark s tab on top left side of d oc ument windowUNITED STATES TRANSPORTATION COMMAND 508 SCOTT DRiVE SCOTT AIR FORCE BASE, ILLINOIS 622255357



### 26 May 2009



### Mr. Paul D. 

### Asmus, 

### President Humanitarian Air Logistics 

### P.O. Box 61088 

### Palo Alto CA 94306 

### USTRAN SCOM 

### FOIA 09-55



### Dear 

### Mr. Asrnus



### This is 

### an interim response to 

### your Freedom of Information Act (FOIA) 

### request of 1 1 

### March 2009, 

### in refwcnce to 

### records 

### on cargolcharter flights 

### performed 

### by Volga-Dnepr 

### and Polet 

### Airlincs on 

### behalf of thc 

### Department of 

### Dcfense for 

### FYs 04- 

### OX. Your 

### request is 

### being processed 

### in 

### accordance with 

### Department 

### of Defense 

### Regulation 5400.7, 

### DOD FOTA 

### Program.

We 

### are 

### releasing in 

### full a 

### one page 

### extract from Commercial Operalions 

### Integrated System 

### (COINS) that is 

### responsive to 

### questions 

### I 

### and 2 of 

### your requcst. 

### No awards wcrc 

### rnade

to 

### Polet prior to 

### FY 06.

There are no 

### assessed fees 

### associated with this 

### relcase. Once 

### all staff actions 

### are complett: on your request 

### for copies 

### of the most current contracts with 

### Volga-Dnepr and Polet,


### you will receive a 

### final response.

' 

### JOLW J. 

### BJEN 

### Chief, Command Information Management United States 

### Transportation 

### Cammand

At 

### tachrnent COINS Extract 

### (1 pagc)Total trips FYW-08 Trips 26

45

Total Dollarshttp://aes.faa.gov/Form/Doc.asp?SelExemptID=3829



### Exemption No. 319

UNITED STATES OF AMERICA
FEDERAL AVIATION AGENCY WASHINGTON, D.C.

* * * * * * * * * * * * * * * * * *
* In the matter of the petition of *
* LOCKHEED AIRCRAFT CORPORATION * Regulatory Docket * No. 3041 for an exemption from Part 9a of * the Civil Air Regulations *
*
* * * * * * * * * * * * * * * * * *

GRANT OF EXEMPTION

Lockheed Aircraft Corporation, acting for its division, Lockheed-Georgia Company, requested an exemption from Section 9a.1 of Part 9a of the Civil Air Regulations by petition dated January 10, 1964. The purpose of the exemption is to permit type certification under Part 9a of a military transport airplane designated by the United States Air Force as Model C-130 even though that airplane has not been declared as surplus by the Air Force. This airplane is powered by four turbine engines, and is currently being produced for the Air Force and is programmed for production for several more years.

Pursuant to the eligibility provisions of Section 9a.1, type certification under Part 9a is restricted to airplanes designed and constructed in the United States, accepted for operational use by the military services of the United States and declared surplus by such military service. The Model C-130E airplane is not eligible for type certification under Part 9a because it has not been declared surplus by the United States Air Force.

The petitioner indicates that domestic and foreign operators have expressed intentions to procure this airplane if it is type certificated in accordance with airworthiness requirements which would make it generally eligible for operations for compensation and hire. Airplanes certificated under Part 9a in the transport category would be eligible for carriage of passengers and cargo for compensation and hire.

Under the currently effective regulations, eligibility of the

http://aes.faa.gov/Form/Doc.asp?SelExemptID=3829 (1 of 3)2/7/2010 12:18:22 PMhttp://aes.faa.gov/Form/Doc.asp?SelExemptID=3829


### Model C-130E airplane for such operations can be established only on the basis of type certification under the transport category requirements of Part 4b of the Civil Air Regulations. The petitioner contends that type certification of the Model C-130E airplane under Part 4b would be prohibitively costly and burdensome.

If an application were to be made for type certification of the Model C-130E airplane under Part 4b, the airplane would be subject to all of the currently effective requirements of Part 4b including Amendment 4b-12. (Amendment 4b-13 is not applicable to this airplane.) On the other hand, if the Model C-130E airplane were accepted for operational use by the Air Force prior to October 1, 1959, and the requested exemption were granted, type certification under Part 9a would require compliance to be shown with the requirements of Part 4b including amendments up to Amendment 4b-11.

A grant of this exemption would permit the petitioner to apply for certification of the Model C-130E airplane under the provisions of Part 9a. The petitioner argues that the benefits of certification under Part 9a would eventually be derived when the airplane is declared surplus by the Air Force. In addition, the petitioner claims that type certification of the Model C-130E airplane under the Civil Air Regulations prior to it being declared surplus is in the public interest because:

(1) Production and sale of such airplanes would be of direct financial advantage to the United States Government by reducing the price of U.S. military airplanes currently produced by the petitioner.

(2) The United States Government would recover more money when airplanes similar to the Model C-130E airplane are declared surplus and are subsequently sold.

(3) Petitioner will be able to provide more effectively for solutions to any problems posed by operational services because of the availability of technical and production competence.

(4) Purchasers of such airplanes would be assured by the petition of timely, comprehensive, and continuing technical and logistic support.

The petitioner also contends that granting of the requested exemption would not interfere with future U.S. Government procurement requirements for Model C-130E airplanes and that certification of this airplane under the Civil Air Regulations while the airplane is at the same time

http://aes.faa.gov/Form/Doc.asp?SelExemptID=3829 (2 of 3)2/7/2010 12:18:22 PMhttp://aes.faa.gov/Form/Doc.asp?SelExemptID=3829



### being built for military use is strictly in accordance with the national policy being presently applied to the USAF Model C-141A cargo jet airplane.

In further support of its request, the petitioner states that: there is a need for commercial cargo operations for the Model C-130E airplane; the airplane would provide to commercial operators an economic potential superior to existing piston-powered cargo airplanes; sales of the Model C-130E airplane to domestic commercial operators is in the interest of national defense; and sales to friendly foreign countries would tend to improve our balance of payments.

In consideration of the requested exemption, the Agency solicited views and comments from the Department of State, Department of Commerce, Civil Aeronautics Board, and the Department of Defense. Responses received from these agencies indicated that granting of the requested exemption with respect to the Model C-130E airplane would be in the national interest or has a potential therefor.

In addition, this Agency believes that the Model C-130E airplane has parformance and cargo-handling capabilities which would make it particularly suitable for commercial use.

In consideration of the foregoing, I find that granting of the exemption request by the petitioner would be in the public interest and would not adversely affect safety. Therefore, pursuant to the authority contained in Sections 313(a) and 601(c) of the Federal Aviation Act of 1958 which has been delegated to me by the Administrator (14 CFR 11.53), Lockheed-Georgia Company, a division of Lockheed Aircraft Corporation, is hereby granted an exemption from Section 9a.1 of the Civil Air Regulations to permit the Lockheed airplane designated by the United States Air Force as Model C-130E to be eligible for type certification under Part 9a of the Civil Air Regulations, notwithstanding the fact that it has not been declared surplus by the military services of the United States.

/s/ W. Lloyd Lane Acting Director Flight Standards Service

Issued in Washington, D.C., on April 23, 1964.

915A

http://aes.faa.gov/Form/Doc.asp?SelExemptID=3829 (3 of 3)2/7/2010 12:18:22 PMAIR

- 06

- 497

- E Exemption No. 9759

UNITED STATES OF AMERICA DEPARTMENT OF TRANSPORTATION FEDERAL AVIATION ADMINISTRATION WASHINGTON, DC 20591

In the matter of the petition of

THE BOEING COMPANY

for an exemption from § 21.27 ( a) of Title 14 , Code of Federal Regulations Regulatory Docket No. FAA

- 2006

- 25210

DENIAL OF EXEMPTION

By let ters submitted o n March 22, 2006 and November 29 , 2007, R.P. Ciesla, BC

- 17 Program Manager, The Boeing Company (Boeing), 2401 E. Wardlow Road, Long B each, California 90807, petitioned the Federal Aviation Administration (FAA) on behalf of Boeing for an exemption from § 21.27(a) of Title 14, Code of Federal Regulations (14 CFR). The proposed exemption, if granted, would allow Boeing’s Model BC

- 17 airc raft to be exempt from the eligibility requirements of § 21.27(a) , specifically, the need for the aircraft to be “accepted for operational use, and declared surplus by an armed force of the United States.” Boeing seeks development of the Model BC

- 17 aircr aft for sale to civilian customers.

The petitioner requests relief from the following regulation: Section 21.27(a) prescribes, for issue of type certificate[s]: surplus aircraft of the Armed Forces. (a) Except as provided in paragraph (b) of this sectio n an applicant is entitled to a type certificate for an aircraft in the normal, utility, acrobatic, commuter, or transport category that was designed and constructed in the United States, accepted for operational use, and declared surplus by, an2

Armed Forc e of the United States, and that is shown to comply with the applicable certification requirements in paragraph (f) of this section.

The petitioner supports its request with the following information: In its petition, Boeing lists the relief requested an d describes the capabilities of its

m odel BC

- 17 aircraft. Boeing applied for FAA type certification of the BC

- 17, which is a commercial derivative of the U

. S

. Air Force C

- 17 Globemaster cargo aircraft. Boeing requests the aircraft be eligible for FAA typ e certification even though it has not been accepted for operational use and declared surplus by an armed force of th e United States as required by § 21.27(a)

.
Boeing states the U

. S

. Air Force has conducted studies that conclude there is a viable commerc ial market for the BC

- 17. The aircraft is versatile

, uniquely capable , and equipped with powerplants similar to those installed on the Boeing 757 aircraft. Its operational service for the military began in 1993 and the aircraft was designed and built to U

. S

. Air Force standards. The 148 aircraft in service have completed 1,000,000 flight hours with an excellent safety record. The aircraft uses modern Primary Flight Display equipment that enhances flight safety. In typical commercial applications, the B C

- 17 will have delivery capabilities that are not available in any other airplane certificated by the FAA. The BC

- 17 would replace U

. S

. military aircraft currently engaged in humanitarian relief operations to victims of disaster, and its use will help ful fill the U

. S

. foreign policy objectives. Its ability to operate in austere environments increases the number of locations where project work s uch as; oil and gas development , pipelines, and refinery projects is possible

, offsetting the loss of projects in areas of political instability, hostilities, or other geopolitical problems. The air craft will benefit the public by its use in transporting spent nuclear fuel and for fighting f orest fires

.

The BC

- 17 will continue to support military operations as part of a Civilian R eserve Air Fleet (CRAF) , should the BC

- 17 be needed to support military operations in excess of the foreseen military production schedule of 180 aircraft. The BC

- 17 would support CRAF initiatives because an equivalent aircraft does not exi st in the civilian fleet.

Boeing states the marketability of the BC-17 will depend on cost. Compliance with § 21.21 requirements will raise production costs and would restrict sales of the BC-17 in the civilian market. The provisions of § 21.27 reduce certification and production costs by minimizing required changes from the aircraft’s military configuration. Boeing prefers this method to ensure marketability of the aircraft and shorten the certification schedule. B oeing states many commercial operat ors are forced to use foreign

- registered aircraft for large cargo operations which are designed to different safety standards than the BC

- 17. The aircraft would provide a domestic alternative to the commercial market currently monopolized by the3

Russian A ntonov AN

- 124 cargo aircraft. Boeing cites a 2002 report from the Commission on the Future of the Uni ted States Aerospace Industry in support of its plans for the BC

- 17.

The petition is in the public interest because c ertification of the BC

- 17 under § 21 .27 would represent a financial advantage to the U

. S

. Government, and civilian operations of the BC

- 17 aircraft would improve operational service for the C

- 17. Domestic employment would benefit from the jobs created for civilian production of the aircraft , which would generate increased tax revenues. Finally, the BC

- 17 would provide a safe alternative for large cargo operations, especially for operations into smaller airports.

Boeing includes in its petition separate descriptions of the BC

- 17 and C

- 17 ai rcraft in used and new designations. It also defines the Class I and Class II configurations for the BC

- 17.

A summary of the petition was published in the Federal Register on July 10 , 2006 (71 FR 40776). The FAA received 84 comments . All comments we re in support of granting the exemption. Eleven were from various air cargo companies, two were from air carriers

, one was from a consulting firm and the remainder of the comments were submitted from individuals.

The FAA's analysis is as follows:

The FAA has reviewed the petitioner’s supporting information and we find the circumstances presented by the petitioner do not justify a grant of exemption.

When considering a petition for exemption, the FAA considers two mai n points: 1) why granting the requ est would be in the public interest and 2) the

e ffect on safety.

The FAA finds Boeing’s public interest argument insufficient and does not support a grant of exemption. While the petition asserts certification would reduce costs for the military, improve operational service for the Air Force C-17 and the viability of CRAF, it does not include an affirmative statement from any arm of the Department of Defense supporting this claim nor have these agencies independently supported Boeing’s petition

. The FAA has the responsibility to assign and maintain safety in air commerce; it does not have the necessary knowledge to validate that the military applications presented in the petition are, in fact, in the public interest.

The petition also asserts that grant ing the exemption would benefit the public by providing a safe alternative , in lieu of the foreign

- registered and certified AN

- 124, for transport of heavy and outsize cargo for commercial and government4

customers while f

acilitat ing operations into short fi eld and austere airports. Although Boeing has asserted that there is a compelling need to provide outsized cargo civil service to smaller airports , it has not provided any information to substantiate that civil use of the BC

- 17 to fulfill this need is in the public interest

. Without a compelling reason, the FAA does not find that circumventing the normal certification process through an exemption to § 21.27(a) is justified.

The petition asserts that U.S. jobs will be created by the entry of the BC

- 17 in to civil service

. As most petitions of exemption could cite economic benefit to some degree, the FAA does not consider statements of positive economic impact , on the local or national scale, to be a persuasive argument in the justification that the peti ti on is in the public interest.

The alternative argument made by Boeing that an abbreviated certification process would be in the public interest is not sufficiently compelling to justify an exemption.

The FAA’s Decision: In consideration of the foregoin g, I find that a grant of exemption would not be in the public interest. Therefore, pursuant to the authority contained in 49 U.S.C. §§ 40113 and 44701, delegated to me by the Administrator, the petition of The Boeing Company for an exemption from 14 CFR § 21.27(a) is hereby denied.

I ssued in Washington, DC , on September 23, 2008

.
Sincerely,

/s/

John H. Hickey Director, Aircraft Certification ServiceTITLE 10 > Subtitle A > PART IV > CHAPTER 152 > § 2561



### § 2561. H umanitarian as s i s t a n c e

(a) Authorized Assista nce. — (1) To the extent provided in defense authorization Acts, funds authorized to be appropriated to the Department of Defense for a fiscal year for humanitarian assistance shall be used for the purpose of providing transportation of humanitarian relief and for other humanitarian purposes worldwide. (2) The Secretary of Defense may use the authority provided by paragraph (1) to transport supplies intended for use to respond to, or mitigate the effects of, an event or condition
, such as an oil spill, tha t threatens serious harm to the environment, but only if other sources to provide such transportation are not readily available. The Secretary may require reimbursement for costs incurred by the Department of Defense to transport supplies under this paragr aph. (b) Availability of Funds.

— To the extent provided in appropriation Acts, funds appropriated for humanitarian assistance for the purposes of this section shall remain available until expended. (c) Status Reports.

— (1) The Secretary of Defense shall submit to the congressional committees specified in subsection (f) an annual report on the provision of humanitarian assistance pursuant to this section for the prior fiscal year. The report shall be submitted each year at th e time of the budget submission by the President for the next fiscal year. (2) Each report required by paragraph (1) shall cover all provisions of law that authorize appropriations for humanitarian assistance to be available from the Department of Defense for the purposes of this section. (3) Each report under this subsection shall set forth the following information regarding activities during the previous fiscal year: (A) The total amount of funds obligated for humanitarian relief under this section. (B) The number of scheduled and completed transportation missions for purposes of providing humanitarian assistance under this section. (C) A description of any transfer of excess nonlethal supplies of the Department of Defense made available for humanita rian relief purposes under section 2557 of this title. The description shall include the date of the transfer, the entity to whom the transfer is made, and the quan tity of items transferred. (d) Report Regarding Relief for Unauthorized Countries.

— In any case in which the Secretary of Defense provides for the transportation of humanitarian relief to a country to which the transportation of humanitarian relief has no t been specifically authorized by law, the Secretary shall notify the congressional committees specified in subsection (f) and the Committees on Appropriations of the Senate and House of Representatives of the Secretary’s intention to provide such transpor tation. The notification shall be submitted not less than 15 days before the commencement of such transportation. (e) Definition.

— In this section, the term “defense authorization Act” means an Act that authorizes appropriations for one or more fiscal yea rs for military activities of the Department of Defense, including authorizations of appropriations for the activities described in paragraph (7) of section 114 (a) of this title. (f) Congressional Committees.

— The congressional committees referred to in subsections (c)(1) and (d) are the following: (1) The Committee on Armed Services and the Committee on Foreign Relations of the Senate. (2) The Committee on Armed Services and the Committee on International Relations of the House of Representatives.122 STAT. 4597 PUBLIC LAW 110–417—OCT. 14, 2008

to the access of unmanned aerial systems of the Department of Defense to the National Airspace System. (8) Joint management attention at the highest levels ofthe Department of Defense and the Federal Aviation Administration may also be required on other important issues, such as type ratings for aerial refueling aircraft. (b) S ENSE OF C ONGRESS .—It is the sense of Congress that the Secretary of Defense should seek an agreement with the Administrator of the Federal Aviation Administration to jointlyestablish within the Department of Defense and the Federal Aviation Administration a joint Department of Defense–Federal AviationAdministration executive committee on conflict and dispute resolution which would— (1) act as a focal point for the resolution of disputes on matters of policy and procedures between the Department of Defense and the Federal Aviation Administration with respect to— (A) airspace, aircraft certifications, and aircrew training; and(B) other issues brought before the joint executive committee by the Department of Defense or the Department of Transportation; (2) identify solutions to the range of technical, procedural,and policy concerns arising in the disputes described in paragraph (1); and (3) identify solutions to the range of technical, procedural, and policy concerns arising in the integration of Department of Defense unmanned aerial systems into the National AirspaceSystem in order to achieve the increasing, and ultimately routine, access of such systems into the National Airspace System.

SEC. 1037. SENSE OF CONGRESS ON SALE OF NEW OUTSIZE CARGO, STRATEGIC AIRLIFT AIRCRAFT FOR CIVILIAN USE. (a) F INDINGS .—Congress makes the following findings: (1) The 2006 Quadrennial Defense Review and the 2005 Mobility Capability Study determined that the United States Transportation Command requires a force of 292 to 383 organic strategic airlift aircraft, augmented by procurement of airlift service from commercial air carriers participating in the Civil Reserve Air Fleet, to meet the demands of the National Military Strategy. Congress has authorized and appropriated funds for 316 strategic airlift aircraft. (2) The commander of the United States TransportationCommand has testified to Congress that it is essential to safeguard the capabilities and capacity of the Civil Reserve Air Fleet to meet wartime surge demands in connection with major combat operations and that procurement by the Air Force of excess organic strategic airlift aircraft could be harmful to the health of the Civil Reserve Air Fleet. (3) The C–17 aircraft is used extensively by the Air Mobility Command in the Global War on Terror. Production of the C–17 aircraft is scheduled to cease in August, 2010.(4) The Federal Aviation Administration has informed Congress that no fewer than six commercial operators have expressed interest in operating a commercial variant of the C–17 aircraft. Commercial sale of the new C–17 aircraft would require that the Department of Defense determine that it is


in the national interest for the Federal Aviation Administration to proceed with the issuance of a type certificate for C-17 aircraft in accordance with section 21.27 of title 14, Code of Federal Regulations. (5) New C–17 aircraft sold for commercial use could bemade available to the Civil Reserve Air Fleet, thus strengthening the capabilities and capacity of the Civil Reserve Air Fleet. (b) S ENSE OF C ONGRESS .—It is the sense of Congress that the Secretary of Defense, in consultation with the Secretary of Transportation, should— (1) review the benefits and feasibility of pursuing a newproduction commercial cargo capability with new C–17 commercial variant aircraft and determine whether such capability is in the national interest; and (2) if the Secretary of Defense determines that such a capability is in the national interest, take appropriate actions to coordinate with the Federal Aviation Administration to achieve the type certification for a commercial variant of the C-17 required by section 21.27 of title 14, Code of Federal Regulations. 

### Subtitle E—Studies and Reports

SEC. 1041. REPORT ON CORROSION CONTROL AND PREVENTION. (a) R EPORT R EQUIRED .—The Secretary of Defense, actingthrough the Director of Corrosion Policy and Oversight, shall prepare and submit to the Committees on Armed Services of the Senate and the House of Representatives a report on corrosion control and prevention in weapons systems and equipment. (b) M ATTERS C OVERED .—The report shall include the comments and recommendations of the Department of Defense regarding potential improvements in corrosion control and prevention throughearlier planning. In particular, the report shall include an evaluation and business case analysis of options for improving corrosioncontrol and prevention in the requirements and acquisition processes of the Department of Defense for weapons systems and equipment. The evaluation shall include an analysis of the impact of such potential improvements on system acquisition costs and life cycle sustainment. The options for improved corrosion control and prevention shall include corrosion control and prevention—(1) as a key performance parameter for assessing the selection of materials and processes; (2) as a key performance parameter for sustainment; (3) as part of the capability development document in the joint capabilities integration and development system; and (4) as a requirement for weapons systems managers to assess their corrosion control and prevention requirements over a system’s life cycle and incorporate the results into their acquisition strategies prior to issuing a solicitation for contracts. (c) D EADLINE .—The report shall be submitted not later than 120 days after the date of the enactment of this Act. (d) R EVIEW BY C OMPTROLLER G ENERAL .—The Comptroller General shall review the report required under subsection (a), includingthe methodology used in the Department’s analysis, and shall provide the results of the review to the Committees on Armed Services


### DEPARTMENT OF THE AIR FORCE HEADQUARTERS AIR MOBILITY COMMAND



### 5 Mar 09

HQ 

### AMClA60BR (FOIA) 203 

### W. Losey St., Room 3600 Scott AFB IL 62225-5223

Mr. Paul D. Amus Humanitarian Air Logistics P. 

### 0. Box 61088 Palo Alto CA 94306

Dear Mr. Amus

This letter is in response to your 1 

### 1 December 2008, Freedom of Information Act (FOIA) request for the following:

1. The total number of domestic and international humanitarian missions performed by AMC for FY06,07 and 08.



### 2. The number of flight hours for each model of aircraft used on these humanitarian flights (C-5, C-17 and C-130).

3. The total amount of money spent by the AMC on humanitarian missions for FY06,07 and 08.

4, Also to include the FY09 AMC aircraft charter rates for the C-5, C-17 & 

### C-130 aircraft.

This information is releasable and attached. The fee for processing your request is waived. Our point of contact is Ms. Candice Velazquez at (6 18) 229-57 10 or e-mail to amca6.a6obr(13,scott.af.mil.



### Sincerely

Command Records Manager Operations Division

Attachment: Releasable information



### UNRIVALED GLOBAL REACH FOR AMERICA



# ... ALWAYS!

AMC FOIA 2009-0038678th Tanker Airiift Control Center DATA DIVISION

618 TACClXOND COMM: (618) 229-3865 (DSN: 779)

Scott Air Force Base, Illinois

tmose: Provide a summary of AMC Humanitarian mlssions for FY06 to FYO8. Note: Thls summary does not include Guanl ~d

Reserve nonAMC missions. sared For: Mr. Paul D Asmus, Humanitarian Air Logistics, Palo Alto, CA 94306 eoared Bv: 618th TACCIXOND. DSN: 779-3865, Scott AFB. 11. Data current as of 7 Jan 2008.

If the 105 FY06 Commercial Missions, 28 Missions Were Contracted by State Dept and Not AMCxi SUMMARY

The Air Force has been losing unprecedented numbers of experienced pilots, who are leaving at the end of their initial active dutyservice commitment (ADSC) and at the end of the initial bonuspayback period. These losses apparently occur because (1) employment opportunities are excellent in the private sector and (2) continued high tempos for contingency support operations are degrading their quality of life. In the face of high losses and difficulty in training new pilots and absorbing them into operational units, the Air Force faces a growing shortfall. As widely reported, the Air Force reached a shortfall of 1000 pilots in FY1999 and projects a shortfall twice that size by FY2002, which will stay that large (or larger) through FY2007. Throughout the period, about half of the shortfall occurs in fighters.

Moreover, because the Air Force hired and trained insufficient numbers of new pilots during its major force drawdown in the early 1990s, the shortfall is most critical among those who collectivelymust fill key staff and cockpit jobs and provide instruction and leadership to newcomers in operational and training units. Because almost all new pilots must be assigned to operational units, experience levels in these units will continue to decrease.
Our analytical model of the training required in operational units indicates that fighter squadrons may need up to 25 percent more flying hours to provide continuation and upgrade training as theylose experienced pilots and gain inexperienced ones. Although inexperienced pilots need more flying hours than do experienced pilots, an experienced, qualified pilot must provide essential supervision and thus must fly as part of virtually every flying training activity. Asxii The Air Force Pilot Shortage

squadrons include more newcomers and fewer experienced pilots,each experienced pilot must fly more to oversee and develop the inexperienced pilots. Our model runs confirmed that units with experience levels 1 below 60 percent cannot distribute sorties uniformly to all assigned pilots.
Consequently, unless sorties and flying hours are increased, each inexperienced pilot will fly a smaller share of the squadron’s sorties as newcomers replace experienced pilots. This creates an aging rate deficit (ARD), or slowdown in the inexperienced pilots’ accumulation of training and experience. Deficits of even one or two flying hours per month exacerbate the experience problem—inexperienced pilots then take longer to become experienced. Recent Air Force objectives were to ensure that operational fighter units kept the experienced portion of their squadron-assigned (RPI-1) pilots above 45 percent, with an “absolute” minimum of 40 percent. When ARDs are taken into account, however, our analysis indicates that it will be extremely difficult to stabilize experience near these levels. There aren’t enough sorties to allow inexperienced wingmen to age fast enough [without a sizable sortie or aircraft utilization rate (UTE) increase] to keep the unit from becoming even less experienced. Even if there are enough pilots to fill all of the cockpits, the experience problem is serious enough to compromise the ability of fighter units to accomplish their primary missions and meet their Air Expeditionary Force (AEF) demands.
There are only a few options to alleviate the experience problem. The most obvious is for units to fly more, but the additional flyinghours need to be programmed into the Air Force budget. This difficult and time-consuming process is complicated by the recent inability of fighter units to generate enough training sorties to fly their currently programmed hours. Reduced UTE rates have been dropping for several reasons: reduced funding for engines and other

______________ 1 A unit’s experience level is basically the percentage of its assigned pilots who are experienced. Although pilot experience is formally defined in terms of hours flown, the majority of pilots meet this requirement near the end of their initial operational flyingtour. Thus (in layman’s terms) an experienced pilot is one who has completed an operational assignment in the unit’s primary mission aircraft. Our experience level calculations include only the unit’s primary assigned pilots [those with a rated position indicator (RPI) code of RPI-1]. The excluded pilots carry supervisory (or staff) RPI codes and cannot be inexperienced.Summary xiii

spare parts, reduced depot support, and lower experience levels for the flightline maintenance personnel responsible for generating the sorties.
If the Air Force cannot program and fly more hours, the only assured solution is to reduce the number of new fighter pilots absorbed each year into operational units, a notion that is counter to correcting itslargest peacetime pilot shortfall. Such a policy would provide a reasonable long-term solution only in combination with improved retention and reduced requirements. The Air Force is indeed examining expanded pilot bonus opportunities and other retention initiatives, and it is also investigating alternative manning options, but it is unlikely that the shortfall and resulting experience problem can be corrected by these initiatives alone. Because operational units in the Guard and Reserve have much higher experience levels than active units, we were drawn to look at Total Force alternatives.
We examined several options. The first was a follow-on to PROJECT SEASON, a program implemented in the early 1980s in response to the last serious peacetime pilot shortage. The others involve using Guard and Reserve pilots in associate instructor pilot (Associate IP) programs that could free additional experienced active duty pilots for other assignments. All of these programs need to be evaluated in the context of increasing manning problems for Guard and Reserve units.
The first option sends new active duty pilots to Guard or Reserveunits to gain experience there. This opens more cockpits for experienced pilots in active squadrons, maintaining a higher experiencelevel while increasing the reserve components’ responsibility for absorbing and training new pilots. The ratio of newcomers to experienced pilots in Guard and Reserve units would remain low, but the units would require additional resources to provide the training and supervision required by the additional active duty pilots. If some 40 inexperienced fighter pilots per year were absorbed in Guard and Reserve units, it would correspond to a UTE increase of sufficient magnitude to eliminate the aging rate deficit.
Associate programs that place experienced reserve pilots in active units can increase the number of available experienced pilots and help to alleviate the overall shortfall. Associate IP programs in un-xiv The Air Force Pilot Shortage

dergraduate flying training (UFT) units and Formal Training Units (FTUs) are also appealing because they fill cockpit requirements with experienced pilots. These alternatives show promise, but they must be implemented carefully and evaluated thoroughly to deal with cultural issues and prevent unintended consequences.
Guard and Reserve units themselves face a dynamic recruiting and retention challenge. Many pilots will leave the active component and be available to join reserve-component units within the next two or three years, but then the active component’s smaller cohorts will begin coming to the end of their service commitments. Effective implementation of Associate IP programs requires that they move now to take advantage of the “window of opportunity” presented bythe current profuse losses from active duty. Once the separationeligible cohorts become smaller, the hiring pool will dwindle, and it will be too late to implement these programs.
The same window of opportunity could provide additional supervisors for active-component pilots involved in a Total Force exchange.If participating Guard and Reserve units received additional manning and grade authorizations, they could hire separating instructor pilots as overages 2 to provide some of the required supervision.Pilots in this category could also provide a hedge against hiring difficulties that the Guard and Reserve might expect when active duty loss rates drop off.
The results of our analysis were considered in the Four-Star RatedSummit that the Air Force convened in April 1999. The following actions were among the policy decisions resulting from that summit:

• Set 55 to 60 percent as the low-end experience-level goal for fighter units • Reduced fighter FTU production to 330 per year, with 30 new pilots to be absorbed in Guard and Reserve units

______________ 2 In order to hire these pilots, the units would require approval to exceed existing manpower (and grade authorizations).Summary xv

• Supported the UFT Associate IP program • Examined the feasibility of using Associate IPs in FTUs.

These are essential steps to prevent the lack of experience problem from becoming unmanageable. It is important to recognize, however, that retention must improve significantly and alternativemanning options must be effective if production levels are to be sustained at 330 fighter pilots per year. We hope the Air Force will pursue the Total Force initiatives despite the implementation problems.
These policies can be effective, however, only if the UTE rate problem is resolved in time to ensure that operational units will be able tofly their programmed flying hours starting in FY00. If the units underfly by as little as two hours per crew per month (on average), the aging rate problem remains and experience falls to unmanageable levels.UNITED STATES OF AMERICA DEPARTMENT OF TRANSPORTATION OFFICE OF THE SECRETARY WASHINGTON, D.C.

Issued by the Department of Transportation on January 21, 2010

NOTICE OF ACTION TAKE N -- DOCKET DOT-OST-2010-0016

_______________________________________________________________________________________________________________________________ _ This serves as notice to the public of the action described belo w, taken by the Department official indicated (no additional confirming order will be issued in this matter).
Applicant: VOLGA-DNEPR J.S. CARGO AIRLINE (Volga-Dnepr) Date Filed: January 18, 2010
Relief requested: Exemption from 49 USC § 40109(g) to permit the applicant to operate three, one-way, all-cargo charter flight s, using its AN-124-100 aircraft, carrying outsized cargo on behalf of U.S. TRANSCOM, on or around February 8-13, 2010. The applicant states that the flights would operate as follows: 1) one flight between March ARB, California, and Kona International Airport at Keahole, Hawaii, on February 8, 2010, carryi ng a combination of UH-1N and AH-1W helicopters and support equipment; and 2) two flights between Ka neohe MCAS, Hawaii, and March ARB, Calif ornia, on February 10 and 12, 2010, both carrying a combination of UH-1N and AH-1W helicopters and suppor t equipment. The applicant asserts that U.S. TRANSCOM needs the subject lift to ensure the smooth rotation of equipment without disruption to operational missions; that the U.S. TRANSCOM organic lift scheduled to transport the cargo was diverted to other areas; that the cargo is too large for transportat ion on any commercially available U.S. aircraft; and that surface transportation is not feas ible because of the nature of the cargo and the urgency of the shipment.
Applicant representative: Colon Miller, 832-585-8611 DOT analys t: Robert J. Finamore, 202-366-2405

Responsive pleadings: Volga-Dnepr served its application on t hose U.S. carriers operating large all-cargo aircraft. Each carr ier indicated that it did not have aircraft available to conduct the proposed operations and that it had no comment or did not oppo se grant of the requested authority.

Statutory Standards: Under 49 USC § 40109(g), we may authorize a foreign air carrier to carry commercial traffic between U.S. points ( i.e ., cabotage traffic) under limited circumstances. Specifically, we must find that the authority is required in the public interest; that because of an emergency cr eated by unusual circumstances not arising in the normal course of business the traffi c cannot be accommodated by U.S. carriers hol ding certificates under 49 USC § 41102; that a ll possible efforts have been made to place the traffic on U.S. carriers; and that the transportation is necessary to avoi d unreasonable hardship to the traffic invo lved (an additional required finding, concerning emergency transpor tation during labor disputes, was not relevant here).

DISPOSITION Action: Approved. Action date: January 21, 2010

Effective dates of authority granted: February 8-13, 2010.

Basis for approval: We are granting Volga-Dnepr’s request to ope rate the proposed one-way flights (described above), on behalf of U.S. TRANSCOM. We found that its request met all the relevant criteria of 49 USC § 40109(g) for the grant of an exemption of this type, and that the grant was required in the public interest. Specifically, we were persuaded that the need to move th e cargo to ensure the smooth rotation of equipment without disruption to operational missions; the fact that the U.S. TRANSCOM organic lift scheduled to transport the cargo was diverted to other areas; and the unique, outsized nature of the cargo, constituted an emergency not arising in the normal course of business. More over, based on the representations of the U.S. carriers, we concluded that no U.S. carrier had aircraft available that could be used to conduct the operations at issue here. We also foun d that grant of this authority would prevent unreasonable hardship to U.S. TRANSCOM. Finally, we found that the applicant was qualified to perform its proposed operations.

Except to the extent exempted/waived, this authority is subject to our standard exemption conditions (attached) and to the cond ition that the applicant must comply with FAA-approved flight routings for the authorized operations. We may amend, modify, or revoke the authority granted in this Notice at any time without hearing at our discretion.
Action taken by: Susan L. Kurland Assistant Secretary for Aviation and International Affairs
An electronic version of this document is available on the World Wide Web at: http://www.regulations.gov**What GAO Found**

**United States Government Accountability Office Why GAO Did This Study**  

# H ighlights **Accountability Integrity Reliability S**  **eptember 2009** 

## MILITARY AIRLIFT

**DOD S**  **hould Take S**  **tep s**  **to S**  **tren g**  **then Mana g**  **ement of the Civil Re**  **s erve Air Fleet Pro**  **g ram** 
Highlights of GAO-09-625 , a report to congressional committees

To move passengers and cargo, the Department of Defense (DOD) must supplement its military aircraft with cargo and passenger aircraft from commercial carriers participating in the Civil Reserve Air Fleet (CRAF) program. Carriers participating in CRAF commit their aircraft to DOD to support a range of military operations. In the Fiscal Year 2008 National Defense Authorization Act, Congress required DOD to sponsor an assessment of CRAF and required GAO to review that assessment. GAO briefed congressional staff on its observations. As discussed with the staff, GAO further analyzed some of the issues identified in its review. This report assesses (1) the extent to which DOD has assessed potential risks to the CRAF program, and (2) the extent to which DOD’s management of CRAF supports program objectives.

For this engagement, GAO reviewed DOD-sponsored CRAF study reports and interviewed study leadership. GAO also interviewed over 20 of 35 CRAF participating carriers that responded to a request for a meeting, DOD officials, and industry officials.

**What GAO Recommend s** 
GAO is recommending that DOD (1) conduct risk assessments on two CRAF passenger and cargo issues and (2) develop policies to strengthen its management of the CRAF program. In comments on a draft of this report, DOD disagreed with the first recommendation and agreed with the second. DOD needs to establish the level of risk associated with declining charter passenger capabilities and DOD’s increas ed need to move very large cargo. Although DOD depends on CRAF charter passenger aircraft to move more than 90 percent of its peacetime needs, there has been nearly a 55 percent decline in this CRAF capacity since 2003. In addition, si nce 2003, DOD’s large cargo movement needs have increased with the acquisition of over 15,000 Mine Resistant Ambush Protected vehicles. Since there are no U.S. commercial cargo aircraft capable of mo ving cargo this size into Iraq and Afghanistan, DOD is using foreign-owned car riers to assist it s military aircraft in such movements. However, there are scenarios where foreign-owned carriers may be unwilling or not allowed to fly. As a result, the lack of a commercial U.S. outsized cargo capabilit y might restrict DOD’s ability to meet its large cargo airlift needs in a time ly manner. DOD has not quantified the risks these challenges pose to the CRAF program’ s ability to meet DOD’s future transportation requirements because DOD has not completed risk assessments as described in the 2008 National Defense Stra tegy. Until risk assessments are conducted, DOD will not be sufficiently informed about potential risks in the CRAF charter passenger segment and in very large cargo airlift capability that could prevent DOD fr om managing its future airlift needs and the CRAF program effectively.

DOD’s management of CRAF has not provided CRAF participants with a clear understanding, which could strengthen the program’ s ability to support its objectives, in some critical areas of th e program. Although internal controls such as policies can help meet prog ram objectives, CRAF business partners do not have a clear understanding of DOD’ s expectations concerning four CRAF objectives—an enhanced mobiliza tion base, modernization, increased air carrier participation, and communication—because DOD has not developed policies in these four areas. First, DOD has not developed policies regarding the enforcement of its business rules, such as the 60/40 rule that states that participants should fly onl y 40 percent of their total business for DOD. DOD does not consistently enforce this rule and this may decrease the mobilization base since it is difficult fo r carriers to size their fleets to meet DOD demands. Second, DOD has not d eveloped policies or economic incentives that promote CRAF modern ization and this may hinder CRAF carriers from modernizing their airc raft. Third, DOD has not developed policies regarding oversight of the di stribution of its peacetime airlift business, the primary incentive to carri ers for participating in CRAF. DOD has no involvement in this distribution, and the perceptions of some carriers that this process is unfair could ultimately reduce carrier participation in CRAF. Fourth, DOD has not developed policy concerning communication with the carriers on CRAF studies or proposed changes to the CRAF program. DOD has not always communicated with carriers prior to implementing changes or completing studies. Until DOD develops po licies that provide carriers with a clear understanding of CRAF, DOD cannot provide reasonable assurance that CRAF will meet its primary objective of providing critical airlift. View GAO-09-625 or key components. For more information, contact William Solis, (202) 512-8365, solisw@gao.gov.

### Dedicated to the memory of Robert W. Baker

Bob was a member of the Commercial Review Board and a leading airline authority who taught the airline industry the need to change. One of his last projects was his work on this study. Mr. Baker died on April 20, 2003 and will be deeply missed. BC

- 17X Case Studies and SAM Forecast

Council for Logistics Research, Inc. 1111 Jefferson Davis Hwy Arlington, VA 22202 

# RISK REDUCTION REPORT ON THE SHORT AUSTERE MARKET This report is for information only. No Boeing, CLR, or US Government commitment to sell,

loan, lease, co

- develop, or co

- produce defense articles or services is implied or intended.This report was cleared for public release by the U.S. Air Force on September 8, 2003 i This report is for information only. No Boeing, CLR, or US Government commitment to sell, loan, lease, co

- develop, or co

- produce defense articles or services is implied or intended. 

## Executive Summary

BACKGROUND: The November 2000 Commercial Application of Military Airlift Aircraft (CAMAA) report recommended a proposal that would allow the Department of De fense to leverage military airlift aircraft if such aircraft were available in the commercial market. The report suggested a unique military

- commercial risk

- sharing strategy to introduce a commercialized C

- 17, or BC

17X, into the market for transporting h eavy and/or outsize goods (the Heavy Outsize Market, or HOM), which is currently being served by Russian

- made AN

- 124s.

CONCLUSIONS: As a follow

- up to the initial study, this Risk Reduction Report on the Short Austere Market (SAM) was commissioned to det ermine if there are current commercial markets closely aligned with unique BC

- 17X operational characteristics that might mitigate commercial market

entry risks for potential BC

- 17X operators and thus reduce the risk of the CAMAA concept. This SAM study, c ompleted in 2003, concludes that the SAM, the market for transporting heavy and/or outsize equipment and material loads to short, austere airfields, is large enough and has a yield sufficient to maintain a profitable operation for at least ten BC

- 17X aircr aft, validating the commercial market premise of the CAMAA initiative. Consequently, the previous study’s findings that the Department of Defense’s outsize airlift requirements could be fulfilled, in part, by leveraging the BC

- 17X in the commercial market , can be viewed as well founded and as a viable business concept worthy of detailed implementation studies.

METHODOLOGY: The analysis underlying this conclusion divided the potential BC

- 17X SAM into segments and concentrated on the SAM Project Market

— th e market for transporting heavy and/or outsize and material loads to short, austere airfields for large, international construction and development projects (including, but not limited to, energy, infrastructure, and mining projects). Other outsize

- capabl e and wide

- body aircraft cannot access these austere locations, and other aircraft that can land at short or austere airfields are not able to carry the outsize freight, volume of cargo, or tonnage needed to make these projects profitable. This makes the BC

- 17X not only well suited for use in these projects, but also, potentially, the exclusive best choice. Two potential risks were noted: economic and geopolitical. Neither was considered critical at this time. The SAM Project Market is heavily weighted in the energy sector and most projects are located in developing countries, but the market for oil and gas development, pipeline, and refinery projects and the global demand for petroleum products are not projected to abate within the next 20 years. Geopol itically, the BC

- 17X’s ability to exploit austere environments increases the number of locations where project work is possible, offsetting the loss of projects in areas of political instability, hostilities, or other geopolitical problems. The BC

- 17X SAM Project Market Forecast is based on 11 SAM Project Market Case Studies of large international construction projects involving major corporations. These case studies provided data and parameters used to filter a project

- market database and estimate a 2003 base year market of approximately $2.36 billion that will grow by more than thirty percent over the next ten years. Significantly, this market estimate does not include business from the SAM Supply

- Chain Market, Special Mission Market, or Heavy Outsize M arket, which were examined in additional case studies and represent additional sources of revenue for the BC

- 17X. Due to the differing nature of value calculations in these market segments, their potential values were not included in the current market es timate.This report was cleared for public release by the U.S. Air Force on September 8, 2003 ii
Disclaimer on Cover applies 

## Table of Contents

1. Purpose and Structure of the Report

................................ ................................ ................................ ..................... 1
1.1 Purpose of the Report

................................ ................................ ................................ ................................ ......... 1
1.2 Structure of the Report

................................ ................................ ................................ ................................ ........ 1

2. Background

................................ ................................ ................................ ................................ .............................. 3
2.1 Definitions

................................ ................................ ................................ ................................ .......................... 3
2.2 Background

................................ ................................ ................................ ................................ ......................... 4 2.2.1 Background of the Global Air Cargo Market

................................ ................................ .............................. 4 2.2.2 History and Design of the BC

- 17X

................................ ................................ ................................ ............. 5 2.2.3 History of this Risk Reduction Report on the Short Austere Market

................................ .......................... 6

3. SAM Project Market Case Studies and Forecast

................................ ................................ ................................ . 9
3.1 Overall Methodology

................................ ................................ ................................ ................................ .......... 9

3.2 SAM Pr oject Market Case Studies

................................ ................................ ................................ .................... 12 3.2.1 Case Study Methodology

................................ ................................ ................................ .......................... 12 3.2.2 SAM Project Market Background

................................ ................................ ................................ ............. 16 3.2.3 SAM Project Market Case Studies

................................ ................................ ................................ ............ 19 3.2.3.1 Sakhalin I Onshore Processing Facilities, Offshore and Onshore Pipelines, and Well Development Project

................................ ................................ ................................ ................................ ........................... 19 3.2.3.2 Sakhalin II Phase 2 Pipeline Project

................................ ................................ ................................ .. 25 3.2.3.3 Wabu Gold Project

................................ ................................ ................................ ............................ 30 3.2.3.4 Kashagan Oil and Gas Field Project

................................ ................................ ................................ .. 36 3.2.3.5 Qalhat, Oman Liquefied Natural Gas Refinery

................................ ................................ ................. 42 3.2.3.6 Villano Pipeline and Central Processing Facility Project

................................ ................................ .. 47 3.2.3.7 Tan Jung Jati B Power Plant Project

................................ ................................ ................................ . 52 3.2.3.8 In Salah Gas Field Development

................................ ................................ ................................ ....... 59 3.2.3.9 Mackenzie Delta Gas Pipeline Project

................................ ................................ .............................. 64 3.2.3.10 Chad

- Cameroon Petroleum Development and Pipeline Project

................................ ...................... 70 3.2.3.11 National Petroleum Reserve Alaska Project

................................ ................................ .................... 78 3.2.4 SAM Project Market Case Study Summary

................................ ................................ .............................. 83

3.3 The BC

- 17X SAM Project Market Forecast

................................ ................................ ................................ ..... 84 3.3.1 Forecast Methodology

................................ ................................ ................................ ............................... 84 3.3.2 Forecast Results

................................ ................................ ................................ ................................ ........ 85 3.3.2.1 Phase One: Identifying the Quantity and Cost of BC

- 17X

- Eligible SAM Projects

.......................... 85 3.3.2.2 Phase Two: Assessing the Current Value of the BC

- 17X SAM Project Market

............................... 90 3.3.2.3 Phase Three: Calculating a Ten

- year BC

- 17X SAM Project Market Forecast

................................ .. 94

4. Additional Sources of Revenue

................................ ................................ ................................ ........................... 100
4.1 SAM Supply

- Chain Market

................................ ................................ ................................ ............................. 100 4.1.1 Raytheon Polar Services’ Transport Service to Antarctica

................................ ................................ ..... 101 4.1.2 Worldwide Sodium C yanide Distribution

................................ ................................ ............................... 104
4.2 Special Mission Market

................................ ................................ ................................ ................................ .. 107 4.2.1 Aerial Firefighting

................................ ................................ ................................ ................................ .. 107 4.2.2 Spent Nuclear Fuel Transportation

................................ ................................ ................................ ......... 111 4.2.3 Kabul Embassy Project

................................ ................................ ................................ ........................... 113 4.2.4 Humanitarian Relief to the Sudan

................................ ................................ ................................ ........... 116
4.3 Heavy Outsize Market

................................ ................................ ................................ ................................ ..... 118

5. Implementation Issues for a Prospective BC

- 17X Operator

................................ ................................ ........... 121
5.1 Summary of the Possible Financial Return of a Ten

- Aircraft Fleet

................................ ................................ 121This report was cleared for public release by the U.S. Air Force on September 8, 2003 iii
Disclaimer on Cover applies 5.2 Risk

................................ ................................ ................................ ................................ ................................ . 121 5.2.1 Economic Risks

................................ ................................ ................................ ................................ ...... 122 5.2.2 Geopolitical Risks

................................ ................................ ................................ ................................ ... 122 5.2.3 Competitive Aircraft Risks

................................ ................................ ................................ ..................... 124
5.3 Stabilizing Factors

................................ ................................ ................................ ................................ .......... 125

6. Review Board Comments

................................ ................................ ................................ ................................ .... 128

Bibliography

................................ ................................ ................................ ................................ ............................. 131

Biographies

................................ ................................ ................................ ................................ ............................... 134
Team Biographies

................................ ................................ ................................ ................................ ................. 134
Review Board Biographies

................................ ................................ ................................ ................................ ... 141

# Risk Reduction Report on the Short Austere Market

Section 1: Purpose and Structure of the Report1 Disclaimer on Cover applies 

## 1. Purpose and Structure of the Report

1.1 Purpose of the Report

The purpose of the Risk Reduction Report on the Short Austere Market is to present a realistic market forecast that assesses the potential contribution of a BC

- 17X fleet to the Commercial Appl ication of Military Airlift Aircraft (CAMAA) program.


### 1.2 Structure of the Report

The report has six sections.

Section 1 outlines the goals and structure of the report.

Section 2 provides background information, including definitions (Section 2.1) and b rief descriptions (Section 2.2) of the air cargo market, the BC

- 17X, CAMAA, and the Risk Reduction Report on the Short Austere Market.

Section 3 contains the bulk of the market analysis, the BC

- 17X Short Austere Market (SAM) Project Market Forecast, and has two essential subsections. The first (Section 3.2) contains the SAM Project Market Case Studies, which provide data and establish the parameters for the SAM Project Market Forecast. The case studies also contain detailed descriptions of the kinds of work appropriate for the BC

- 17X. Using the information from the case studies, the next essential subsection (Section 3.3), builds a ten

- year BC

- 17X SAM Project Market Forecast.

Section 4 describes additional sources of revenue for the BC

- 17X outside the SAM Project Market, including SAM Supply

- Chain Projects (Section 4.1), Special Missions (Section 4.2), and Heavy Outsize Market (HOM) charters (Section 4.3).

Section 5 analyzes the implications of implementing a BC

- 17X fleet as part of the CAMAA
progra m from the perspective of a prospective BC

- 17X operator and covers possible financial return (Section 5.1), risk factors (Section 5.2), and stabilizing factors (Section 5.3).

Section 6 presents comments on the Risk Reduction Report on the Short Austere Market from a review board of industry experts.

# Risk Reduction Report on the Short Austere Market

Section 2: Background3 Disclaimer on Cover applies 

## 2. Background

2.1 Definitions

Outsize Cargo : Cargo that is too large to fit into conventional commercial wide

- body passenger/ca rgo aircraft.

Heavy Outsize Market (HOM) : The market for transporting individual cargo pieces that are too heavy for and/or too large to fit on conventional commercial wide

- body passenger/cargo aircraft.

Short, Austere Airfield : A short (4000

- ft to 5000

- ft), narrow (but at least 90

- ft), hard

- packed prepared airfield with limited cargo on

- load and off

- load capacity, little or no aircraft maintenance capability, and ramp areas and taxiways that will not accommodate large conventional wide

- body cargo aircraf t. The BC

- 17X can operate in short, austere airfields and does not require support equipment to load and unload cargo at austere sites. 1 An internal study of the world’s airfields by the Council for Logistics Research found that the number of short,
aust ere runways is more than three times as large as the number of international airports with long, wide runways. In addition, the study showed that the BC

- 17X can service more than half of the world’s 13,800 runways (while the AN

- 124 can only service appro ximately 2000 runways) and that nearly 5000 runways around the world can only be serviced in an outsize capacity by the BC

- 17X. 2

Short Austere Market (SAM) : The market for transporting heavy and/or outsize equipment and material loads to short, austere airfields. This market is ideally suited for the BC

- 17X because other outsize

- capable aircraft such as the AN

- 124 and existing wide

- body aircraft such as the B

747

- 400F, MD

- 11F, and DC

- 10

- 30 cannot access short or austere airfields. Additionally, other aircraft that can land at short or austere airfields (such as the L

- 100) cannot carry the outsize freight, volume of cargo, or tonnag e required to make air shipment profitable for most austere projects. Prior to this study, the potential size of the SAM has yet to be fully explored, and, unlike the HOM, in which one

- off charters are commonplace, the SAM has the potential to support rep eated, scheduled deliveries. Note that the term austere applies not only to airfield length, but to the entire runway operational environment.

1 The C

- 17 (the BC

- 17X’s military pr edecessor) can land on unprepared runways as short as 3,000 feet with a full load, but, because of FAA commercial certification and angle of landing requirements, the BC

- 17X will only be certified for 4000

- foot prepared runways when it is first operational . It may be certified for shorter runways over time.
2 Council for Logistics Research, Inc., Worldwide Runway Analysis, 19 February 2003, p.3. See Appendix A for the entire study. L

- 1004 Disclaimer on Cover applies SAM Project Market : The market for transporting heavy and/or outsize equipment and material loads to short, austere airfields for large, international construction and development projects, including, but not limited to, energ y, infrastructure, and mining projects.

SAM Supply

- Chain Market : The market for heavy and/or outsize equipment and material loads to short, austere airfields as part of an ongoing logistics supply chain.

Special Mission Market : The market for transpo rting heavy and/or outsize equipment and material loads that emerges as a result of humanitarian concerns, environmental regulations, national security needs, or international law. Economic benefits, while they may exist, are secondary rationales for usin g the BC

- 17X. The missions in this market may or may not involve an austere airfield component.



### 2.2 Background

2.2.1 Background of the Global Air Cargo Market

In 2001, the commercial air cargo market was 137.4 billion revenue ton

- kilometers (RTKs), but its rate of growth, though positively forecasted at 5.1 to 7.8 percent annually, is inherently limited by airlift technology that is not tailored to meet the changing needs of modern global logistics. 3

As Mike Eskew, Chairman of United Parcel Service, has stated, “Logistics today has got to sort through the excesses of commerce.” The bulk of today’s shipping volume trav els to and from major airports in the bellies of passenger aircraft or
on passenger

- converted freighter aircraft. However, as global commercial development reaches into increasingly remote areas, opportunities for new, more dramatic growth in the air carg o market will be found in non

- traditional markets that are inaccessible by today’s standard modes of commercial air transportation and difficult to reach by surface transportation. Moreover, according to both Boeing’s World Air Cargo Forecast 2002

- 2003 an d the Commission on the Future of the United States Aerospace Industry , the majority of the forecasted growth in the traditional air cargo market will be captured by non

- US carriers who have started to expand their cargo thinking through vertical logistics

- chain alliances, mergers and acquisitions, and specialized equipment (such as the AN

- 124, AN

- 225, and A

- 400X) capable of serving these new developing markets.

4

3 The Boeing Company, World Air Cargo Forecast 2002

- 2003

, Historically, the market has conspired to make logistics more complicated by developing new distribution channels, and currently globalization, technology, and deregulation are redefining the logistics business. In add ition, supply

- chain management goes far beyond the distribution of goods and is now, according to Eskew, “the

http://www.boeing.com/commercial/cargo/flash.html , 2002. 4 “UPS’s Eskew Sees Logistics Golden Age Coming, Bringing Good Corporate Governance With It,” Traffic World , 14 October 2002, p. 22. AN

- 1245 Disclaimer on Cover applies bedrock of the business plan.” For example, supply

- chain disciplines such as rational investment and driving down inventory constitute a company’ s natural defense against inefficiency; therefore, in effect, a company’s supply

- chain strategy becomes its business plan. 5 As Eskew goes on to say, “Managing global commerce means effectively managing your supply chain. They’re more than mutually depend ent ... they are synonymous. They’re also essential for continued economic development and opportunity around the world.” 6

Such changes in logistics thinking, combined with globalization’s drive to develop increasingly austere locations, are expanding the air cargo market beyond its traditional passenger aircraft orientation. Furthermore, as the Commission on the Future of the United States Aerospace Industry concludes in its first recommendation, “the integral role aerospace plays in [the United States] e conomy, ...security, ...mobility, and ...values makes global leadership in aviation and space a national imperative.” 7 As the United States stands “dangerously close to squandering the advantage bequeathed to [it] by prior generations of aerospace leaders,” 8



### 2.2.2 History and Design of the BC

- 17X i t is essential to its international competitiveness in the aerospace industry (and the commercial and trade advantages that derive from that position) that US companies manufacture and operate aircraft, such as the BC

- 17X, that can penetrate the relatively untapped air cargo markets of the future.

The unparalleled design of the BC

- 17X ideally matches the expanding needs of the global commercial market. In addition to accommodating approximately 87 tons (79 metric to ns) in its 20,900 cubic

- foot (592 cubic

- meter) cargo bay that is wide enough for two rows of large trucks side by side, this highly versatile aircraft can take off, land, deliver its cargo, and turn around on austere runways approximately 4,000 feet (1,200 meters) long and 90 feet (28 meters) wide.

Moreover, landing in short distances is not the only capability that makes the BC

- 17X uniquely suitable to austere airfields. Powered by four Pratt & Whitney PW2000 series turbofans with full

5 Ibid.
6 Mich ael L. Eskew, Executive Speeches

, http://www.pressroom.ups.com/execforum/speeches/speech/0,1402,38,00.html , 2002.
7 Commission on the Future of the United States Aero space Industry , Final Report, 2002, p. vi.
8 Ibid.6 Disclaimer on Cover applies reverse capabi lities and a combined 161,760 lbs (719.6kN) of thrust, the BC

- 17X has a cruise speed of 563 mph (906 kmph, or 489 knots) and a range of 2,500 nautical miles (4,630 km) at maximum payload without refueling. The engine thrust

- reversing system can back the B C

- 17X up a 2 percent grade fully loaded, allowing the aircraft to park forward in tight ramp spaces, off

load, and back out when the crew is ready to depart. This system also eliminates the jet blast and engine noise danger to crew members and equipment m oving behind the aircraft during off

loading and on

- loading operations with the engines running. In addition, the thrust

- reversing engines are mounted well above the ground. This design feature, combined with the high wing, directs the exhaust up and for ward, greatly reducing blowing debris and the potential for foreign objects to be ingested by the engines. 9 Furthermore, ready access to all areas of the aircraft without complicated or sophisticated ground equipment makes the BC

- 17X easy to maintain in

a ustere airfields. (For example, a self

- jacking capability allows for tire and brake changes on the main landing gear without having to rely on standard aircraft jacks, and fuel boost pumps can be removed and replaced without de

- fueling and purging the fue l tanks.) 10

The United States Air Force has been taking advantage of the extraordinary capabilities of the BC

17X’s mil itary variant, the C

- 17, for a decade. The C

- 17 took off on its maiden flight on September 15, 1991, and the first production model was delivered to Charleston Air Force Base, South Carolina, on June 14, 1993. Since the first C

- 17 squadron was declared

o perationally ready on January 17, 1995, the Air Force’s C

- 17 fleet has logged over 400,000 flight hours. Its missions have included flying troops, equipment, and humanitarian aid to Operation Joint Endeavor in Bosnia, the Allied Force Operation in Kosovo, the war on terrorism in Afghanistan, and Operation Iraqi Freedom. The USAF’s initial contract with McDonnell Douglas/Boeing was for 120 C

- 17s to be delivered through 2004, but in early 2002 the order was increased to 180 planes through 2008. The wisdom of this decision was borne out when the aircraft proved indispensable during the war on terrorism in Afghanistan and Operation Iraqi Freedom.

In May of 1995, the C

- 17 was awarded the Collier Trophy for the top aeronautical achievement of the year, and o n February 4, 1999, President Clinton presented the Malcolm Baldrige National Quality Award to the manufacturer, The Boeing Company Airlift and Tanker Program. During routine flight testing at Edwards Air Force Base in 2001, the C

- 17 set 22 world records, including payload to altitude, time to climb, and short takeoff and landing mark. (The aircraft successfully took off and landed in less than 1,400 feet while carrying a payload of 44,000 lbs to altitude.) In subsequent testing, the C

- 17 set 11 more reco rds pending approval, bringing the total number of world records to 33.



### 2.2.3 History of this Risk Reduction Report on the Short Austere Market

9 The Boeing Company, C

- 17 Globemaster III: Technical Description and Planning Guide , 2002, p. 2

- 1.
10 Ibid, p. 6

- 1. The C

- 17’s roll

- on/roll

- off cargo capabilities allow very large and heavy military equipment to be loaded quickly and efficiently.7 Disclaimer on Cover applies The November 2000 Commercial Application of Military Airlift Aircraft (CAMAA) report recommended a proposal that would allow the Department of Defense to leverage military airlift aircraft if such aircraft were used in the commercial market. The report suggested a unique military

- commercial risk

- sharing strategy to introduce the BC

- 17X into the commercial marke t.

If successful, the CAMAA initiative may provide a real and current solution to the Commission on the Future of the United States Aerospace Industry ‘s recommendation that the US government “develop an air transportation system that simultaneously meets our civil aviation, national defense and homeland security needs.” 11 (See Appendix B for a point paper on other ways in which the CAMAA project seeks to fulfill the recommendations of the report.) Additionally, the CAMAA initiative supports the Departmen t of Defense Transportation Policy that “the DOD will foster an economically sound, safe, reliable, and efficient national transportation system and supporting infrastructure by using commercial transportation services and facilities to the greatest extent practicable, consistent with military needs.” 12

One of the goals of the November 2000 CAMAA Report was to identify and describe the commercial market for the BC

- 17X. To this end, it provided data on the BC

- 17X’s potential in the HOM, but time and resou rce constraints precluded the investigation of an even more significant market for the aircraft: the Short Austere Market (SAM). CAMAA then launched a risk reduction effort that, among other projects, investigated the BC

- 17X’s unique ability to develop an d serve the SAM by delivering heavy and/or outsize cargo loads to short, austere airfields.

The first case study review of the SAM, completed in early 2001, consisted of a sample analysis of specific infrastructure development projects to determine the ex istence and viability of the SAM and the ability of the BC

- 17X to serve this market profitably. The initial Case Study Report established that a commercial SAM did exist and that companies would pay a premium for air transportation to SAM sites.

The findi ngs of the first case study review were sufficiently compelling to prompt a more in

depth case study project. As such, this report contains analyses of a representative sample of case studies to create both a description of BC

- 17X

- appropriate SAM projects and the foundation for a compelling commercial forecast of the BC

- 17X’s potential in the SAM.

11 Commission on the Future of the United States Aerospace Industry , Final Report, 2002, p. vii. 12 Department of Defense, Department of Defense Transportation Policy , March 1990, p.1. See Appendix C for the full text of the policy.

# Risk Reduction Report on the Short Austere Market

Section 3: SAM Project Market
Case Studies and Forecast9 Disclaimer on Cover applies 

## 3. SAM Project Market Case Studies and Foreca st

3.1 Overall Methodology

The market for the BC

- 17X has two major market segments: the SAM and the HOM (see Chart 3.1). As explained above, this report concentrates on the SAM as the most substantial BC

- 17X market segment.

Chart 3.1

Within the SAM, the BC

- 17X has three main sources of revenue: the Project Market, the Supply

Chain Market, and the Special Mission Market. The Project Market (the market for large, international construction and development projects

— including, but not limited to, energy

, infrastructure, and mining projects) is the main focus of this market analysis and the basis of the BC

- 17X SAM Project Market Forecast.

Several factors led to selecting the SAM Project Market as the foundation of the BC

- 17X forecast. Most importantly, it is a market segment that has the potential to be exclusive to the BC

- 17X because the projects tend to have outsize cargo requirements and be in austere locations difficult to reach by well

- developed modes of surface transportation and not near large int ernational airports. (See SAM Project Market Background in section 3.2.2.) Other outsize

capable aircraft (such as the AN

- 124) and existing wide

- body aircraft (such as the B747F

- 400F, MD

- 11F, and DC

- 10

- 30) cannot access the austere locations, and other a ustere aircraft (such as the L

- 100) cannot carry the outsize freight, volume of cargo, or tonnage required to make air shipment profitable for most austere projects. Furthermore, the BC

- 17X is a self

- contained cargo system that does not need support equip ment to load and unload cargo at austere sites. Other characteristics of the SAM Project Market that make it well suited to the BC

- 17X are long project lead times, long project lengths, its ability to be developed quickly, and its potential to support rep eated, scheduled deliveries. 

# BC

- 17X Extended Market

Heavy Outsize Market Short Austere Market

Project Market Supply Chain Special Mission One

- Off Charter

Oil and Gas Pipelines Refineries Power Plants Mining Raytheon Polar Services Sodium Cyanide

Distribution Aerial Firefighting

Spent Nuclear SAM Market

Forecast Based On Project Market

Sudanese Aid

Fuel Kabul Embassy10 Disclaimer on Cover applies Recognizing the potential of the project market as a BC

- 17X opportunity is not new. In 1996, Boeing studied import and export data from the Port Import/Export Reporting Syste m (PIERS) database. Looking only at oil drilling equipment, Boeing analyzed the uncontainerized seaborne cargo categorized as machinery, vehicles, and metals and concluded that ocean vessels carried nearly 4.5 million tons of oil project cargo in 1995. I f, as Boeing estimated, only five percent of this cargo were available for BC

- 17X operators or other outsize aircraft operators, it would amount to over 234 thousand tons. 13 Looked at another way, that amount of cargo carried in BC

- 17Xs with an average 70 percent load factor would generate over 3,800 BC

- 17X missions annually. Depending on the number of hours required for each mission, this demand could support a BC

- 17X fleet of fifteen to twenty

- five aircraft. 14 While these numbers seem impressive, they d id not engender a substantive response from the commercial airfreight industry.

The fundamental problem with Boeing’s original project market analysis was twofold. First, the study focused solely on the BC

- 17X’s outsize cargo capability (the HOM), which, in isolation, does not distinguish it from the lower

- cost AN

- 124 that already services the HOM on a one

off basis. Second, there was no market motivation for choosing five percent of the available cargo as potential BC

- 17X business. The data alone, albe it representing a large quantity of potential business, did not indicate why BC

- 17X air transportation would be used instead of ocean transportation.

This study addresses both shortcomings of the early analysis. First, it focuses on the SAM Project Ma rket, a market that excludes other outsized cargo air transportation alternatives. Second, it contains case studies, detailed analyses of the ways in which the BC

- 17X is ideally suited to serve the SAM and the amount of revenue that can be generated by in cluding the BC

17X in real

- world logistics chains.

The case study data is the starting point for a three

- part BC

- 17X SAM Project Market Forecast. In the first step, the case study data is used to develop specific criteria by which to identify the quantit y and cost of all BC

- 17X

- eligible projects. Next, the percentage of the case study project costs that would be spent on the BC

- 17X is used to determine the size of the current BC

- 17X

13 The Boeing Company, Airlift and Tanker Division, Integrated Defense Systems, MD

- 17 General Briefing Update , 1 998.
14 Mission lengths varied between 10 hours (two five

- hour legs) and 16 hours (two eight

- hour legs), and each BC

17X could fly 2,500 hours annually. The BC

- 17X can easily accommodate bulky cargo.11 Disclaimer on Cover applies SAM Project Market, or the amount of all BC

- 17X

- eligible project money t hat could potentially be spent on the aircraft. To supplement this revenue

- based approach to market definition, the forecast also uses the SAM Project Market Case Studies to make a rough estimate of the types and total volume of project shipments presentl y transported by ocean freight that would be eligible for BC

- 17X air delivery. Finally, the growth of the current BC

- 17X SAM Project Market is projected out ten years using global Gross Domestic Product. (A more detailed discussion of the BC

- 17X SAM Proje ct Market Forecast methodology will precede the forecast analysis.)

BC

- 17X12 Disclaimer on Cover applies 

### 3.2 SAM Project Market Case Studies

3.2.1 Case Study Methodology

Many factors needed to be considered in selecting the SAM Project Market Case Studies. First, the case studies had to accurately represent the SAM Project Market (i.e., they had to be energy, mining, infrastructure, or other large construction projects with outsize cargo requirements in austere locations). Second, they had to meet the basic BC

17X

- favorable criteria established by the 2001 preliminary case study review

— a project cost of more than $100 million and a project duration of more than one year. Third, in order to be as diverse as possible, the case studies needed to be a mix of past, present, and future projects. Fourth, it was critical to analyze enough case studies for the forecast input data to be statistically significant.

Keeping in mind the importance of selecting SAM projects run by large companies or organizations with substantial influence in their respective fields, the first step in actually selecting the case studies was to iden tify candidates that would be willing to grant access to highly sensitive proprietary data essential to a thorough analysis. This process generated a list of fifty

- five projects (included as Appendix D), which had to be reduced to twenty to meet the Risk Reduction Report on the SAM budget. Once these organizations had been contacted by the Risk Reduction Report on the SAM’s team of logistics experts and had agreed to participate in the studies, team members met with representatives of each potential case study group to fill out the Selection Worksheet, a detailed questionnaire designed to help determine if a case study was really a SAM project. (See Appendix E.) The data from the Selection Worksheets, several months of working with each potential case st udy organization (see the Data Collection Worksheet in Appendix F), and several rounds of team meetings reduced the number of SAM Project Market Case Studies that fit the study criteria to eleven. 15

Each SAM Project Market case study has the same format: the project name, a list of the project participants, a description of the data source company or organization, a description of the project environment, a description of the project, an outline of the present or executed logistics plan, an outline of a pr oposed BC

- 17X logistics plan, a description of the next best alternative logistics plan, a data analysis chart, a brief conclusion, and a letter of agreement from the data source company or organization. 16

15 A similar process was used to select the six case studies that represent additional sources of revenue

. 16 Some of the case studies do not include letters of agreement either because of the amount of time needed to clear such a document through the legal departments of the data source companies or organizations or because the case study analysis was conduct ed before it was decided to request letters of agreement. These presentations, however, are just summaries of the complete case studies, which can be found in Appendix G and contain more detailed descriptions and calculations. The BC

- 17X is uniquely able to serve the Short Austere Market (SAM) by transporting heavy and/or outsize

e quipment and material loads to austere project sites.13 Disclaimer on Cover applies The sample data analysis chart below defines each of the line items. It is important to note that all the analysis is from the perspecti ve of the total project, not the individual project participants or data source companies. The distribution of the net benefit between the project participants and the BC

- 17X operator would be decided contractually on a per

- project basis.

Project Name Name of the project

Project Description Description of the project Project Owner Company or consortium that owns the project Project EPC Company Company doing the engineering, procurement, and construction work for the project Project Logistics Comp any Company doing the project logistics

Project Cost Cost of project construction/Cost of project contract Project Duration Length of project (first construction to completion and first production) Freight Description Description of freight Flight Origin and Destination Origin and destination of BC

- 17X project flights Air Cargo Duration Amount of time over which the project requires air cargo shipments BC

- 17X Operational (Fly) Days Number of days the project require s BC

- 17X flights BC

- 17X Committed (Contracted) Days Number of days the BC

- 17X must be available for the project BC

- 17X Schedule Distribution, frequency, and timing of BC

- 17X flights (including number of flights per day and number of flight days per wee k) Average BH per RT Flight Average block hours per round trip flight Estimated BC

- 17X BH Number of block hours the project will require. Calculated by multiplying Average BH per RT Flight by Number of RT Flights per Day by BC

- 17X Operational (Fly) Day s.

Possible Type of Contract Possible type of payment contract committing the BC

17X to the project. For example, if the project uses 7 or more block hours per day, a block hour payment contract will probably be used. If the project uses less than 7 blo ck hours per day, a committed day payment contract will probably be used.

Total Cost of BC

- 17X to Project 17 Cost to the project of the BC

- 17X. (This is also the BC

- 17X operator’s revenue from the project.) If the project uses 7 or more block hours per da y, Total Cost is calculated by multiplying the Block Hour Cost of the BC

- 17X ($20,000) by Estimated BC

- 17X BH. If the project uses less than 7 block hours per day, Total Cost is calculated by multiplying the Daily Cost of the BC

- 17X ($137,000) by BC

- 17X C ommitted (Contracted) Days. 18

17 The cost calculations shown in the data analysis charts are for the case study estimates only and do not reflect the actual cost for future work (which will be bid per a client’s “Referral for Quo te” (RFQ) / “Scope of Work” document).
18 Prices as of January 1, 2003.14 Disclaimer on Cover applies These prices were derived from the revenue needed to make the BC

- 17X operation commercially successful for the owner/operator (a 15% ROI) and are the minimum possible prices for the aircraft. Since the case studies reveal si gnificant net benefits to utilizing the aircraft at these prices, the owner/operator would most likely be able to negotiate higher prices on a per

- project basis. Moreover, as there is currently no equivalent competitive aircraft that can service these SAM projects, the aircraft operator/owner would be able to negotiate a price based on the savings to the customer, not the cost of the aircraft. Cost of Airfield Upgrade Cost to the project of making the runway suitable for the BC

- 17X. Note that building a paved, 4000

- ft runway that could support the BC

- 17X would cost approximately $2 M, not including cost of land acquisition, taxiways, the apron, etc. Simply improving an existing runway would be significantly less expensive. Also note that, in some cases, it may be possible to certify an unimproved runway for BC

17X operations at a cost of approximately $1.5 M. 19 Cost of Airfield Maintenance Cost to the project of maintaining a BC

- 17X

- suitable runway. Note that unimproved runways will have higher maintena nce costs than improved runways and that airfield maintenance will not always be the responsibility of the project. Delta Cost of BC

- 17X to Project Cost of the BC

- 17X to the project adjusted for transportation savings created by the BC

- 17X (i.e., the amou nt of surface and ocean transportation eliminated by the BC

- 17X logistics plan). Delta Cost is calculated by adding Cost of Airfield Upgrade and Cost of Airfield Maintenance to Total Cost of BC

- 17X to Project and subtracting Transportation Cost Savings. 20 Transportation Cost w/o BC

- 17X Project’s transportation cost with present logistics plan Transportation Cost w/ BC

- 17X Project’s transportation cost with BC

- 17X logistics plan. Calculated by adding Delta Cost of BC

- 17X to Project to Transportation cost w/o BC

- 17X. Cost Benefit Labor, materials, and other construction and operational savings from using the BC

- 17X logistics plan, including the operational savings from the early completion of the project (excludes transportation savings, which are account ed for in the Delta Cost calculation) Months

- to

- Completion Savings How much faster, in months, the project is completed using the BC

- 17X logistics plan instead of the present/executed logistics plan Capital Interest Benefit/ Return on Capital Invested Be nefit If the project is funded primarily externally, the Capital Interest Benefit is the amount of interest payments eliminated by the project’s early completion. If the project is funded primarily internally, the Return on Capital Invested Benefit is the amount of interest benefit earned by freeing up the money invested in the project faster. Although the definitions are different depending on the primary funding source, the calculations are the same because of the assumption that the rate at which the c ompany borrows money is the same as its internal rate of return.

19 Although these unimproved fields are likely to be located outside the US, it is assumed that an FAA “certification” (as outlined in AC 25

- 7A) would be necessary for the BC

- 17X operato r to maintain its FAA ticket.
20 In most of the case studies, the Increase in Transportation Cost from the BC

- 17X is the same as the Total Cost of the BC

- 17X to Project. This is because most of the BC

- 17X logistics plans still require surface transport

—

jus t less of it. Compared to the cost of the BC

- 17X, the decrease in surface transportation is minimal and thus excluded. In other case studies, the BC

- 17X replaces almost all of the present logistics, and the Increase in Transportation Cost from the BC

- 17X is less than the Total Cost of the BC

- 17X to Project.15 Disclaimer on Cover applies For each case study, the estimated interest rate is based on the projected LIBOR rate (3%), adjusted 100 to 200 basis points depending on the apparent risk of the project, and the benefit is calculated by multiplying the estimated interest rate by Project Cost, dividing by 12, and multiplying by Months

- to

Completion Savings. Accelerated Product Benefit The revenue from the accelerated product adjusted for the direct operating cost of prod uction. For example, if an oil pipeline is completed one month faster, the accelerated product benefit is the revenue from one extra month’s worth of oil flowing through the pipeline. All oil project accelerated product benefit calculations, except when noted, use an oil price of $25 per barrel. When there is a cost associated with creating the accelerated product benefit (5% for oil projects, 80% for power projects, and 50% for gold projects), the number has been reduced by the appropriate percentage to account for this cost.

The logic behind this benefit is based on the fact that energy and mining companies operate as if there is an infinite supply of their products (or at least enough to last until their own company shuts down). Continuing with the oil example, a barrel of oil not pumped today is lost forever because, although the particular field being pumped will eventually be exhausted anyway, if the oil company finishes pumping the field one day early, they can begin pumping the next field one d ay early, and so on for all time (or until the company shuts down). At infinity (or the shut

- down date), there is always an extra day of oil revenue, and that is the accelerated product benefit. While it is debatable whether or not these products are, es sentially, in infinite supply, the critical fact is that energy and mining companies operate (and calculate financial information) as if they are, making accelerated product revenue a significant benefit of the BC

- 17X. Project Construction Cost

— w/o BC

- 17 X Project construction cost with present logistics plan (includes materials, labor, and transportation) Project Construction Cost

— with BC

- 17X Project construction cost with BC

- 17X logistics plan. Construction Cost with BC

- 17X is calculated by adding Delt a Cost of BC

- 17X to Project to Project Construction Cost w/o BC

- 17X and subtracting Cost Benefit and Capital Interest Benefit/Return on Capital Investment Benefit. BC

- 17X Revenue per Operating Day Amount that the BC

- 17X earns per operating day. Revenue p er Operating Day is calculated by dividing Total Cost of BC

- 17X to Project by BC

- 17X Operational (Fly) Days. BC

- 17X Revenue per Committed Day Amount that the BC

- 17X earns per committed day. Revenue per Committed Day calculated by dividing Total Cost of B C

- 17X to Project by BC

- 17X Committed (Contracted) Days. Net Benefit The net benefit of the BC

- 17X to the project, calculated by adding Cost Benefit and Capital Interest Benefit/Return on Capital Invested to Accelerated Product Benefit and subtracting Delt a Cost of BC

- 17X to Project.16 Disclaimer on Cover applies 

### 3.2.2 SAM Project Market Background

Before analyzing the BC

- 17X’s potential in the SAM Project Market, it is important to understand what the SAM Project Market is and how the various companies involved in a large
construc tion project interact.

Simply, the Project Market is the market for large, international construction and development projects, including (but not limited to) energy, infrastructure, and mining projects, and the SAM Project Market is the market for tran sporting heavy and/or outsize equipment and material loads to short, austere airfields for the Project Market.

More specifically, most of the large projects relating to this study fall into four basic categories and a number of subcategories:

1. Energy proj ects

a. Pipelines b. Oil and gas exploration and development

c. Refineries and liquid natural gas production facilities 2. Infrastructure projects

a. Power generation b. Transportation (roads and railroads)

c. Airports, seaports, and waterways d. Water supply and sanitation 3. M ining projects 4. Other large construction projects

a. Factories b. Petrochemical products plants

c. General construction (war damage and natural disaster recovery)

These categories of projects have large SAM components because, over the years, many of the
easy

- to

- ge t

- to locations for these types of projects have been exploited, and much of the construction opportunities that remain are in areas well inland from large seaports where the transportation infrastructure is usually primitive or nonexistent. In most instan ces, overland transportation is via narrow roads, which are often nothing more than packed dirt kept passable by periodic grading. Furthermore, even if there is an airfield near a large project location, it is likely to be a short, austere airfield that c an only be serviced in an outsize capacity by the BC

17X. (See the definition of short, austere airfield in Section 2.1.)

Project logistics costs can range from six to eight percent of the equipment costs or two to five percent of the total project cos t. The transportation cost increases appreciably as the jobsite moves farther from convenient water transportation, and it is not uncommon for the logistics budget to be as high as twenty percent of the total project cost if the jobsite is several hundred miles from the nearest ocean port. 21

21 These estimates are from Bill Murphy, former Director of Global Logistics for Halliburton (one of the top ten large

- project management companies).17 Disclaimer on Cover applies For any given large construction project, there are multiple levels of management. The highest is the project owner, the company, organization, or government that will own and operate the completed project. ExxonMobi l, for example, is often a project owner in oilfield development projects and thus owns the rights to the oil the field produces. The project owner’s most pressing concerns are how quickly and at what cost the product can be brought to market and the cost of the capital needed to finance the project. In most large projects, the owner does not actually construct the entire project itself, but rather outsources all or some of the engineering, procurement, and construction, or EPC, to an EPC company. The mo st important single factor to an EPC company, such as ABB Lummus, is finishing the EPC work in the amount of time specified in its contract. Finally, to allow the EPC work to be completed on a continuous schedule, the EPC company often contracts the respo nsibility for getting the needed materials to the jobsite to a logistics provider or freight forwarder, such as SDV. The logistics provider is primarily concerned with on

- time deliveries within the budget allocation (allowing an adequate return).

Devel oping a bid for the logistics portion of an EPC contract involves an average of eight steps, depending on the complexity of the logistics work: 22

1) Receive and review the bid request, known as the “referral for quote,” or RFQ, and select a project manager to oversee the bidding process. 2) Develop a preliminary equipment and materials list. 3) Put together a preliminary logistics plan that includes information on equipment size, sourcing locations, and project location. 4) Send the preliminary logistics plan to a few logistics providers for a budget estimate and rough plan of how the equipment can be moved from the manufacturing location to the jobsite. 5) Make an internal cost estimate based on experience. 6) Collect the budget estimates from the logistics providers. 7) Avera ge the budget estimates and compare them to the internal cost estimate to develop a bid. 8) Combine the logistics bid with the other bids requested by the RFP and submit a formal bid to the client. A very rough rule of thumb for pricing a typical process facility is 12 to 14 percent for home

- office costs (engineering work, management, etc.), 55 to 65 percent for procurement and logistics, and 21 to 33 percent for construction.

Once an EPC company has successfully bid on a contract for a major project, th e project manager becomes responsible for the profit and loss of the project and for completing the EPC work according to the terms of the contract. As the business end of an EPC project, project management deals with all aspects of the EPC work. For exa mple, a project manager on a typical major project needs to address project organization and management personnel, business processes (acquisition of work, performance monitoring, etc.), legal issues, procurement issues and bid solicitation, supplier quali ty management and bid solicitation (with logistics providers and other suppliers), project scheduling, resource and financial estimating, project controls, and environmental issues. 23

22 See Appendix H for more information.
23 Appendix I contains more detailed information on project management practices.18 Disclaimer on Cover applies An EPC process owner goes through twelve basic steps in soliciting b ids for freight services from qualified logistics providers: 24

1) Determine the amount of required logistics freight services. 2) Collect data on trade lanes and the volume of freight to be moved. 3) Develop an RFQ on the scope of work to be accomplished and de termine if the work should be a subcontract or a straight purchase contract for transportation. 4) Develop a scoring matrix to rank the bids. 5) Send out the RFQ to potential bidders. 6) Gather the sealed bids and distribute them to the appropriate internal rev iew teams. 7) Use the scoring matrix to rank the bids. 8) Hold conferences with the highest

- ranked bidders. 9) Complete the final scoring of the bids. 10) Notify the winning bidder. 11) Develop service agreements. 12) Monitor performance and cost parameters.

24 See Appendix J for a more detailed description.19 Disclaimer on Cover applies 

### 3.2.3 SAM Project Market Case Studies

3.2.3.1 Sakhalin I Onshore Processing Facilities, Offshore and Onshore Pipelines, and Well Development Project

Sakhalin Island, Russia Project Owner: ExxonMobil, SODECO, ONGC Videsh, SMNG, Roseneft

- Astra EPC Company: ABB Lumm us Global, Inc. 25

ABB Lummus Global was formed in 1995 by the merger of ABB Lummus Crest and ABB Global Engineering. It is a unit of the Swiss giant ABB Ltd, a company that employs approximately 146,000 p eople. Focusing on the oil and gas, petroleum refining, and petrochemical process industries, ABB Lummus Global provides engineering, procurement, and construction services (EPC) in over seventy countries.

Environment Logistics Company: Panalpina

Data Source Company

Sakhalin Island is located off the eastern coast of Russia and is surrounded by the Sea of Okhotsk and the Sea of Japan. The island measures 650 miles long by 100 mi les at its widest point, and it is characterized by harsh terrain (two

- thirds of the island is mountains), natural disasters (landslides, blizzards, and earthquakes), and extreme weather conditions. Although the southern third of the island is open to the sea year

round, the rest of the island is only accessible by sea two to five months per year due to ice and ice flows.

In the mid

- 1920s, the Russians discovered oil in the northern part of the island near Okha, but the severe environment prevented
any su bstantive development. It was only after the breakup of the USSR that the new government invited foreign entities with the technology necessary to service the complicated site to help develop the island’s vast offshore reserves of oil and natural gas.

25 Since the time this case study was conducted, ABB has experienced financial difficulties. While ABB will still complete the project en gineering, Fluor will take over the project construction. Sakhalin Island is located off the eastern co ast of Russia and is surrounded by the Sea of Okhotsk and the Sea of Japan.20 Disclaimer on Cover applies To day, a plethora of multinational oil companies are working in partnership with the Russian government to capitalize on the island’s resources.

In addition to its oil and natural gas reserves, the island is also home to extensive fishing and spawning groun ds, lush forests, and rich mineral deposits, making the region very environmentally sensitive.

Project

Sakhalin Island has been divided into at least seven development reserves:

Sakhalin I

– ExxonMobil, SODECO, ONGC Videsh, SMNG, Rosneft

- Astra ($12 billion development contract) Sakhalin II

– Royal Dutch Shell, Mitsui, Mitsubishi ($11 billion development contract) Sakhalin III

– ExxonMobil, Chevron Texaco, Rosneft, SMNG ($531 million exploration contract) Sakha lin IV

– BP, Rosneft, Rosneft

- SMNG Sakhalin V

– BP, Rosneft, Rosneft

- SMNG Sakhalin VI

– Alfa Group Sakhalin VII

– Not defined

At this time, the Russian government has sanctioned the first two projects, and both operating companies (ExxonMobil and Roy al Dutch Shell, respectively) have signed production

- sharing agreements. Stakeholders in the other seven projects are currently exploring how much oil and gas is in each of their reserves.

The energy companies involved in the projects, such as ExxonMobil and Royal Dutch Shell, are expected to spend in excess of $23 billion over the next twenty years to develop the oil and gas reserves in Sakhalin I and II alone. Moreover, as new proje cts begin in the region, they will create a sustainable business environment that will, to some degree, lessen the risk of working on Sakhalin. According to Dinty Millar, the onsite Vice

- President of Sakhalin Development at BP, “If more projects come on t he line, the opportunities for business on the island will go from excellent to staggering.” 26

This case study focuses on the Sakhalin I development project, valued at approximately $12 billion and situated on the eastern coast of the island just northeast of Nogliki. The project’s reserves in the Odoptu, Chayvo, and Arkutum

- Dagi fields, adjacent to the barrier reef, are estimated at 2.3 billion barrels of oil and seventeen trillion cubic feet of natural gas. At a Moscow summit meeting between President Pu tin and President Bush in May 2002, President Putin “praised the proposed $12 billion Sakhalin I project as a model of economic cooperation.” 27

26 Quoted in “Interview with Marianne Drain,” Business Information Service for Newly Independent States , May 2002. Ms. Drain is the BISNIS Trade Specialist for Sakhalin Island.
27 “Oil Producers Flock to Island in Russia with Fragile Ecology,” The Wall Street Journal , 4 September 2002. Two Shell oil drilling platforms off the coast of Sakhalin Isla nd.21 Disclaimer on Cover applies Sakhalin I is expected to be developed in two phases. The first and biggest phase will consist of three barri er island rigs for directional drilling, offshore to onshore pipelines from the fields to the onshore processing facilities (OPF), and an oil pipeline from the OPF to the Russian mainland. The through

- put of the pipeline is estimated to be 200,000 barrels per day. The second phase of the project will be a sub

- sea gas pipeline running from the OPF to Japan’s northern island of Hokkaido. Since Japan does not have a defined internal pipeline distribution system, the alternate plan is to build a liquefied na tural gas (LNG) plant on Sakhalin and move the LNG by tanker to a gasification plant on the southern Japanese islands that connects with the current pipeline distribution system.

ABB Lummus was awarded the engineering, procurement, and construction (EPC) contract from the Sakhalin I operating group for the Chayvo OPF, the Chayvo wellsite, the Odoptu OPF, and the offshore pipeline and two Odoptu wellsites that will connect the OPFs to the wellsite manifolds. ABB was also awarded the logistics contract for the drilling operation and was bidding on the 28

- inch pipeline that will connect the OPF to the refinery and oil loading terminal on the Russian mainland. The total value of these contracts was estimated at $3.5 billion.

Infrastructure

The transportatio n system infrastructure on the island dates back to the end of World War II and consists of a series of rail barges from the mainland and a railroad that runs to the northern part of the island. The rail system is made up of three different gauges of trac k, and cargo must be on and offloaded at each gauge change. There are some paved roads in and around the island’s cities, but they are poorly maintained. Away from the cities the roadbeds turn into gravel, and in the wintertime they become ice highways. There is an air system, but it is made up of small aircraft used mainly for passenger movement. The international airport at Yuzhno is weight restricted to exclude wide

- body aircraft, and the other, more austere airports at Okha and Nogliki are supposed to be upgraded with hard surfaces and navigational aids (but not expanded) over the next few years. The runway at Nogliki, for example, will not exceed 6000 feet.

Present Logistics Plan

The present logistics p lan for the OPF freight is to move as much material as possible to the jobsite during the summer months (typically May through September) via ocean

- going barges and beach landings. However, all beach landings are currently under review because of their de trimental environmental impact. The material that cannot make this four

- month window of opportunity and cannot be held for the next spring thaw will be shipped to the southern ports of Korsakov or Kholmsk. From there, the material will be moved by rail t o Nogliki and then by truck to the jobsite. Rail ferry at Kholmsk, Sakhalin Island.22 Disclaimer on Cover applies The cross

- country 28

- inch pipe for the project will be provided free issue 28

28 Free issue means owner

- provided; in other words, not bought by the contractor. to the winning contractor at the Russian east coast material yards of Vostochny and Vanino. The pipe to run west from the OPFs throu gh the mountains will be shipped via rail ferry and ocean

- going barges to the ports of Kholmsk and Korsakov before moving by rail to the northern laydown (storage) yards near Nogliki. The pipe to run from the western slope of the mountains to the Tatar St raight and down the east coast of the mainland to the refinery will move first via ocean barge to the west coast of the island and then via truck to the jobsite.

In addition, it is estimated that the oilfield service company contracted to support the dril ling program will need to move approximately 1,000 forty

- foot containers of material to the jobsite. These materials are presently scheduled to be brought into Sakhalin through the ports of Kholmsk and Korsakov and moved by rail and truck to the jobsite.

The rail barge, railroad, and trucking systems on Sakhalin will be overburdened by the extra traffic from the project in addition to the normal freight and passenger movements. Furthermore, the environment in which the train and trucks operate is not co nducive to continuous scheduled service because of frequent natural disasters and the easily missed, short time frame for the barge landings. The corporations involved in the Sakhalin I project, however, have assumed one hundred percent performance of the transportation infrastructure in estimating the project costs and timing.

BC

- 17X Logistics Plan

In an effort to meet and possibly beat the intended schedule, the Sakhalin I project logistics could preplan the use of the BC

- 17X. This would allow the max imum amount of equipment and materials to be moved to the northern jobsite as quickly as possible without any seasonal restrictions due to ice. The capabilities of the aircraft would enable it to transport large loads up to 170,000 lbs while still maintai ning its ability to take off and land at Nogliki, a very austere airstrip. No other aircraft capable of serving the Nogliki airstrip can carry anywhere near this weight.

The BC

- 17X could also fly freight directly to the northern airport of Nogliki from m arshalling yards on the Russian mainland, Korea, or Japan, thus bypassing the queue for the rail barge, the

ocean

- going barges, the port congestion at Kholmsk and Korsakov, and the rail and trucking system and minimizing the environmental impact of the pro ject.

Next Best Alternative

The next best alternative is to go forward with the current logistics plans. Critical smaller items could be moved by air on L

- 100s or AN

- 12s (the L

- 100’s Russian counterpart), but since these aircraft have extremely limited capacity compared to the BC

- 17X the time savings are not significant. The AN

- 124 could provide greater lift capacity than the BC

- 17X, but it could not operate on the jobsite without hefty investments in airport infrastructure.23 Disclaimer on Cover applies Analysis

Project Name Sak halin I Development Project Project Description Sakhalin Island onshore processing facilities, offshore and onshore pipelines, and well development Project Owner ExxonMobil, SODECO, ONGC Videsh, SMNG, Roseneft

- Astra Project EPC Company ABB Lummus Global 29 Project Logistics Company Panalpina Project Cost $3.5 B for OPF and pipelines Project Duration 5 years Freight Description Pressure vessels, columns, package units, pipe spools and line pipe, structural steel, drilling materials, construction equipm ent, etc. Flight Origin and Destination Vladivostock, Russia to Nogliki, SI 50% Seoul, Korea to Nogliki, SI 10% Pusan, Korea to Nogliki, SI 10% Sapporo, Japan to Nogliki, SI 10% Hakodata, Japan to Nogliki, SI 10% Yuzhno, Sakhalinsk to Nogkili, SI 10% Note : % of total flights Air Cargo Duration 3 years BC

- 17X Operational (Fly) Days 429 days BC

- 17X Committed (Contracted) Days 500 days BC

- 17X Schedule 143 days during each winter season (October through April) for 3 years; approximately 2 RT flights per d ay, 6 days per week Average BH per RT Flight 4.4 BH including flight, loading and unloading time Estimated BC

- 17X BH 3775 BH Possible Type of Contract Long

- term hourly contract that includes fixed costs and margin

Total Cost of BC

- 17X to Project 3775 BH at $20,000 = $75.5 M

Cost of Airfield Upgrade $2 M (Nogliki) Cost of Airfield Maintenance $600,000 (Nogliki) Delta Cost of BC

- 17X to Project $75.5 M cost of BC

- 17X 2.0 cost of runway upgrade

.6 cost of maintenance (40.0) less transportation savings Delta cost to the project = $38.1 M Transportation Cost w/o BC

- 17X $150 M Transportation Cost w/ BC

- 17X $188.1 M

Cost Benefit $15 M per month for 3 months = $45 M Months

- to

- Completion Savings 3 months Capital Interest B enefit/ Return on Capital Invested Benefit $35 M @ 4%

Accelerated Product Benefit 200,000 BBL/day for 90 days @ $25 per BBL = $450 M less 5% per BBL extraction cost ($22.5 M) = $427.5 M Project Construction Cost

— w/o BC

- 17X $3.5 B Project Construction Co st

— with BC

- 17X $3,500.0 M project cost 38.1 delta cost (45.0) less cost benefit (35.0) less capital interest benefit Project cost with BC

- 17X = $3.4681 B BC

- 17X Revenue per Operating Day $161,000 BC

- 17X Revenue pe r Committed Day $151,000 Net Benefit $427.5 M accelerated product benefit 45.0 cost benefit 35.0 capital interest benefit (38.1) less delta cost of BC

- 17X Net benefit to the project = $469.4 M

29 Since this case study was done, ABB has experienced financial difficulties. Whil e ABB will still complete the project engineering, Fluor will take over the project construction.24 Disclaimer on Cover applies Conclusion

Including t he BC

- 17X in the logistics chain would increase the project’s costs by approximately $38.1 million. However, the $45 million cost benefit, $35 million capital interest benefit, and $427.5 million accelerated product benefit result in a net benefit to the project of about $469.4 million.

Letter of Agreement25 Disclaimer on Cover applies 3.2.3.2 Sakhalin II Phase 2 Pipeline Project

Sakhalin Island, Russia Project Owner: SEIC (Sakhalin Energy Investment Company: Royal Dutch Shell, Mitsui Co., Mitsubishi Corp.) EPC Company: Fluor, Inc.

– this EPC project had not yet been awarded at the time of this case study Logistics Company: Not yet assigned

– still in the bid stage

Data Source Company

Fluor, Inc. of Sugar Land, Texas is a subsidiary of The Fluor Corporation of California, on e of the world’s largest publicly owned engineering, procurement, construction, and maintenance companies. In addition to providing construction management services to many different industrial sectors worldwide, Fluor’s projects include designing and bui lding manufacturing facilities, refineries, power plants, pharmaceutical facilities, and telecommunications and transportation infrastructure. Employing a workforce of over 50,000, The Fluor Corporation maintains offices in 25 countries across six contine nts, posted sales of $10.1 billion in 2001, and is consistently ranked as one of the top three international contractors by Engineering News Record Magazine.

Project

The environment, infrastructure, and overall project layout are the same as for the Sakhalin I project.

The Sakhalin II development project, thought to contain one billion barre ls of recoverable oil and more than four trillion cubic feet of natural gas, is valued at approximately $11 billion and has been broken down into four phases. In Phase 1, completed in 1999, the first of three offshore platforms was installed. The platfor m, Molikpaq in the Pitun

Astokhskoye field, presently operates six months per year and produces 75,000 barrels of oil a day when not threatened by ice. The oil is then pumped through a sub

- sea pipeline, stored in a stationary tanker, and transferred to an ocean

- going tanker every six days for delivery to refineries in the Pacific Rim. Phase 2 consists of the engineering, procurement, and construction (EPC) of a dual (oil and gas) pipeline system, and Phase 3 is the EPC of the liquefied natural gas (LNG) p lant and oil export terminal. The fourth and final phase will be the installation of the two remaining platforms.

Fluor and two other companies are in the process of The Sakhalin II Phase 2 project is a 500

- mile dual pipeline system consisting of a 20

- inch, 100,000 barrel per day oil pipeline and a 48

- inch gas pipeline.26 Disclaimer on Cover applies presenting bids to the operating group for the EPC of the Sakhalin II Phase 2 project, a 20

- inch, 100,000 barrel per day oil pipeline and a 48

- inch gas pipeline. Spanning 500 miles, the dual pipeline will follow the railroad right

- of

- way from the OPF near Nogliki to Prigorodnoye on the southern coast. This part of the contract is valued at around $2 billion. The value of the logistics work of moving the pipe from its free issue locations, Vostochny and Vanino, to the right

- of

- way is estimated at $135 million. The contract winner, expected to be chosen in the second to third quarter of 2003 , will be the overall project manager and will be responsible for the EPC of the pipeline system. Construction is slated to begin in the second quarter of 2004.

Present Logistics Plan

Transportation of the pipe from Vostochny to the primary receiving po rts of Kholmsk and Korsakov will be principally by barge. The free issue pipe from Vanino will be loaded on rail cars and moved via rail ferry to Kholmsk, where the rail cars will be queued for the next available train to the current jobsite. The loose p ipe from the barges will be transferred to a laydown yard if empty rail cars are not available.

A total of 19,360 rail cars at full capacity, or 484 trains at forty rail cars per train, will be required to transport the pipe. While there are ten engine s in total on the island, less than half of them will be available to move the pipe. (The rest will be needed for standard freight and passenger traffic.)

Beach landings are also being considered at the northern terminus of the pipeline, but, as in the

c ase of the Sakhalin I project, this raises serious environmental concerns.

BC

- 17X Logistics Plan

If preplanned in the logisti cs chain, the BC

- 17X could be used to move the northern area pipe directly from the free issue sites to Nogliki, meaning that the pipeline could be built from both ends simultaneously. The aircraft could also be used to bring in construction equipment, ho using, and consumables to reduce the pressure on the already overburdened transportation infrastructure and minimize the environmental impact of the project. Additional materials and equipment could be flown into Nogliki from Japan and South Korea, bypass ing the current ocean, trucking, and rail logistics system. The rugged coastline and lack of beach creates significant logistical obstacles for the Sakhalin Island pipeline projects.27 Disclaimer on Cover applies Next Best Alternative

Since no other aircraft has both the capacity and austere capabilities of the BC

- 17X, the next best alternative would be the present logistics plan. In some cases, lighte r equipment could be moved to the northern airports on L

- 100s or AN

- 12s, but heavier materials, such as the sixty

- ton pipeline valves, would have to travel by barge or heavy

- haul truck, depending on the environmental conditions. As a result, this logistic s plan would generate almost no time savings. Once again, the AN

- 124 could carry approximately the same amount of cargo as the BC

- 17X, but would require substantial investments in airport infrastructure.

Analysis

Fluor performed a discrete

- event simula tion transporting just the twenty

- inch pipe on the BC

17X to determine how removing this pipe from the standard logistics chain would free up rail cars to move other material. The result of the simulation was that 38 trains with forty cars per train, or 1 520 cars, 30

30 The cars are limited to 22 tons each because of the condition of the track. were eliminated. Considering that the average round trip for each train to the northern terminus takes ten days, the twenty

- inch pipe would arrive at the jobsite 380 days in advance, and the rest of the pipe, moving on a less crowded rail syste m, would arrive two months earlier. Furthermore, in this logistics plan there is enough free space on the aircraft to transport several of the sixty

- ton valves alongside the pipe each day, whereas trucking the valves could take a week or more per unit.28 Disclaimer on Cover applies The following analysis simulated transporting construction equipment and other materials in addition to the twenty

- inch pipe.

Project Name Sakhalin II Phase 2 Pipeline Project Project Description 500

- mile dual oil & gas pipeline running from the northern drill sites to the southern coast Project Owner SEIC

– Sakhalin Energy Investment Company (Royal Dutch Shell, Mitsui, Mitsubishi Corp.) Project EPC Company Bid by Fluor, Inc.

– This EPC contract had not yet been awarded at the time of this case study P roject Logistics Company Not yet assigned

– still in the bid stage Project Cost Estimated to be between $1.5 B and $2.2 B

– for the purpose of this study an average of $1.85 B has been used Project Duration 3 years Freight Description Pipe, pipeline va lves, pig launchers and receivers, structural steel, instrumentation, construction equipment, etc. Flight Origin and Destination Vladivostok, Russia to Nogliki, SI 70% Pusan, Korea to Nogliki, SI 5% Sapporo, Japan to Nogliki, SI 5% Hakodata, Japan to N ogliki, SI 5% Yuzhno, Sakhalinsk to Nogliki, SI 10% Seoul, Korea to Nogliki, SI 5% Note: % of total flights Air Cargo Duration 2 years BC

- 17X Operational (Fly) Days 308 days BC

- 17X Committed (Contracted) Days 360 days BC

- 17X Schedule Continuous th roughout the winter months

– 7 months (October through April) during the first year and 5 months (October through February) during the second year

– approximately 2 RTs per day, 6 days per week Average BH per RT Flight 3.94 BH Estimated BC

- 17X BH 2427 BH not including loading and unloading Possible Type of Contract Long

- term daily contract that includes fixed costs, margin, and an hourly rate for each block hour in excess of a specified number Total Cost of BC

- 17X to Project 360 days at $137,000 = $49.3 M Cost of Airfield Upgrade $2 M (Nogliki) Cost of Airfield Maintenance $600,000 (Nogliki) Delta Cost of BC

- 17X to Project $49.3 M cost of BC

- 17X 2.0 cost of runway upgrade

.6 cost of maintenance (30.0) less ground tran sportation Delta cost to the project = $21.9 M Transportation Cost w/o BC

- 17X $131 M Transportation Cost w/ BC

- 17X $152.9 M Cost Benefit $15 M per month for 3 months = $45 M Months

- to

- Completion Savings 3 months Capital Interest Benefit/ Return on Cap ital Invested Benefit $18.5 M @ 4%

Accelerated Product Benefit 100,000 BBL/day for 90 days @ $25 per BBL = $225 M less 5% per BBL extraction cost ($11.2 M) = $213.8 M Project Construction Cost

— w/o BC

- 17X $1.85 B Project Construction Cost

— with BC

- 17X $1, 850.0 M project cost 21.9 delta cost (45.0) less cost benefit (18.5) less capital interest benefit Project cost with BC

- 17X = $1.8084 B BC

- 17X Revenue per Operating Day $160,000 BC

- 17X Revenue per Committed Day $137,0 00 Net Benefit $213.8 M accelerated product benefit 45.0 cost benefit 18.5 capital interest benefit (21.9) less delta cost of BC

- 17X Net benefit to the project = $255.4 M29 Disclaimer on Cover applies Conclusion

Including cost, capital interest, and incremental revenue benefits, the BC

- 17X would provide $277.3 million in total benefits to the project. Taking into account the additional $21.9 million in transportation costs for the aircraft, using the BC

- 17X would result in a $255.4 million net benef it to the project.

Letter of Agreement

Note that this letter of agreement applies not only to Sakhalin II, but to Villano and In Salah as well.30 Disclaimer on Cover applies 3.2.3.3 Wabu Gold Project

Papua, Indonesia Project Owner: Freeport McMoRan Copper and Gold EPC Compa ny: Freeport McMoRan Copper and Gold Logistics Company: Freeport McMoRan Copper and Gold

Data Source Company

Freeport McMoRan Copper and Gold is the one of the world’s largest producers of copper and gold. Their principal operating subsidiary, PT Freep ort Indonesia, explores, develops, mines, and mills copper, gold, and silver ore throughout the province of Papua, Indonesia. With a workforce of over 8,000 employees, Freeport posted sales of $1.75 billion in 2001.

Environment

Freeport’s Indonesian min ing projects are located in the western half of the island of New Guinea in the province of Papua, an area first explored for mineral deposits in early 1966. The Erstberg underground copper mining site, completed in 1973, was the first mine built in the

r egion. In 1988, the Grasberg copper and gold deposit was discovered in a 13,000

- foot mountain at Tembegapura, 68 miles north of the port of Amamapari. Since that time, this deposit has been developed into an open pit mine (at a 9,000

- foot elevation) and pipeline system that produces 3.4 million ounces of gold and 1.7 billion pounds of copper annually.

The Wabu gold deposit, valued at about $3.5 billion was discovered 30 miles down the mountain from the Grasberg mine.31 Disclaimer on Cover applies Project

Another major deposit, estimated to contain in excess of eight million ounces of gold valued at $3.5 billion, has been discovered on the Wabu ridge thirty miles down the mountain from the current Grasberg mine. In order to develop the new, 6,500

- foot

- elevation mine, Freeport will have to overcome a multitude of complex logistics problems, including access from the Gr asberg site to the Wabu site, power generation, camp requirements, water requirements and sources, sanitary disposal, product and supply shipment, air support requirements, environmental concerns, and material warehousing. The cost of getting the mine up and running is estimated at $190 million.

Furthermore, the Wabu mine will use an entirely different mined

- ore processing procedure than the Grasberg mine. At Grasberg the ore is ground, milled into a concentrate, and shipped to a refinery for smelting, w hile at Wabu the gold will be leached from the ore at the mine using sodium cyanide and shipped as pure gold ingots. This leaching process will require recurring loads of both cyanide and blasting material to be transported from the seaport to the mine si te throughout the estimated ten

- year life of the mine.

Infrastructure

Presently, there are no roads to the Wabu site, and the dirt road that runs from the seaport to the Grasberg mine weaves back and forth as it climbs a 13,000

- foot elevation to minimi ze the grade of ascent. A new road to Wabu would have to be routed over the mountain and then descend down to 6,500 feet.

About four miles from the Wabu site at Bilogai (at an elevation of 7,000 feet), there is a 1,935

- by

- 79

- foot unpaved runway, but it would have to be improved to handle either an L

- 100 or a BC

17X. The airport at Timika, while already capable of serving the BC

- 17X, is about twenty

- five miles inland from the seaport. Some consideration is being given to determining if an airstrip could be built closer to the seaport, eliminating the double handling and trucking to and from Timika. This road goes from Freeport’s mill complex to the Grasberg mine. The trail begins at an elevation of 7,000 feet and ends at an elevation of 12,500 feet.32 Disclaimer on Cover applies Present Logistics Plan

Freeport’s current plan is to const ruct a $25 million, fifty

- mile

- long unpaved road over the extremely mountainous terrain from Grasberg to Wabu. Upon completion of the road in approximately two years, Freeport will use it to truck the materials necessary to begin building the mine and rel ated facilities. Assuming no delays, the mine and the related facilities could be built in 1.5 years, bringing the total construction time to a minimum of about three

- and

- a

half years (43 months). Once the mine is up and running, it will be about six mor e months before the first gold ingots are ready to ship.

BC

- 17X Logistics Plan

Independent Mining Consultants, the consulting firm Freeport contracted to oversee the logistics at Wabu, suggested using the BC

- 17X (from Timika to Bilogai) to build the roa d from both ends and support the initial construction phases of the plant and facilities. The remainder of the equipment and materials could be transported by road once it was completed. Although the airstrip at Bilogai would have to be improved for this supply chain (a task that would require 51 sky

- crane trips and six BC

- 17X flights), the airfield upgrade could be completed in three months and the BC

- 17X could land on the airstrip after only one month. Building the road from both ends would take only t hirteen months, and, while the plant and facility construction and preproduction stripping would still take 19 months, it could begin during the second month, reducing the total construction time to 21 months. Under this logistics plan, Freeport would be ready to ship the first gold a full 22 months ahead of schedule. In addition, the permanent paved, lighted, and enlarged airfield at Bilogai would be available for future use.

Next Best Alternative

The next best alternative to the BC

- 17X logistics pl an would be to revert to the current plan of building the road from one end and trucking the construction materials up the mountain. However, John Marek, the President of Independent Mining Consultants, has indicated that without the BC

- 17X it will be ext remely difficult to construct the mine. Freeport McMoRan Copper and Gold has a port site and power plant in West Papau, New Guinea.33 Disclaimer on Cover applies Analysis

Project Name Wabu Gold Mine Project Description Open new gold mine in Indonesia Project Owner Freeport McMoRan Copper & Gold Project EPC Company Freeport McMoRan Copper & Gold Project Logistics Compan y Freeport McMoRan Copper & Gold Project Cost $190 M Project Duration 3.5 years Freight Description Construction equipment and materials Flight Origin and Destination Timika to Bilogai mine site Air Cargo Duration 2.5 months BC

- 17X O perational (Fly) Days 72 days BC

- 17X Committed (Contracted) Days 72 days BC

- 17X Schedule 3 RTs per day, 7 days per week, for 207 R/T flights (includes one 12.7 BH ferry) Average BH per RT Flight 1.36 BH Estimated BC

- 17X BH 292 BH Possible Type of Co ntract Long

- term daily contract that includes fixed costs, margin, and an hourly rate for each block hour in excess of a specified number Total Cost of BC

- 17X to Project 72 days at $137,000 = $9.9 M Cost of Airfield Upgrade $2.8 M (including $0.8 M for helicopter) Cost of Airfield Maintenance None Delta Cost of BC

- 17X to Project $9.9 M cost of BC

- 17X 2.8 cost of runway upgrade Delta cost to the project = $12.7 M Transportation Cost w/o BC

- 17X $28 M (including $25 M to build the road) Trans portation Cost w/ BC

- 17X $40.7 M Cost Benefit None Months

- to

- Completion Savings 22 months Capital Interest Benefit/ Return on Capital Invested Benefit $17.5 M @ 5%

Accelerated Product Benefit $547.0 less a 25 % mining cost ($136.8 M) = $410.2 M Proj ect Construction Cost

— w/o BC

- 17X $190 M Project Construction Cost

— with BC

- 17X $190.0 M project cost 12.7 delta cost (17.5) less capital interest benefit Project cost with BC

- 17X = $185.2 M BC

- 17X Revenue per Operating Day $137, 000 BC

- 17X Revenue per Committed Day $137,000 Net Benefit $410.2 M accelerated product benefit 17.5 capital interest benefit (12.7) less delta cost of BC

- 17X Net benefit to the project = $415.0 M

A critical factor to consider i n gold

- mine development is the effect of the gold price cycle. Historically, the market price of gold fluctuates cyclically

— for example, the price might be depressed in year zero, slowly rise to a peak in year two, and gradually return to its initial depr essed level by year four, when the cycle would start again. Thus if mine development begins when the price of gold is depressed, by the time the mine is completed (three to four years later), the cycle will have peaked and the price may be dropping again. Reducing the time it takes to build the mine would have allowed the producer to sell the gold at a higher cost. If the opposite occurs and the original mine construction plan hits the price cycle at its peak, the producer would be no worse off had it co mpleted the mine sooner because it could have held the gold until the price increased. This means that any major compression in the elapsed time to first gold will maximize Freeport’s opportunity to take advantage of gold price increases and minimize the startup risk of the project.34 Disclaimer on Cover applies To calculate the accelerated product benefit given the gold price cycle, a simulation was run assuming that the project had been started in 1999 and that using the BC

- 17X reduced the total project construction time by 22 mo nths. (Using this historical time frame allowed the simulation to use actual, historical prices instead of forecast prices.) The simulation showed that using the BC

- 17X would have generated $547 million in accelerated product revenue ($410.2 million afte r adjusting for the cost of mining the gold). In addition, the BC

- 17X logistics plan would have allowed Freeport to take advantage of an upswing in the gold price cycle instead of finishing near the peak and having to sell all the gold on a downswing.

Co nclusions

The BC

- 17X logistics plan would generate approximately $410.2 million in cost

- adjusted incremental revenue. Factoring in the cost of the BC

- 17X committed days and airfield upgrade (about $12.7 million) and the capital interest benefit ($17.5 mi llion), the net value to Freeport of inserting the BC

- 17X into its proposed supply chain is $415.0 million. Dick Warden, an expert on the gold industry who has visited Freeport’s Indonesian mining operations, has reviewed and approved the analysis and conc lusions of this case study.35 Disclaimer on Cover applies Letter of Agreement36 Disclaimer on Cover applies 3.2.3.4 Kashagan Oil and Gas Field Project

Kazakhstan, CIS Project Owner: Kashagan Consortium (BG 16.7 % owner, 6 other owners) EPC Company: AgipKCO Division of ENI Italy Logistics Company: AgipKCO, op erator to determine carriers

Data Source Company

The BG Group PLC, or British Gas, explores, extracts, and distributes natural gas to existing and developing markets worldwide. Its four main business segments are Exploration and Production (oil and ga s), Liquefied Natural Gas (distribution, shipping, and selling), Transmission and Distribution (oil and gas pipeline and distribution networks), and Power Generation (commercialization). With over 20,000 employees around the globe, BG posted 2002 sales of $4.34 billion.

Environment

The Kashagan oil and gas field lies in the shallow waters of the northeastern Caspian Sea, 47 miles south of the port of Atyrau and 186 miles overland from the eastern terminus of the Volga

Don Canal at Astrakhan, Ukraine. On ly about ten feet deep, this portion of the Caspian Sea is also the breeding area of the Caspian sturgeon, the largest producer of caviar roe. Additionally, the crude here is very high in noxious gases, making it particularly challenging to protect the
st urgeon in particular and the environment in general during extraction.

In June 2001, the first five exploration wells in the Kashagan field resulted in one of the largest oil and gas finds on record, estimated at seven to thirteen billion barrels of oil . Further exploration has produced a new find in the neighboring Kalamkas field, which should assure many more years of drilling operations in the area.

Winters are harsh in this region of Kazakhstan, and, while Aktau is an ice

- free port, all the
wate rs to its north are frozen over six months of the year, including the port of Atyrau.

Project

The North Caspian Sea Production

- Sharing Agreement (involving BG, ENI, ExxonMobil, Inpex, Phillips, Shell, and Total Fina Elf) established a consortium that hol ds the rights to 5,600 square km of the Kazakh sector of the Caspian Sea, including the new Kashagan discovery. The development of the Kashagan field is expected to cost $9.35 billion and entail mostly offshore drilling, with drill rigs beginning about 46 miles offshore (although the processing and gas treatment facilities will be inland at Eskene West). AgipKCO, a subsidiary of ENI of Italy, will operate the project. The Kazakh government would like the field to begin producing oil by 2005 and to be pro ducing up to one million barrels per day by 2015.37 Disclaimer on Cover applies The Caspian Sea area (left) has very harsh winters and Kazakhstan (right) is a relatively undeveloped country with few roads or rail lines. The meager infrastructure that does is exist is rapid ly deteriorating.

Infrastructure

This entire country of Kazakhstan is basically undeveloped, with few roads, rail lines, or airports. The infrastructure that does exist is often old and in disrepair.

The primary seaports around the Caspian are Atyrau , Aktau, Bautino in Kazakhstan, Astrakhan in Russia, and Baku in Azerbaijan. Of these, only Aktau and Baku are open in the winter.

The Russian rail system services the port of Atyrau, and a 22

- mile, single

- track rail spur with a parallel dirt road has be en constructed from Atyrau to the Kashagan field. Three factors, however, limit the effectiveness of rail service. First, it takes up to two months to get approval from the Russian government to transport heavyweight shipments and to traverse the system’ s bridges and tunnels. Second, coal trains have top priority on the tracks, and all other trains must move aside to let them pass. Third, the rail gauge changes several times, meaning freight has to be loaded and unloaded onto several different railcars to complete its journey.

Providing an alternative to surface travel between the Black Sea and the Caspian Sea, the 63

- mile Volga

- Don Canal connects the Black Sea port of Rostov, near the mouth of the Don River, to the port of Astrakhan, where the Volg a River meets the Caspian Sea. Like the rest of the northern Caspian waters, the Volga

- Don Canal is frozen over from November to April each year. Only shallow

- draft vessels (weighing about 5,000 tons) can be used in the canal, and the amount of freight t hat can be carried is limited by the width and weight limitations of the vessels.

The airfield at Atyrau, located 47 miles from the Kashagan field at the northern end of the Caspian Sea, has a 7,700 ft by 148 ft asphalt runway with an Instrument Landing System (ILS). BG is currently conducting a study to determine if this airfield could be made into an international hub for the development project. There is another small airport (with an 8,700

- ft by 147

- ft runway and no ILS) at the Caspian port of Akta u, and a study is presently underway regarding improvements there. Both these airstrips can already accommodate the BC

- 17X and, using a portable microwave ILS system, could support its operation in most of the area’s severe winter weather conditions.38 Disclaimer on Cover applies P resent Logistics Plan

AgipKCO estimates that over eight billion pounds of material and equipment wil l need to be transported over the next five years for the Phase I Experimental Program, divided up as follows: 748 million pounds to the drilling field, 594 million pounds to Eskene West, 1,210 million pounds to pipeline storage areas, and 5,500 million po unds to field construction sites.

Most freight will move via sea over one of two possible routes, both of which require a great number of transfers from one mode of transport to another. First, the major materials and equipment from Europe and the Unite d Kingdom must traverse seven seas to the port of Novorissisysk on the Black Sea. From there, the freight will be offloaded onto trucks, driven to the Caspian ports of Baku or Komsomolskaya, and transferred to barges for the voyage across the Caspian to A tyrau. Finally, the materials will move by truck or rail to the Kashagan field. From Marseille or Genoa, this supply chain covers 3,480 miles in 34 days; from the United Kingdom or Antwerp, it covers 4,971 miles in 38 days.

The second possible sea route is through the Volga

- Don Canal. Upon arriving in the Black Sea port of Rostov, freight on this route will travel through the canal to Astrakhan and across the Caspian to Atyrau. In total, this logistics path covers 3,449 miles in thirty days from Marsei lle or Genoa and 4,937 miles in 33 days from the United Kingdom or Antwerp. Using the Volga

- Don Canal instead of ground transport reduces the transit time by four days and eliminates one offload transfer.

The remaining materials will travel from Europe t o Atyrau via the Trans

- Siberian railroad, a trip that takes between thirty and forty days.

Winter icing of the northern Caspian Sea and Volga

- Don Canal primary supply chains will force the project to alternate supply routes every six months. Furthermore, to support year

- round construction and drilling operations in Kashagan, the project will have to build an offshore winter base for stockpiling materials and equipment during the non

- winter months.

BC

- 17X Logistics Plan

While the total tonnage to be ship ped is too large to replace the sea and ground supply chains with air cargo, supplementing the surface transport with continual BC

- 17X flights would minimize the effect of many logistical impediments, such as winter freezing, and positively contribute to m aintaining a smooth, uninterrupted construction schedule.

More specifically, the BC

- 17X utilization would be divided into three phases: startup, ongoing supply, and “last six months.” Additionally, the case study analysis assumed that the BC

- 17X would only assist in the transportation of materials to the drilling field (via Aktau airfield) and Eskene West (via Atyrau airfield) and that eighty percent of the total weight to be moved over In the winter months, the waters of the north Caspian Sea (including the seaports) are frozen over. This drilling rig is completely isolated by ice.39 Disclaimer on Cover applies the next five years would be transported in the first three years. 31

31 The case study analysis only deals with the first three years of project shipm ents, but the BC

- 17X would continue to run project flights after the first three years. For the startup phase, the BC

17X would run two months of daily flights to transport select equipment and materials needed to set up the personnel camp and begin the first phases of construction. This part of the logistics plan would save 1.2 months on the current construction schedule. For the ongoing supply phase of the project, the BC

- 17X would schedule weekly flights for strategic materials that were delayed beyond their planned shipping date and essential to maintain a seamless construction schedul e, saving approximately 2.3 months. During the last six months of the project, as the contracted completion date neared, the BC

- 17X would run two flights per week to assist with the final push to finish the last elements of the project construction, savin g about 0.6 months. The total time savings under the BC

- 17X logistics plan would be approximately 4.1 months.

Next Best Alternative

Atyrau, the airport nearest the new project site, cannot support the AN

- 124. Moreover, upgrading the airfield to suppor t the AN

- 124 would take a significant amount of time and cost as much or more than using the BC

- 17X to support the project. Combined with restrictions that prevent IL

- 76s from taking off in European Union countries, this presents a clear opportunity for
t he BC

- 17X. Without this aircraft, the next best alternative is the current mix of sea and ground transportation routes.40 Disclaimer on Cover applies Analysis

Project Name Kashagan, Kazakhstan Oil/Gas Field Project Description Phase 1 development of offshore oil/gas field in C aspian Sea Project Owner Kashagan Consortium (BG 16.7% owner, 6 other owners involved) Project EPC Company AgipKCO Division of ENI Italy Project Logistics Company AgipKCO, operator to determine carriers Project Cost $9.35 B Project Duration 5 years Freight Description Construction and drilling equipment Flight Origin and Destination United Kingdom and Europe to Atyrau and Aktau airfields Air Cargo Duration 2.6 years, spread over 31 months BC

- 17X Operational (Fly) Days 194 days BC

- 17X Committ ed (Contracted) Days 194 days BC

- 17X Schedule 1 RT flight per day, 5 days per week for 57 days = 41 trips; 1 RT flight per week for 24 months = 101 trips; and 2 RT flights per week for the last 6 months = 52 trips Average BH per RT Flight 9.0 BH Esti mated BC

- 17X BH 1746 BH (194 RT flights) Possible Type of Contract Long

- term hourly contract that includes fixed costs and margin Total Cost of BC

- 17X to Project 1746 BH’s at $20,000 = $34.9 M Cost of Airfield Upgrade None Cost of Airfield Maintenance None Delta Cost of BC

- 17X to Project $34.9 M Transportation Cost w/o BC

- 17X $748.0 M Transportation Cost w/ BC

- 17X $782.9 M Cost Benefit $12.6 M Months

- to

- Completion Savings 4.1 months or 126 days Capital Interest Benefit/ Return on Capital Invested Benefit $159.7 M @ 5%

Accelerated Product Benefit 200,000 BBL/day for 126 days @ $25 per BBL = $630.0 M less a 5% extraction cost per BBL ($31.5 M) = $598.5 M Project Construction Cost

— w/o BC

- 17X $9.35 B Proje ct Construction Cost

— with BC

- 17X $9,350.0 M project cost 34.9 delta cost (12.6) less cost benefit (159.7) less return on capital invested benefit Project cost with BC

- 17X = $9.2126 B BC

- 17X R evenue per Operating Day $180,000 BC

- 17X Revenue per Committed Day $180,000 Net Benefit $598.5 M accelerated product benefit 12.6 cost benefit 159.7 capital interest benefit (34.9) delta cost of BC

- 17X Net benefit to the project = $735.9 M

Conclusion

Inserting the BC

- 17X into the Kashagan supply chain would increase transportation costs by $34.9 million. However, the aircraft’s total net benefit to the project, including cost, capital interest, and accelerated p roduct benefits, would be approximately $735.9 million.41 Disclaimer on Cover applies Letter of Agreement42 Disclaimer on Cover applies 3.2.3.5 Qalhat, Oman Liquefied Natural Gas Refinery

Qalhat, Oman Project Owner: Oman LNG L.L.C. (Government of Oman) EPC Company: Foster Wheeler, UK subsidiary Logistics Co mpany: Transglobal

Data Source Company

Foster Wheeler Corporation, headquartered in Clinton, N.J., is a major construction and engineering company with specific expertise in the construction of liquefied natural gas refining plants. It also provides se rvices and products to the petroleum, petrochemical, pharmaceutical, chemical processing, and power

- generation industries. It has ongoing and future projects in Saudi Arabia, Abu Dhabi, Oman, Poland, the Czech Republic, Singapore, Europe, the United Kingd om, Finland, Italy, Turkey, and the United States. In addition to its commercial operations, Foster Wheeler also does work for the US Navy, Air Force, and Department of Defense. Foster Wheeler has offices in more than thirty countries and earned over $3. 5 billion in revenue in 2002.

Environment

In 1989, vast amounts of natural gas were discovered in Central Oman at Barik, Saih Nihatda, and Saih Rawl. To date, the reserves have been proven to contain 18.6 trillion cubic feet of non

associated gas, and they are expected to contain an additional 7.3 trillion cubic feet.

Qalhat, Oman is situated in the region known Sharqiya, south of the eastern Hajar Mountains. Characterized by a subtropical climate, it is twenty miles west of the small port of Sur, and 210 miles southeast of Muscat, the capital city. There is a small natural harbor at Qalhat that is sheltered from tropical storms and strong ocean currents. The deep waters close to the shore permit short jetties to be constructed without disturbing the fragile marine environment.

Project

In June 1997 construction began on a $2.2 billion liquefied natural gas refinery and supporting infrastructure in Qalhat, Oman. Completed in June 2000, the government

- o wned project included the refinery, pumping stations, pipelines, a desalination plant, roads, and a new onsite seaport to pump the product onto ocean tankers. Prior to this project, Bechtel Corporation had already constructed 400 km of upstream pipeline f rom the central gas fields at Saih Nihayda to Qalhat. An upstream power plant was built as well. Night at the Qalhat, Oman LNG project site.43 Disclaimer on Cover applies The Qalhat LNG was the largest single construction project ever undertaken in Oman. In total, the project took forty million man

- hours to complete, and th ere were 6,400 workers onsite during the peak of construction. Foster Wheeler finished the project two months ahead of schedule, but only because their bid included the estimated logistics time plus a generous buffer to allow for delays in construction, s upplier ship dates, export procedures, ocean voyages, customs clearance, and inland transport via barge and truck. It was important to include a large buffer in the project planning because the penalty for not meeting the contracted completion date was $1 million a day.

Infrastructure

The northern coast of Oman has many seaports, including the large port of Al Qaboos near Muscat and the much smaller port of Sur near the project site. Air infrastructure is similarly distributed, with a major internationa l airport in Muscat and a small airport with a 2,454

- ft runway in Sur. Extending the runway to 4,700 feet to accommodate the BC

- 17X would have cost approximately $235,000. While there was no rail system available to the project, the road system had been recently paved.

Executed Logistics Plan

Throughout the construction project, 385,837,000 pounds of freight were transported to the project sit e at a total cost of $24 million (one percent of the total project cost). Less than one percent of the total freight (1,477,000 pounds) moved via air; the remainder moved via ocean. Air transportation, however, did account for 26 percent of the 1,725 ind ividual consignment shipments. It is also interesting to note that non

- charter air freight was originally budgeted at $100,000 but ended up costing more than nine times that amount, an indication that the project experienced numerous critical shipping del ays.

Although some of the ocean freight originated in the United States, Japan, Korea, and Argentina, most of the shipments (83 percent) originated in continental Europe and the United Kingdom. All of the ocean freight arrived at the seaport of Al Qaboo s near Muscat. The air cargo was flown from suppliers in continental Europe, the United Kingdom, and the United States to the international airport in Muscat, with the exception of two loads that were flown into Dubai. While 91 percent of the total cargo volume moved inland via truck, the larger shipments (nine percent of the total volume, 32 percent of the total weight) moved down the coast by barge to a specially created jetty near the project site.

The sea shipments took between twenty and 68 days to arrive at Muscat from continental Europe and the United Kingdom and cleared customs at Muscat in approximately two to three days (22 to 71 days total). The air shipments took only one to two days to arrive in Muscat but an average Oman is located on the southeast corner of the Arabian Peninsula. Oman is a traditional Islamic country.44 Disclaimer on Cover applies of six days to clear cus toms (six to nine days total). 32

Since, realistically, so me shipments would have been too large or too heavy for the BC

- 17X, and since flying just a portion of the equipment and materials to the jobsite would have been enough to maintain an uninterrupted construction schedule, there would have been no need to

us e air for all shipments. Moving just five percent of the 320,496,000 pounds of BC

- 17X

- eligible ocean cargo (and all the prior air shipments) by scheduling one BC

17X flight every seven days for the first 25 months of construction would have created a stoc kpile of equipment and materials more than large enough to ensure an uninterrupted construction schedule despite delays in the ocean supply chain. Inland transportation to the jobsite took an additional five days for each mode of transportation. As is expected on a project with so many different suppliers, the actual shipping times varied greatly from the suppliers’ original quotes. For example, there were approximately 55 shipments that did not leave the export port until at least two months after the order date.

BC

- 17X Logistics Plan

33

32 One reason for the difference in customs clearance time was that the air shipments contained complex electronic goods, whereas the sea shipments contained more common goods, such as bulk pipe and cable.
33 Slightly more frequent flights may have been necessary during the initial build

- up phase of the project. Further analysis of Foster Wheeler’s situation might have revealed that an even lesser amount of air cargo could have provided the same desired results.

If a BC

- 17X had been positioned at a strategic location north of London (for example, at Standsted), at Ostend, or at Luxembourg, it would have been able to transport most shipments one to three days after the suppliers’ shipping dates. With weekly scheduled flights, the shipments would have been at the jobsite one to seven days after arriving at the origin airport. While it probably would have been possible to have a customs agent onsite or to arrange pre

cl earance for most of the goods, the plane could have made an intermediate stop for customs clearance (without the goods having to be offloaded).

By eliminating long waiting times at the embarkation port and at sea, unloading time at Muscat, and inland tran sportation legs to the jobsite, the BC

- 17X would have reduced the cost of crating and packaging, the risk of theft and damage, and the overall project duration.

Next Best Alternative

While the AN

- 124 can and did fly a limited number of flights from Euro pe to Muscat, customs clearance at Muscat took an average of six days, and inland transportation to the jobsite (a 210

- mile trip over unimproved road) took an additional five days on average. Since a weekly BC

17X flight could have landed directly at the jobsite, and since onsite customs clearance could have taken place the day each flight landed, each BC

- 17X shipment would have arrived almost two weeks earlier than it would have on an AN

- 124/surface supply chain, and the project duration would have been s ignificantly shorter. A graphic illustration of the LNG plant in Qalhat.45 Disclaimer on Cover applies Analysis

Project Name Liquid Natural Gas Processing Plant Project Description Liquid natural gas processing plant and supporting infrastructure (including pipelines, a desalination plant, roads, and a new onsite seaport) Projec t Owner Oman LNG L.L.C. (Government of Oman) Project EPC Company Foster Wheeler’s UK subsidiary Project Logistics Company Transglobal Project Cost $2.2 B Project Duration 3 years Freight Description Construction material and equipment Flight Origi n and Destination Europe and the UK (used Luxembourg as centralized origin) to Sur, Oman Air Cargo Duration 25 months BC

- 17X Operational (Fly) Days 106 days BC

- 17X Committed (Contracted) Days 106 days BC

- 17X Schedule Approximately 1 RT flight every 7 days for 25 months Average BH per RT Flight 14.4 BH Estimated BC

- 17X BH 1526.4 BH Possible Type of Contract Long

- term hourly contract that includes fixed costs and margin
Total Cost of BC

- 17X to Project 1526.4 BH at $20,000 = $30.5 M Cost of Airfield Upgrade $250,000 Cost of Airfield Maintenance None Delta Cost of BC

- 17X to Project $30.5 M cost of BC

- 17X 0.25 cost of runway upgrade (2.6) less transportation savings Delta cost to the project = $28.2 M Transportation Cost w/o BC

- 17X $24.0 M Transportation Cost w/ BC

- 17X $52.2 M Cost Benefit $200,000 per day for 61 days = $12.2 M Months

- to

- Completion Savings 2 months (61 days) Capital Interest Benefit/ Return on Capital Invested Benefit $14.7 M @ 4%

Accelerated Product Benefit 13 ,700 metric tons of LNG per day for 61 days @ $93.38 per metric tons = $78.0 M less 5% extraction cost ($3.9 M) = $74.1 M Project Construction Cost

— w/o BC

- 17X $2.2 B Project Construction Cost

— with BC

- 17X $2,200.0 M project co st 28.2 delta cost (12.2) less cost benefit (14.7) less capital interest benefit Project cost with BC

- 17X = $2.2013 B BC

- 17X Revenue per Operating Day $288,000 BC

- 17X Revenue per Committed Day $288,000 Net Benefi t $74.1 M accelerated product benefit 12.2 cost benefit 14.7 capital interest benefit (28.2) less delta cost of BC

- 17X Net benefit to the project = $72.8 M46 Disclaimer on Cover applies If the BC

- 17X had been based in the United Kingdom or continental Eu rope (where there was known eligible air cargo), it would have been available to compete for additional utilization as well as solicit backhaul traffic at any point along the return flight. Since the basic direct costs would have been covered by the recur ring trips to Oman, yield management could have allowed the aircraft to be offered at a reduced cost. These reduced costs could have contributed to the value of the project either directly or by increasing the utilization of the BC

- 17X and thus generating additional accelerated product benefits.

Conclusion

Although the BC

- 17X would have increased the project’s transportation costs by $28.2 million, reducing the project duration by two months would have created $12.2 million in operational savings and $14 .7 in capital interest savings and generated a cost

- adjusted accelerated product benefit of $74.1 million. This translates into a total net benefit to the project of $72.8 million.47 Disclaimer on Cover applies 3.2.3.6 Villano Pipeline and Central Processing Facility Project

Puyo, E cuador Project Owner: ARCO (now BP) and AGIP Petroleum Ltd. EPC Company: Joint venture between The Fluor Corporation and Williams Brothers Logistics Company: Panalpina

Data Source Company

Fluor, Inc. 34

Environment

Oil was originally discovered in the Villano region near Puyo, Ecuador in 1950, but exploration was deemed too costly at the time. In 1989, a new seismic pro gram reaffirmed the existence of oil deposits in Villano and led to renewed interest in developing the deposit. The ARCO exploration group, now a division of BP AMOCO, investigated the site and uncovered a major petroleum reserve estimated at 2.3 billion barrels. As a result, in July of 1998 the Atlantic Richfield Company of the United States and AGIP Petroleum, Ltd. of Ecuador signed a joint service contract with the Ecuadorian government for the exploration and development of Block 10 of the Villano pet roleum reserve.

One of the most important considerations in developing the Villano reserve was, and still is, its extremely sensitive environment in the Amazon rainforest. Located 23 miles east of an escarpment, a natural barrier to vehicle access, the V illano wellsite is in a primary rainforest that is home to 1,070 of the world’s plant and animal species. In addition, the project site was found to contain many ancient artifacts that required delicate handling to preserve.

Project

The Villano project , valued at $350 million and completed by Fluor in 1999, consists of a six

well drill site connected to a Central Processing Facility (CPF) by a 23

- mile, 12

- inch mixed

- flow line. 35

34 See Case Study #2
35 A mixed flow line carries both water and oil. At the CPF, the oil is separated from the water, the water is reinjected in to the ground, and the oil is pumped through a 39

- mile, 20

- inch pipeline to Baeza where it intersects with the The Villano pipeline project is located in the northern third of Ecuador in the environmentally sensitive Amazon rainforest.48 Disclaimer on Cover applies Trans

- Ecuadorian Pipeline

– the Sestina del Oleodueto Trans

- Ecuadorian, or SOTE. The through

put of the pipeline is 40,000 barrels per day, but a study is currently being conducted to determine the feasibility of expanding it to 100,000 barrels per day without a major environmental impact on the area.

Infrastructure

In the past, no matter how careful a developer has been to minimize the environmental impact of construction, creating road access into the rainforest to service the construction h as made it easier to enter the interior of the rainforest and has led to logging and other forms of environmental destruction. Furthermore, frequent ground transportation of large, heavy construction materials interferes with local wildlife and the indige nous population’s ability to go about its normal routine. With these considerations in mind, the Ecuadorian government decided that the Villano reserve had to be developed without constructing roads through the rainforest.

There are three major airports in Ecuador, located in Guayaquil, Esmeraldas, and Quito. Two smaller airports near the CPF and Villano drilling site at Tena (a 3,937

- ft by 50

- ft runway) and Puyo (a 5,007

- ft by 81

- ft runway) lack some of the features of the major airports, but with some minor improvements they would be more than adequate to handle the BC

- 17X.

Executed Logistics Plan

The Villano project turned out to be one of the most difficult logistics projects ever undertaken in Ecuador. The logistics strategy was based on a combin ation of one hundred percent ocean shipments to two Ecuadorian seaports, Esmeraldas and Guayaquil, and emergency air cargo flights into Quito International Airport. All the equipment and supplies were then trucked over Andes Mountain passes (at 6,000

- to 7,000

- foot elevations) on one of two routes

— the southern route through Banas to Puyo or the northern route through Quito, Baeza, and Tena to the CPF. Both routes are single

- lane gravel roads with many sharp turns, narrow tunnels, dangerous bridges, and fr equent landslides. With no major obstacles, each one

- way truckload over the 200 miles between the coast and the CPF takes six to seven days. In total, 1,810 truckloads of project material traversed more than 713,000 miles on the primitive road system.

By the time the project was finished, Fluor had spent more than $5 million over two years to upgrade the transportation infrastructure east of the Andes. This included building six new bridges and 19 new miles of gravel roads as well as renovating approx imately 124 miles of existing roads.

Once the material and equipment reached the CPF site, it was transported via helicopter to various locations along the construction route. Helicopters moved over 100 million pounds of The through

- put of the pipeline is 40,000 barrels a day, but a study is curren tly being conducted to determine the feasibility of significant expansion.4 9 Disclaimer on Cover applies 49 drilling and construction equip ment during the construction of the CPF and more than 175 million pounds of material, supplies, and equipment throughout the 27 months of pipeline construction. Upon completion of the water

- injection wells, the rig was dismantled and flown on 240 Chinook flights (carrying 22,000 pounds each) to be reassembled at the drilling site.

BC

- 17X Logistics Plan

The arduous trucking routes of the original logistics plan limited Fluor’s ability to move equipment on an expedited schedule, delaying the startup of the project. Replacing the trucks with the BC

- 17X would have streamlined the supply chain, enabled equipment and materials to be flown in as needed, and eliminated many constructions delays.

A huge electrical truck (above) encounters a problem on a s ingle

- lane gravel road to the main Villano Central Processing Facility (CPF). The primitive single

- lane gravel roads to the project site have narrow tunnels, dangerous bridges, and frequent landslides. With no major obstacles, it takes six to seven days for a one

- way truck load to traverse the 200 miles between the coast and the CPF.

A review of the types of equipment and construction supplies moved to the project site revealed that all the materials could fit into a BC

- 17X, often with much less disass embly than was required to transport them by truck. Had it been preplanned into the logistics strategy, the BC

17X could have entirely replaced the executed logistics plan, with the exception of the helicopter program. More specifically, Fluor could have scheduled the arrival of ocean shipments to connect to a regular BC

- 17X flight schedule between the seaport airports at Esmereldas and Guayaquil and the austere jobsite airport at Puyo. For air shipments arriving at Quito International Airport, the BC

- 17 X could have made an intermediate stop from either seaport in transit to the project area; however, given the difficulty of getting in and out of Quito, this leg could have been eliminated. In addition, the BC

- 17X, alone or in conjunction with other aircr aft (such as the 747F or AN

- 124), could have been used to fly late or emergency shipments from the United States and Europe directly to the project site.

Next Best Alternative

Since no other aircraft could both handle the heavy outsize construction and d rilling equipment and land at the austere jobsite airports, the next best alternative to the BC

- 17X logistics plan would have been truck routes through the mountains.50 Disclaimer on Cover applies Analysis

Project Name Villano Pipeline and Central Processing Facility Project Des cription Development of a drill site, a central processing facility, and interconnecting pipelines between the facilities and main pipeline and the Trans

- Ecuadorian pipeline Project Owner ARCO (now BP) and AGIP Petroleum Ltd. Project EPC Company Joint ve nture between The Fluor Corporation and Williams Brothers. Joint venture office located in Quito, Ecuador Project Logistics Company Panalpina Project Cost $350 M 36 Project Duration 27 months Freight Description Drilling equipment, pressure vessels, pu mps, instrumentation, cable, all sorts of process equipment, etc. Flight Origin and Destination Guayaquil and Esmeraldas to Puyo Air Cargo Duration 9 months BC

- 17X Operational (Fly) Days 5 days (22.5 BH) per week for 36 weeks = 180 days (5 days per wee k is a customer constraint due to weather conditions, labor, etc. and not an operational requirement) BC

- 17X Committed (Contracted) Days 252 days BC

- 17X Schedule 3 RTs per day, 5 days per week, alternating between the port cities Average BH per RT Flig ht 1.5 BH’s Estimated BC

- 17X BH 810 BH’s Possible Type of Contract Long

- term daily contract that includes fixed costs, margin, and an hourly rate for each block hour in excess of a specified number Total Cost of BC

- 17X to Project 252 days at $137,000 = $34.5 M Cost of Airfield Upgrade $1.5 M

– estimate only for Puyo Cost of Airfield Maintenance $500,000 during life of project

– estimate only for Puyo Delta Cost of BC

- 17X to Project $34.5 M cost of BC

- 17X 1.5 cost of runway upgrade

. 5 cost of maintenance (5.0) less trucking savings (5.0) less road construction savings Delta cost to the project = $26.5 M Transportation Cost w/o BC

- 17X $28 M Transportation Cost w/ BC

- 17X $54.5 M Cost Benefit $3 M per month for 3 months = $9 M Months

- to

- Completion Savings 3 months Capital Interest Benefit/ Return on Capital Invested Benefit $3.5 M @ 4%

Accelerated Product Benefit 40,000 BBL/day for 90 days @ $25 per BBL = $90 M less 5% per BBL extraction cost (4.5 M) = $85.5 M Project Construction Cost

— w/o BC

- 17X $350 million Project Construction Cost

— with BC

- 17X $350.0 M project cost 26.5 delta cost (9.0) less cost benefit (3.5) less capital interest benefit Project cost with BC

- 17X = $364.0 M BC

- 17X Revenue per Operating Day $192,000 BC

- 17X Revenue per Committed Day $137,000 Net Benefit $85.5 M accelerated product benefit 9.0 cost benefit 3.5 capital interest benefit (26.5) less delta cost of BC

- 17X Net benefit t o the project = $71.5 M

36 All calculations are in 1998 dollars.51 Disclaimer on Cover applies Conclusion

The $12.5 million in cost and capital interest benefits associated with the BC

- 17X logistics plan combined with the $85.5 million accelerated product benefit, or $55.3 million in total benefits, would have been more t han enough to cover the $26.5 million cost of inserting the BC

- 17X into the logistics supply chain. In total, the BC

- 17X would have generated a $71.5 million net benefit to the project.

Letter of Agreement

See the Fluor, Inc. letter of agreement at th e end of the Sakhalin I case study.52 Disclaimer on Cover applies 3.2.3.7 Tan Jung Jati B Power Plant Project

North Central Java Jepara, Indonesia Project Owner: Confidential owner EPC Company: Black & Veatch (subcontractor to Babcock & Wilcox, the total project EPC company) Logisti cs Company: Confidential US company

Data Source Company

Founded in 1915, Black & Veatch Corporation is a leader in global engineering, construction, and consulting, specializing in infrastructure development in the fields of energy, water, and informati on. With over 9,000 employees in 90 offices worldwide, Black & Veatch provides its clients with conceptual and preliminary engineering services, engineering design, procurement, construction, financial management, asset management, information technology, environmental, security design and consulting, and management

- consulting services. This employee

- owned company posted sales of $2.224 billion in 2001 and was ranked 78th on the 2002 Forbes list of the largest private companies in the United States.

Environment

The Republic of Indonesia constitutes most of the Malay Archipelago. The fourth

- largest country in
t he world, Indonesia’s estimated population is over 232 million. The estimated population of Java is over 114 million, and it is growing at 1.6 percent per year. In 2001, 41 percent of the population lived in urban areas, compared with less than 22 percen t in 1980, and the capital city of Jakarta now has a population exceeding ten million. The cause of this rapid urban growth is the nation’s new and expanding industrial base, which is also driving the need for infrastructure

development projects such as p ower plants and water and sanitation facilities.

Any development project in Indonesia must be sensitive to its rich and complex environment. Within its extremely varied topography (ranging from mangrove swamps to rainforests, jungles, dense forests, and mountain ranges), are significant deposits of natural resources, including oil, gas, coal, copper, nickel, bauxite, silver, gold, rubies, and diamonds. The islands are also home to over 40,000 species of flowering plants and many species of animal life, some of which are bordering on extinction. Th e Tan Jung Jati B Power Plant project site is located twenty miles northwest Jepara (upper left on map) on the rugged coast of the Java Sea.53 Disclaimer on Cover applies Project

The Tan Jung Jati B Power Plant (TJB) project consists of two 600 MW coal

- fired power plants being built on a si ngle site twenty miles northwest of Jepara on the coast of the Java Sea. The value of the completed project is around $925 million, and the annual operating revenue at 80 percent capacity is estimated to be between $285 million and $300 million. The plan ts will be fueled by coal, the largest single operating cost.

A victim of the deteriorating Asian economy coupled with the nation’s political unrest, the TJB project was suspended in May of 1998. At the time it was suspended, approximately 35 percent of the construction material and equipment had been shipped, and an estimated five percent of the construction had been completed. Now that the political situation has somewhat stabilized, a new owner is pursuing government approval and commercial and privat e financing to complete the project. Shipping and construction are expected to resume during the second quarter of 2003. The shipping phase of the project should commence in the third quarter of 2003, and the entire project should be completed by the four th quarter of 2004.

The prime contractor on the project is Babcock & Wilcox. Black & Veatch, a subcontractor to Babcock & Wilcox, is responsible for the plant layout and design, the procurement of the coal

handling and fly

- ash systems, and the timely del ivery of its procured items to the jobsite. For this work, Black & Veatch has a $350

- million fixed

- price contract with no incentives or penalty clauses. This case study focuses exclusively on Black & Veatch’s portion of the project work.

Infrastructure

There are both federal and local roads on the island; most are two

- lane roads with fair maintenance. The federal roads provide free passage, but the local roads are generally toll roads that provide income to the local villages and cities that build and maintain them. Local roads are often unpaved and difficult to use during periods of heavy rain.

Carved out of a jungle on the seacoast, the TJB jobsite is very much an austere area. The coastal location is necessary because coal, the plants’ fuel, mus t be delivered by barge and ocean vessel.

The closest regularly served seaports and airports are Semarang and Surabaya, 55 and 180 miles from the jobsite respectively. There is an additional airport at Surakarta (Solo), approximately eighty miles from the jobsite. All these airports are capable of handling a BC

- 17X. The Hang Nadim International Airport, capable of serving all wide

- body aircraft, is over 700 miles from the jobsite on Batam Island. The Black & Veatch beginning construction site at the Tan Jung Jati B Power Plant.54 Disclaimer on Cover applies Present Logistics Plan

The present logistics plan is to containerize all the remaining freight, with the exception of the oversize pieces such as breakbulk structural steel, and use one hundred percent ocean transport from Italy, Taiwan, and the United States to the seaports at Semarang and Surabaya. Th e total weight to be shipped is estimated at 28,000 tons, or 56 million pounds.

Freight from Italy will be moved to the jobsite using a part

- charter self

- sustaining vessel; because of draft considerations, the ship will be anchored about three miles off shore. The freight will then be transferred to seagoing barges for delivery to the jobsite using the slip constructed for the coal barges. The pipe and pipespools from Taiwan will be loaded on an oceangoing barge that can be taken directly to the jobsite slip for offloading.

BC

- 17X Logistics Plan

Black & Veatch has suggested an alternative logistics plan using the BC

- 17X that involves establishing a commercial warehouse and laydown yard on Batam Island, the prime location for EPC contractors and oilfield service companies to distribute materials and equipment throughout Southeast Asia. Batam is a central location for importing goods and is accessib le by ship year

- round.

All ocean freight, other than ocean part charter, would be shipped to Batam, where it would clear customs and be catalogued and warehoused. The jobsite construction personnel would maintain a direct computer link to the warehouse to monitor what supplies were on hand and to generate a list of materials needed at any given time. The warehouse staff would then pull the requested materials and dispatch them on a regularly scheduled BC

- 17X flight to one of the jobsite airports. It i s estimated that over ten million pounds of freight would go through the Batam warehouse.

This logistics plan would eliminate the need to for a large jobsite construction warehouse and laydown yard, reducing the amount of jungle clearing and easing the en vironmental impact on the area. It would also make the materials and supplies much more secure, since the probability of losses due to theft of both containerized and loose freight between the ports and the jobsite is high.

Black & Veatch is looking for alternative ways to supply and maintain a strict construction schedule for this critical infrastructure project. Marshalling supplies and equipment in a protected environment and moving them as needed would allow the company to meet an expedited construct ion schedule.

Next Best Alternative

Considering the increased security and reduced jobsite construction costs, the next best alternative would be to go forward with the Batam Island facilities and use either an L

- 100 or an oceangoing barge to carry the w eekly load. However, an L

- 100 would have to make many more Java’s dense jungle makes moving construction materials to the power plant site extremely difficult.55 Disclaimer on Cover applies trips than a BC

- 17X to transport the same capacity, and an oceangoing barge would be too slow to maintain the weekly shipping schedule.56 Disclaimer on Cover applies Analysis

Project Name Tan Jung B Power Plant Project Pro ject Description Two 600 MW coal

- fired power plants. For this case study, only Black & Veatch’s engineering, procurement, and delivery work on the project is analyzed. Project Owner Confidential Project EPC Company Black & Veatch (subcontractor to Bab cock & Wilcox, the total project EPC company) Project Logistics Company Confidential US company Project Cost $350 M (Babcock & Wilcox’s total project contract is valued at $925 M) Project Duration 2.5 years

– project was shut down after 1 year with 1. 5 years left to go Freight Description Crushers, conveyors, boilers, loaders, belt feeders, valves, structural steel, etc. Flight Origin and Destination Batam Island to Semarang, limited trips from Surabaya Air Cargo Duration 1 year BC

- 17X Operational (Fly) Days 62 days BC

- 17X Committed (Contracted) Days 62 days BC

- 17X Schedule 1 RT from Batam Island every 6 days Average BH per RT Flight 3.3 BH Estimated BC

- 17X BH 205 BH

– includes loading and unloading Possible Type of Contract Long

- term daily c ontract that includes fixed costs, margin, and an hourly rate for each block hour in excess of a specified number Total Cost of BC

- 17X to Project 62 days at $137,000 = $8.5 M Cost of Airfield Upgrade None

– international airports Cost of Airfield Mainte nance None

– international airports Delta Cost of BC

- 17X to Project Delta cost to the project = $8.5 M (Note: The cost of ocean freight to Batam Island is about the same as the cost to Semarang, so there are no transportation savings and the delta cost i s the same as the total cost) Transportation Cost w/o BC

- 17X $2 M Transportation Cost w/ BC

- 17X $10.5 M Cost Benefit $5 M Months

- to

- Completion Savings 1 month Capital Interest Benefit/ Return on Capital Invested Benefit $1.2 M @ 4%

Accelerated Pr oduct Benefit Operating revenue at 80% of capacity for 1 month = $24.4 M less 80% cost ($19.5 M) = $4.9 M Project Construction Cost

— w/o BC

- 17X $350 M

– value of B&V contract Project Construction Cost

— with BC

- 17X $350.0 M project cost 8.5 delta cost (5.0) less cost benefit (1.2) less capital interest benefit Project cost with BC

- 17X = $352.3 M BC

- 17X Revenue per Operating Day $137,000 BC

- 17X Revenue per Committed Day $137,000 Net Benefit $4.9 M accelerated pro duct benefit 1.2 capital interest benefit less cost benefit (8.5) less delta cost of BC

- 17X Net benefit to the project = $2.6 M57 Disclaimer on Cover applies Conclusion

The $4.9 million in incremental revenue benefits, combined with $5 million in jobsite cost benefits and $1.2 million in capital interest benefits, or $11.1 million in total benefits, would more than offset the additional $8.5 million in transportation costs and result in a total net benefit to the project of $2.6 million.

This study has shown that there is a small reward for inserting the BC

- 17X into the TJB project, but everything would need to work as planned to achieve it. It is also important to note that the prime contractor’s portion of the work (Babcock and Wilcox’s contract) was not a part of this study and that a study of the entire project could result in a larger net benefit. Moreover, the BC

17X logistics plans provides a much higher degree of security in transporting equipment and supplies to the jobsite. Regardless of the net benefit , Black & Veatch felt that it was important to be able to present the client with the option of a logistics plan that would provide a very high degree of security and the ability to expedite the construction process.58 Disclaimer on Cover applies Letter of Agreement59 Disclaimer on Cover applies 3.2.3.8 In Sa lah Gas Field Development

In Salah, Algeria Project Owner: Sonatrach (Algerian government) and BP Amoco EPC Company: Halliburton Company (Kellogg Brown & Root) Logistics Company: Transglobal

Data Source Company

Halliburton, founded in 1919, is the worl d’s largest provider of products and services to the petroleum and energy industries. It is a world leader in integrated energy services, energy equipment, engineering, and construction and maintenance. Its various business units and subsidiaries make hu ndreds of products and have approximately 88,000 employees. It customers include ninety percent of the major oil and gas companies, and it had more than $12 billion in sales in 2002. Its Kellogg Brown & Root unit is the world’s largest engineering, procu rement, construction, and maintenance (EPC/M) contractor.

Environment

Algeria, the second

- largest country in Africa, began commercial production of natural gas in 1961. With 160 trillion cubic feet of proven natural gas reserves, Algeria is one of the t op ten gas producers in the world and accounts for one

- quarter of European Union gas imports.

The In Salah region of Algeria, located 750 miles south of Algiers on the southern edge of the arid Tademait Plateau, is rich in natural gas. Its existing ga s fields are known to contain five trillion cubic feet of dry gas reserves and have the potential to contain twice that amount.

The largest city in Algeria, the port city of Algiers has 2.9 million inhabitants.60 Disclaimer on Cover applies Project

In December 1995, Sonatrach (the Algerian government’s state

- owned oil and gas company) formed a joint venture with BP Amoco to develop seven of the twelve existing gas fields in the In Salah region, including the Garat al

- Bafinat, Teguentour, Krechta, Reg, In Salah, Hassi Moumeme, and Gour Mahmoud fields, at a cost of $3.5 billion. The joint venture will also explore for new gas reserves in the region. When the existing fields reopen in mid

- 2003, they are expected to deliver nine to eleven billion cubic meters of gas to southern Eu rope. 37

The airport at In Salah has a 7,874

- ft by 90

- ft runway with Jet

- A availability and can easily accommodate the BC

- 17X. There is a major port in Algiers, but the overland transit routes to the jobsite, while adequate, are very dangerous because of Algeria’s guerilla civi l war. The desert jobsites in the south Sahara are relatively

secure. This case study focuses on the $2.4

- billion sub

- project to drill up to two hundred production wells, construct compressor stations, and build a $700

- million, 340

- mile, 48

- inch pipeline linking the In Salah fields to the processing plant at Hassi R’Mel. In late 2001, Kellogg Brown & Root was awarded the contract to provide pre

- sanction engineering services to the project and had bid on the contract to construct the wellhead drilling equipment, gas pipelines, and compressor stations. The expected completion date of mid

- 2003 includes not only the engineering and construction time, but also the follow

- up and testing after construction is completed.

Infrastructure

Present Logistics Plan

Accumulating the necessary startup equipment and supplies was to take between two and four months prior to the start of construction. The equipment and const ruction materials (coming mainly from Korea and the United Kingdom) were forwarded via ocean freight to Europe and via surface transportation to Marseille, France, a trip that could take anywhere from eight to 45 days, depending on the point of origin. Fr om Marseille, the shipments were moved by tug and barge across the Mediterranean to the port of Algiers, cleared through customs, loaded onto trucks, and forwarded to the In Salah construction sites. The movement from Marseille to In Salah (1,220 miles) w as expected to take approximately sixteen days. However, since equipment and materials generally arrive randomly from suppliers via ocean freight, the Mediterranean crossing would probably not have run on a predetermined, consistent schedule, resulting in longer transit times for many shipments.

37 Th e analysis for this case study was last revised in January 2002. The In Salah gas fields are 750 miles south of the port of Algiers.61 Disclaimer on Cover applies BC

- 17X Logistics Plan

The BC

- 17X could have been used to fly equipment and materials from Marseille directly to the jobsite at In Salah, and arrangements could have been made with the government of Algeria to h ave an onsite customs inspector. By preplanning the arrival of selected strategic supplies needed to begin construction, Halliburton could have started the project a minimum of thirteen days earlier than scheduled. Throughout the project, Halliburton cou ld have selectively airlifted certain items that were holding up construction. The insertion of the BC

- 17X at these critical times would have provided a steady stream of materials without gaps or delays in the construction flow, effectively reducing the p roject construction time by as many as thirty to sixty days (depending on the duration and timing of the delays and their effect on the construction schedule).

For example, at a schedule of one flight every 2.5 days, it would have taken 45 days for the BC

17X to move the 2,832,000 pounds of air

- eligible material (about 13.6 percent of the total cargo weight). 38

38 It is possible that some of the pieces too large for the BC

- 17X could have been broken down to fit on the plane, but it was not feasible to research this at the time of the study. A brief review of the cargo has revealed that another 21 percent, or about 34.6 percent of the total weight to be shipped, might have been eligible to move via BC

- 17X. Since this same weight would have taken 96 days to arrive at the jobsite via barge, the BC

- 17X would have reduced the project duration by 51 days. T he remaining shipments would have to have been forwarded via barge and truck.

Next Best Alternative

Since the AN

- 124 cannot land at the In Salah airfield, the next best alternative would have been to use the AN

- 124 to fly the equipment and materials from Marseille to Algiers. By eliminating the barge movement to Algiers, this logistics plan could have reduced the sixteen

- day transit time between Marseille and In Salah to eleven days. The BC

- 17X logistics plan, however, would have had a far greater impac t on the project duration because it would have allowed Halliburton to bypass the dangerous overland transit route to from Algiers to the jobsite and reduced the Marseille

- Algiers’ transit time to 2.5 days.62 Disclaimer on Cover applies Analysis

Project Name In Salah Gas Field Deve lopment Project Project Description 340

- mile, 48

- inch gas pipeline, compressor stations, and production wells Project Owner Sonatrach (Algerian government) & BP Amoco Project EPC Company Halliburton Company (Kellogg Brown & Root) Project Logistics Comp any Transglobal Project Cost $2.4 B Project Duration 2 years Freight Description Oversize prefabricated materials and equipment Flight Origin and Destination Marseille, France to In Salah, Algeria (plus ferry flights from Luxembourg to Marseille) Ai r Cargo Duration 1.5 months BC

- 17X Operational (Fly) Days 18 days BC

- 17X Committed (Contracted) Days 18 days BC

- 17X Schedule One RT per day every 2.5 days Average BH per RT Flight 5.48 BH Estimated BC

- 17X BH 146.7 BH including 48.06 BH of ferry fligh ts Possible Type of Contract For project flights: long

- term daily contract that includes fixed costs, margin, and an hourly rate for each block hour in excess of a specified number

For ferry flights: long

- term hourly contract that includes fixed costs an d margin Total Cost of BC

- 17X to Project 18 days at $137,000 48.06 BH at $20,000 Total Cost = $3.4 M Cost of Airfield Upgrade None Cost of Airfield Maintenance None Delta Cost of BC

- 17X to Project $3.4 M Transportation Cost w/o BC

- 17X $ 7.5 M Transportation Cost w/ BC

- 17X $10.9 M Cost Benefit $50,000 per day for 51 days = $2.6 M Months

- to

- Completion Savings 1.7 months Capital Interest Benefit/ Return on Capital Invested Benefit $13.6 M @ 4%

Accelerated Product Benefit 871.2 mi llion cubic ft/day for 51 days @ $4.10 per 1,000 cubic ft = $266.6 M less 5% extraction cost ($13.3 M) = $253.3 M Project Construction Cost

— w/o BC

- 17X $2.4 B Project Construction Cost

— with BC

- 17X $2,400.0 M project cost 3.4 delta cos t (2.6) less cost benefit (13.6) less capital interest benefit Project cost with BC

- 17X = $2.3872 B BC

- 17X Revenue per Operating Day $189,000 BC

- 17X Revenue per Committed Day $189,000 Net Benefit $253.3 M accelerated product benefit 2.6 cost benefit 13.6 capital interest benefit (3.4) less delta cost of BC

- 17X Net benefit to the project = $266.1 M63 Disclaimer on Cover applies Conclusion

Using the BC

- 17X to prevent gaps in the construction schedule and reduce the o verall project duration would have cost the project an additional $3.4 million in transportation costs. However, after accounting for the cost and capital interest benefits of early completion, the aircraft would have saved the project $12.8 million witho ut including any accelerated product benefit. With the accelerated product benefit, the BC

- 17X would have generated a net benefit to the project of $266.1 million.

Letter of Agreement

See the Fluor, Inc. letter of agreement at the end of the Sakhalin I case study. The author of the letter was Halliburton’s Vice President of Procurement when this case study was being conducted.64 Disclaimer on Cover applies 3.2.3.9 Mackenzie Delta Gas Pipeline Project

Northwest Territories, Canada Project Owner: Mackenzie Delta Gas Pipeline Produc ers Group (Imperial Oil Resources, Conoco, Shell, and ExxonMobil) EPC Company: ColtKBR (Joint Venture between Colt Engineering Company and Kellogg Brown & Root) Logistics Company: Not yet assigned

Data Source Company

Headquartered in Calgary, ColtKBR is a long

- term joint venture between Colt Engineering Company and Kellogg Brown & Root. Colt is a major Canadian engineering, procurement, and construction company that specializes in designing hydrocarbon processing facilities in North America and around t he world. Additionally, Colt has particular expertise working in both desert and Arctic climates. Each year, the total cost of the projects Colt executes is approximately $2 billion. The company has more than 2,200 employees. For information about Kell ogg Brown & Root, a division of Halliburton, see the In Salah Gas Field Development case study.

The 800

- mile Mackenzie Delta gas pipeline will begin at a gathering point near the city of Inuvik on the shore of the Beaufort Sea and run southeast along t he Mackenzie river to Fort Simpson and into Alberta.

Environment

The Mackenzie Delta is located in the upper Northwest Territories, where the Mackenzie River meets the Beaufort Sea. Ecologically and biologically diverse, it is the largest river delta i n Canada. Its interconnected lakes and rivers are home to many species of fish and waterfowl, and herds of caribou inhabit the fragile tundra.65 Disclaimer on Cover applies The climate in the region is quite severe. The coastal waters of the Beaufort Sea are frozen all but three mon ths of the year (September through May), and the lakes and rivers flood in the spring. The soft tundra, however, is only frozen solid from January through March.

A gas pipeline to extract the natural resources of the Mackenzie Delta was first envisione d in the mid

- 1970’s, but in order to settle land claims with the northern aboriginal groups, the Canadian government instituted a moratorium on land

- rights issuance to oil and gas companies in the Northwest Territories. The 1977 Berger Commission report e ntitled Northern Frontier, Northern Homeland supported this moratorium, stating that “[if] the native people are to achieve their goals, no pipeline can be built now.” Subsequent to the report’s issuance, hydrocarbon exploration and development in the are a slowed considerably, despite the high potential for resource development.

Typical welding huts along a pipeline construction right

- of

- way in Alaska.
Project

In 1988, renewed interest in a pipeline led Canada’s National Energy Board to hold hearing s on the Mackenzie Delta Gas Export Project with several major petrochemical companies. Connecting the Mackenzie Delta reserves to the North American transmission grid was of interest to the Canadian government because it would commercialize royalty inter est, expand the natural resources tax base, and provide economic opportunities for the northern communities and their citizens.

Following a January 2000 meeting of aboriginal leaders, the Mackenzie Valley Aboriginal Pipeline Group (MVAPG) was created an d given a mandate to “build a business partnership to maximize ownership and benefits of a Mackenzie Valley pipeline.” 39

The thirty

- inch, 800

- mile pipeline will begin at a gathering point near the city of Inuvik on the shore of the Beaufort Sea and run southeast along the Mack enzie River to Fort Simpson and into Alberta. There will be four compressor stations along the pipeline; at the largest facility (located On the commercial front the Mackenzie Delta Producers Group was formed by Imperial Oil Resources (which has a 50

- percent interest), Con oco (which has a 25

- percent interest), Shell (which has a 17

- percent interest), and ExxonMobil (which has an 8

- percent interest). On October 15, 2001, MVAPG signed an agreement with the Mackenzie Delta Producers Group whereby MVAPG would own

one

- third of a pipeline transporting natural gas from the Delta and the Valley to the Alberta pipeline grid.

39 Northern Gas Pipelines: Mackenzie Valley Pipeline Project

, http://www.arcticgaspipeline.com/Delta%20Route.htm , 2002.66 Disclaimer on Cover applies at Norman Wells), the gas liquids will be extracted and directed to the existing Trans

- Canada Pipeline system. The r eserves are estimated to contain ten trillion cubic feet of gas, and the pipeline is expected to transport between 1.2 and 1.9 billion cubic feet of gas per day (BCFD). The estimated cost of the pipeline is between $2 and $2.64 billion.

In mid

- 2002, the Mackenzie Delta Producers Group and MVAPG awarded the contract for the first phase of the project (the Project Definition Phase, including conceptual and preliminary engineering and permit development and submittal) to Colt KBR. The first phase is expecte d to run into 2004 and be immediately followed by the detailed engineering and procurement phase. The pipe is expected to be delivered in the summer of 2005, with construction beginning in January 2006 and running through March 2008.

Infrastructure

The ports on the Beaufort Sea are only open three months of the year (June through August) because of ice, limiting the possible number of barge shipments. Exacerbati ng the problem are the limited number of berths and amount of unloading equipment available.

There are a plethora of austere airfields along the project construction route that are capable of servicing a BC

- 17X. In the Northwest Territories, there

are runways at Inuvik (6,000 ft by 150 ft), Norman Wells (6,000 ft by 150 ft), Fort Simpson (6,000 ft by 150 ft), Boundary Bay (3,755 ft by 100 ft), Fort St. John (6,700 ft by 200 ft), and Yellowknife (7,500 ft by 150 ft). Additionally, there are two large in ternational airports in Alberta

— Calgary International and Edmonton International.

Present Logistics Plan

Logistics planning is currently underway to determine the most cost

- effective and efficient way to get the construction equipment, project materials, and process equipment in place for construction to begin in January 2006. Environmental concern about the fragility of the tundra restricts construction activity on the pipeline to three months of the year (January through March), although construction o n the compressor stations can go on year

- round, provided all of the necessary materials are present.

The procurement of materials and equipment is scheduled to start in 2004, and about 78,000 tons of equipment and materials (not including line pipe or die sel fuel) will need to be transported to the construction route. Each year, the materials and equipment needed for the next year’s construction will most likely be marshaled on the west coast of Canada, loaded onto barges during the second quarter, and se nt north to arrive during the three months that the Beaufort Sea is open for deliveries (June through August). The line pipe will probably be scheduled so that it can be barged directly to the dock and offloaded to a laydown yard. Additional materials wi ll be trucked up the pipeline route from Alberta during the winter months (January through March), but the amount of materials that can be transported overland is limited because of weight restrictions designed to protect the soft tundra. Since the pipeli ne construction is not continuous, there should be enough time to plan the deliveries; but this may not be true with regard to the compressor station, which will need to be worked on continuously until complete. E ssential pipeline construction equipment includes pipe bending machine, with side boom.67 Disclaimer on Cover applies While workable, this logistics plan leaves the project vulnerable to schedule disruptions (such as delivery delays and equipment problems requiring replacement units) without a way to bring in heavy and oversize loads the other six months of the year. In addition, once the northern area
starts to develop because of the new pipeline, an unloading queue may form at the Beaufort Sea terminals (similar to the one at Prudhoe Bay), making it impossible to receive all the materials for one or more of the construction seasons. Moreover, an unseasonably c old summer or mild winter could shorten the six

- month logistics window.

BC

- 17X Logistics Plan

While it would probably not replace the entire surface supply chain, the BC

- 17X could be used to move freight directly to the any of the austere airfields along the project construction route. For example, equipment and materials could be flown directly to the construction spreads along the pipeline route, and, in case of equipment failure, replacement equipment could be delivered overnight.

The case study ana lysis considers a scenario in which the BC

- 17X transports only about 25 percent of the total freight (18,000 tons). Such a logistics plan would allow the project to be completed one year ahead of schedule. 40

40 ColtKBR will not spend the resources to evaluate a full BC

- 17X logistics plan until the plane is actually available to the commercial market. Inserting the BC

- 17X into the logistics supply c hain could contribute even more to the project schedule if any of the schedule vulnerabilities described above created problems in the supply chain.

Next Best Alternative

The next best alternative is to use the present logistics plan. It would not be po ssible to use the AN

- 124 on this project since there is no airport along the project route with a runway long enough to accommodate it.68 Disclaimer on Cover applies Analysis

Project Name Mackenzie Delta Gas Pipeline Project Project Description 30

- inch, 800

- mile gas pipeline runnin g south through the Mackenzie Delta (from Inuvik to Alberta) and connecting with the Trans

- Canada Pipeline system Project Owner Mackenzie Delta Gas Pipeline Producers Group (Imperial Oil Resources, Conoco, Shell, ExxonMobil) and the Mackenzie Valley Abori gine Pipeline Group Project EPC Company ColtKBR (Joint Venture between Colt Engineering Corporation in Calgary and Kellogg Brown & Root in Houston) Project Logistics Company Not yet assigned Project Cost Estimated to be between $2 B and S2.64 B. An ave rage of $2.32 B has been used for the purpose of this study. Project Duration 7 years (early engineering, planning and permiting from 2002 through 2003; detailed engineering and procurement from 2004 through 2005; construction from 2006 through 2008; co nstruction limited to January through March for environmental reasons) Freight Description Pipeline material such as line pipe, valves, compressors, pressure vessels, pumps, structural steel, construction equipment, etc. The analysis assumes that only 25 % of the total tonnage, or 18,000 tons, is moved by the BC

- 17X. The total tonnage calculated in the case study does not include line pipe or diesel fuel, but the 18,000 tons could include some line pipe. Flight Origin and Destination Inuvik to Normal Wel ls Inuvik to Fort St. John Inuvik to Fort Simpson Inuvik to Yellowknife Inuvik to Boundary Bay Calgary to Normal Wells Air Cargo Duration 1 year (fall 2005 to fall 2006) BC

- 17X Operational (Fly) Days 132 days BC

- 17X Committed (Contracted) Days 140 days BC

- 17X Schedule 92 nearly continuous days in the summer months (June through August) and 40 days scattered over the other 9 months. See Estimated BC

- 17X BH for more detail. Average BH per RT Flight 3.29 BH Estimated BC

- 17X BH 1.5 BH

– 3 R/T day

– 28 days = 126 3.0 BH

– 2 R/T day

– 64 days = 384 8.0 BH

– 1 R/T day

– 40 days = 320 Total estimated BH = 830 Possible Type of Contract For the summer months, a long

- term daily contract that includes fixed costs, margin, and an hourly rate for each block hour in excess of a specified number. The balance of the year will be covered by an hourly contract that includes fixed costs and margin. Total Cost of BC

- 17X to Project $20.1 M (100 days at $137,000 = $13.7 M plus 320 BH at $20,000 = $6.4 M) Cost of Ai rfield Upgrade None Cost of Airfield Maintenance None Delta Cost of BC

- 17X to Project $20.1 M cost of BC

- 17X (1.0) less transportation savings Delta cost to project = $19.1 M Transportation Cost w/o BC

- 17X $46.4 M (20% of project cost) Transp ortation Cost w/ BC

- 17X $65.5 M Cost Benefit $25 M per month for 3 months = $75 M Months

- to

- Completion Savings 12 months (3 months of construction time savings. Since construction is limited to three months per year, this means the project is completed 12 months ahead of schedule.) Capital Interest Benefit/ Return on Capital Invested Benefit $92.8 M @ 4%

Accelerated Product Benefit 1.55 BCFD (billion cubic feet/day) @ $6 per 1,000 CF = $9.3 M per day = less 5% extraction cost ($465,000) = $8.8 M per day Assuming gas

- flow at 80% for the first 6 months and at 100% for the next 6 months, the total accelerated product benefit = $2.8987 B Project Construction Cost

— w/o BC

- 17X $2.32 B Project Construction Cost

— with BC

- 17X $2,320.0 M project cost 20 .1 delta cost (75.0) less cost benefit (92.8) less capital interest Project cost with BC

- 17X = $2.1723 B BC

- 17X Revenue per Operating Day $152,00069 Disclaimer on Cover applies BC

- 17X Revenue per Committed Day $144,000

Net Benefit $2,898.7 M accelerated p roduct benefit 75.0 cost benefit 92.8 capital interest benefit (20.1) less delta cost of BC

- 17X Net benefit to the project = $3.0464 B

Conclusion

After accounting for the operational cost and capital interest benefi ts of early completion and the cost of the airplane, moving 25 percent of the total tonnage via the BC

- 17X would save the project $147.7 million. Including the accelerated product benefit of early gas revenue, the BC

17X’s total net benefit to the project is more than $3 billion.70 Disclaimer on Cover applies 3.2.3.10 Chad

- Cameroon Petroleum Development and Pipeline Project

Chad/Cameroon Project Owner: Consortium (ExxonMobil, Petronas, and Chevron) EPC Company: ExxonMobil and numerous subcontractors Logistics Company: SDV Inc.

Dat a Source Companies

The ExxonMobil Corporation is engaged in exploration for and the production of crude oil and gas, the manufacturing of petroleum products, and the transportation and sale of crude oil, natural gas, and petroleum products. With over 9 7,000 employees, ExxonMobil operates in over 200 countries and from September 2001 to September 2002 earned revenues of $196.5 billion.

A member of the Bolloré Group, SDV Inc. is an international freight forwarding, transportation, and logistics provider. SDV prides itself on its close relationships with the major international transportation operators and employs more than 7,000 people in 85 countries. In 2001, its turnover was approximately $1.8 billion.

Environment

Chad and Cameroon are extremely po or countries with few natural resources. With a GNP of $160 per capita, Chad, a landlocked nation, is the fifth

- poorest country in the world. Cameroon, with access to the Atlantic Ocean and a GNP of $640 per capita, is the 47 th poorest country.

The environment in Chad and Cameroon is quite varied and includes mountains, rivers, rainforests, open country, and heavy jungle inhabited by indigenous Pygmy culture s. From April to July, the rainy season causes the rivers to swell and the plains to flood.

Oil was discovered in southwestern Chad in 1969, and after test drilling produced positive results the government decided to develop the oilfield. The importan ce of this project to Chad and Cameroon cannot be overstated. It will provide money for national education, electricity, water, and sanitation projects and a variety of local projects to improve individual villages. Moreover, the jobs and infrastructure created by the project will greatly improve the quality of life for many of the nations’ citizens. The p ipeline and oilfields associated with the Chad

- Cameroon Project are depicted on the map.71 Disclaimer on Cover applies Project

The project consists of a new 300

- well drilling field in southern Chad, a processing plant in Kome, Chad, a 715

- mile pipeline from Kome to the o cean port of Kribi, Cameroon, four pumping stations, a nine

- mile underwater pipeline connecting Kribi to an offshore storage tanker, and two waste

- management facilities. Additionally, fiber

- optic cable is being laid in the pipeline trench to provide moder n communications capabilities to the interiors of both countries. The total cost of the project is estimated to be $3.7 billion.

Planning and financing for the project began in 1995, and the first construction started in November 2001. Two organizatio ns were formed to oversee the project

— TOTCO (Tchad Oil Transport Company) representing Chad’s interests and COTCO (Cameroon Oil Transport Company) representing Cameroon’s interests. The commercial consortium responsible for building and managing the produ ction and distributing the revenue includes three firms: ExxonMobil (which has a 40

- percent interest), Petronas (which has a 35

- percent interest), and Chevron (which has a 25

- percent interest).

Infrastructure

When the project began, there were no improved roads along the 700

- mile surface

- transport route from the Cameroon port of Douala to Kome (approximately the distance from Washington, D.C., to Chicago), just a 420

- mile rail line from Douala to N’Gaoundere and 280 miles of dirt roads created by grading and removing the top layer of soil. The four rivers that have to be crossed had primitive bridges unable to su pport the weight of the equipment and machinery. Although some roads and temporary bridges have been constructed, conditions are still relatively primitive. At the time data for the study was collected, no fuel was available along the route, and there

was nowhere to service or repair vehicles. It was not feasible for trucks to travel the route at night, since there were no lights or signs and there was no way to locate the numerous holes and bumps in the path. During the rainy season, from April to July, the roads flood, and decreased visibility makes them even more impassable. Moreover, since the road segments become natural water courses when it rains, the truck convoys have to stop until the water recedes and equipment must be brought in to repair the roads. While some of the roads and temporary bridges created for the project will be useful to Chad and Cameroon in the future, most will be deconstructed so as to not open the areas to further development.

The nearest large airfield (with a 9,200

- ft runway) is at the capital city of N’djamena, 280 miles northwest of Kome, and has been used for AN

- 124 charter aircraft. The road between N’djamena and Kome was originally just dirt, but it was improved and maintained for the project at a cost of $200 mil lion. There is another large airfield at the Cameroon port of Douala. In Monaudua, about 75 miles from Kome, there is a small, 5,000

- foot runway, and there are numerous small airfields near the pipeline path. The consortium built an additional 5,904

- foo t laterite airstrip at the project site in Kome that it has used to transport fly

- in labor on L

- 100s and The citizens of Chad and Cameroon could be nefit tremendously from the oil pipeline project, which will provide jobs and money for education.72 Disclaimer on Cover applies Dash

- 8s. The jobsite airfield at Kome is already capable of handling a BC

- 17X, and the small airfields along the pipeline path could be sufficiently i mproved to do so as well.

Present Logistics Plan

At the beginning of the supply chain, materials and equipment are sent by ocean freight from Europe, the United States, and Asia to the port of Douala. The ocean transit, including staging for loading a t the embarkation ports, takes at least 22 to 28 days. Since Douala is not a highly used port, customs, unloading, staging onto truck convoys, and the 705

- mile surface trip take another ten to sixteen days or more. In Exxon’s initial logistics planning t he company estimated a minimum of three months’ transit time to the project site.

Crews travel by L

- 100s or Dash

- 8s into the project site’s airfield, but heavier air cargo must go on chartered AN

- 124s to N’djamena. Including one to three days of flight t ime, two to three days for customs, and three to five days for road transit, air cargo takes between six and ten days to travel from Houston to Kome.

Starting in December 2000, it took three months for the living modules to arrive, and many were damaged and unusable. Without generators, subsistence supplies, or prefabricated housing modules, the project was forced to use “fly

- in” camps. One Dash

- 8 aircraft was used daily for the first two months to rotate the personnel between Douala and Kome. The exce ss cost of this “fly

- in” operation totaled $750,000 per month, including the cost of the aircraft and hotel and food expenses in Douala for more than 200 people. It took two more months for the first vehicles to arrive; construction materials arrived much later and had to be deposited in storage areas along the pipeline right

- of

- way.

Clearing and construction for the project began in September 2001, eight months behind schedule. During the surveying of the pipeline route and marshaling of the necessary supplies, the pipeline had to be rerouted many times. Since the original pipeline route was too close to some native and animal habitats, the project had to use new, infrequently traveled sections of road, resulting in further logistics problems and dela ys. Even without including the actual pipe, the project is expected to require 8,250 surface movements totaling 330,000,000 pounds. Transporting the pipe will require an additional 11,935 surface movements totaling 477,400,000 pounds.

Inevitable del ays in the production and shipping of critical materials forced Exxon to use unplanned air charters from Houston and from continental European and UK suppliers. In addition, a number of large, heavy, and sensitive devices were damaged in transit (from bei ng jostled or falling off of trucks) and had to be sent for recalibration via chartered AN

- 124s. Unforeseen labor and customs

- clearance problems at the port of Douala also prevented a smooth flow of materials from being available when they were needed to meet the construction schedule.

While the original plan estimated that the project would require transporting about 10,100,000 pounds of material to N’djamena via air, by the end of February 2003 some 22,000,000 pounds of airfreight had been shipped on chartered AN

- 124s and IL

- 76s, and there was an estimated 11,000,000 pounds (through September 2003) still to come.73 Disclaimer on Cover applies The target date for oil to begin flowing down the completed pipeline was July 2003, but Exxon speculated that a full flow of processed crude would not be possible for an additional three to five months.74 Disclaimer on Cover applies BC

- 17X Logistics Plan

The BC

- 17X could have been inserted into the logistics plan at two separate points. First, the aircraft could have flown the 30,690,000 pounds of initial startup mate rials from the port of Douala to Kome, saving seventeen to 26 days of transit time per ocean shipment. This would have allowed the camp modules, construction equipment, consumable supplies, fuel, water, and strategic materials necessary to begin construct ion to have been in place two months earlier than they actually were and eliminated the excess costs caused by the delay.

During the second, ongoing phase of the project, the BC

- 17X could have reduced the amount of weight that had to be moved on overseas charter flights by seventy percent by providing a continuous shuttle service between Douala and Kome. The remaining thirty percent of the overseas flights could have been split between the BC

- 17X and AN

- 124 charters (since a few pieces of equipment would still have been too heavy to transport via the BC

- 17X). Additionally, the BC

- 17X shuttle could have moved eighty percent of the surface weight (excluding pipe) directly to Kome. In total, the BC

- 17X could have shortened the ongoing phase of the project b y approximately five months. Moreover, substantially reducing the planned truck traffic would have eliminated the need to improve the road between Douala to Kome

Next Best Alternative

The next best alternative is the current system of ocean and surface freight. However, as the first few years of construction have shown, this logistics chain is unreliable and requires costly supplementary AN

- 124 charters.

Although the AN

- 124 could also have been preplanned into the logistics chain in several ways, thi s logistics strategy would not have been superior to the BC

- 17X logistics plan. For example, the AN

- 124 could have flown into N’djamena on a regular basis, but that would not have eliminated the need for extensive surface transport to Kome and along the p ipeline. And while the Kome airfield could have been upgraded to accommodate regular AN

- 124 flights, it would have been extremely difficult to expand the local airfields along the pipeline sufficiently, and substantial surface transport would still have b een necessary. With such large surface transport components, neither of these approaches would have generated the same time and cost savings as the BC

- 17X.75 Disclaimer on Cover applies Analysis

Project Name Chad

- Cameroon Petroleum Development and Pipeline Project Project Descript ion Oil pipeline, pump stations, processing plant, and oilfield equipment Project Owner Commercial consortium (ExxonMobil, Petronas, and Chevron). TOTCO and COTCO also have interests in the project. Project EPC Company ExxonMobil (and numerous subco ntractors) Project Logistics Company SDV Inc. Project Cost $3.7 B Project Duration 3.5 years Freight Description Pipeline, processing

- plant material, and construction equipment Flight Origin and Destination Houston to Kome, Chad, Luxembou rg to Kome, Chad Douala, Cameroon to Kome, Chad Air Cargo Duration 21 months BC

- 17X Operational (Fly) Days 651 days BC

- 17X Committed (Contracted) Days 651 days BC

- 17X Schedule Startup

— 3 Douala/Kome round trips per day for 62 consecutive days; one Houston/Kome round trip, 60 days in between legs Ongoing

— 31 day cycles for the next 589 days

— 1 leg Houston/Kome, 14 days (42 round trips) Kome/Douala, 1 round trip Kome/Luxembourg, 14 days (42 round trips) Kome/Douala, and 1 leg Kom e/Houston Average BH per RT Flight Douala/Kome = 2.98 BH Kome/Houston = 30.74 BH Kome/Luxembourg = 12.3 BH Estimated BC

- 17X BH 6114 BH Possible Type of Contract Long

- term hourly contract that includes fixed costs and margin Total Cost of BC

- 17X to Pro ject 6114 BH at $20,000 = $122.9 M Cost of Airfield Upgrade None Cost of Airfield Maintenance None: laterite strip maintained by Exxon Delta Cost of BC

- 17X to Project $122.9 M cost of BC

- 17X (111.6) less transportation savings Delta cost to the project = $11.3 M Transportation Cost w/o BC

- 17X $131.1 M Transportation Cost w/ BC

- 17X $142.4 M Cost Benefit $171.5 M Months

- to

- Completion Savings 7 months Capital Interest Benefit/ Return on Capital Invested Benefit $107.9 M @ 5%

Accelerated Pr oduct Benefit 200,000 BBL/day for 214 days @ $25 per BBL = $1.0700 B less a 5% extraction cost per BBL ($0.0535 B) = $1.0165 B Project Construction Cost

— w/o BC

- 17X $3.7 B Project Construction Cost

— with BC

- 17X $3,700.0 M project cost 11.3 del ta cost (171.5) less cost benefit (107.9) less capital interest benefit Project cost with BC

- 17X = $3.4319 B BC

- 17X Revenue per Operating Day $189,000 BC

- 17X Revenue per Committed Day $189,000 Net Benefit $1,016.5 M accelerated product b enefit 173.0 cost benefit 107.9 capital interest benefit (11.3) less delta cost of BC

- 17X Net benefit to the project = $1.2846 B76 Disclaimer on Cover applies Conclusion

While the BC

- 17X would raise the cost of transportation by about $11.3 million, the reduced project duration and resulting operational cost and capital interest benefits would decrease the total project cost by $279.4 million. With the accelerated product benefit included as well, the BC

- 17X would generate a net project benefit of appro ximately $1.2846 billion.77 Disclaimer on Cover applies Letter of Agreement78 Disclaimer on Cover applies 3.2.3.11 National Petroleum Reserve Alaska Project

NPRA, Alaska Project Owner: Phillips Alaska, Inc. EPC Company: Phillips Alaska, Inc. Logistics Company: None

Data Source Company

Phillips Alaska is a division of ConocoPhillips, the third largest integrated energy company in the United States and the sixth largest publicly owned energy company in the world. Operating in 49 countries with a workforce of 56,000, ConocoPhillips has some $75 billion in

ass ets and recorded $48 billion in 2001 sales.

Environment

The National Petroleum Reserve Alaska (NPRA) is bordered by the Beaufort Sea to the north and the Brooks Mountain Range to the south. It begins approximately 70 miles west of Prudhoe Bay and extend s further west for 300 miles. Point Barrow is located on the seacoast midway through the reserve, and the center of the reserve is about 250 miles north of the Arctic Circle.

Environmental conditions in the reserve are both sensitive and harsh. The soft tundra and thousands of small lakes scattered throughout the reserve would be so negatively impacted by the movement of heavy equipment that the US government restricts travel and drilling in the reserve to the time when the ground is frozen solid, usuall y early December through mid

- April. For planning purposes, Phillips assumes a 126

- day test

- drilling window, from December 15 through April 15. During this period, the only “daylight” is a few hours of twilight each afternoon; fog, high winds, and snow fu rther limit visibility. Temperatures average

- 10oF, and they can drop as low as

- 50oF.

Project

The US government has granted Phillips Alaska an eight

- year oil exploration lease in the NPRA. To determine the value of the lease, Phillips must drill sever al test wells in strategic locations to gauge the potential size of the oil reserves on their portion of land. Generally, on a lease of this size, Phillips will drill a minimum of two test wells (at a cost of about $25 million each) at each strategic loca tion to confirm the presence of oil or gas. It would then drill as many additional test wells as necessary (about five to eight miles apart) to fully evaluate the overall potential of the lease before deciding whether to develop the field and build a pipel ine to extract the oil or return the lease to the government. For the purposes of this case study, we assume that it will take ten test wells to fully assess the lease.

Infrastructure

The main airfield for the lease area transport is Deadhorse, near th e ocean port in Prudhoe Bay, a full

- service airport featuring a 6,500 foot runway and precision navigational aids. Since all79 Disclaimer on Cover applies major equipment movements must take place during the frozen season, the remainder of the transportation infrastructure consists of seasonally constructed ice highways and ice runways.

Present Logistics Plan

During the port at Prudhoe Bay’s operational months, usually July and August, the heavy equipment and supplies for the test wells are barged in. The rest of the year, the materials are trucked up the haul road from Fairbanks. Once the winter window begins and the ground has frozen deeply enough to minimize the environm ental damage, Phillips must move quickly to transport the drilling rigs and equipment from Prudhoe Bay to the drilling site and back before the end of the season.

Since most test wells are now more than 50 miles from Prudhoe Bay and thus require some airlift, the logistics chain for a typical exploration well would begin with low

- ground

pressure Rolligon trucks moving construction equipment for an ice airfield to the drilling site. This process, combined with the construction of the ice airfield, usually takes about four weeks, since the ice can only be poured at a rate of one mile a day. Once the airstr ip is in and lit, L

- 100 loads start to fly in the rig camp, crews, and other construction equipment needed to set up the test well. By the time Phillips is ready to drill (four to six weeks later), it is usually early February, and from then to mid

- April, the operation is supported by smaller aircraft, although L

100s are still used to transport fuel. When work at the test site is finished (usually in early April), the entire operation is deconstructed and returned to Deadhorse in reverse order, a process that takes two to three weeks. A typical exploratory well requires 300 inbound L

- 100 loads and 180 outbound L

- 100 loads, and to date Phillips has only been able to drill one test well per frozen season using an L

- 100

- based supply chain.

BC

- 17X Logisti cs Plan

Since the BC

- 17X can land on the same ice airstrip as the L

- 100, it could directly replace the L

100 in the typical logistics plan described above. However, since the BC

- 17X can carry 3.5 times more weight and 6.25 times more volume than the L

- 10 0, it would need to make only 70 The center of the National Petroleum Reserve Alaska (NPRA) is about 250 miles north of the Arctic Circle.

The wheeled rig base is uniquely designed to operate in the harsh winter conditions of northern Alaska, where temperatures can drop as low as

- 50°.80 Disclaimer on Cover applies inbound flights and 58 outbound flights, or 128 total flights instead of 480 using the L

- 100. In addition, the BC

- 17X could carry larger pieces of equipment, reducing the time spent breaking down and rebuilding deconstruct ed equipment, and fly in more severe weather conditions than the L

- 100.

Whereas it takes the full 126 days each season to construct a single test well with the L

- 100 supply chain, the BC

- 17X supply chain could complete the test well in only 73 days, or 53 days faster. This accelerated schedule would enable Phillips to drill a second test well each season (since the equipment would already be in place, the second test well could be constructed in only 28 days). Furthermore, even after completing two test wells with the BC

- 17X supply chain, 25 days would remain in the drilling season. With some further fine tuning, it might be possible to drill three wells per season. If, as we have assumed, it will take ten wells to fully assess the field, the BC

- 17X supply chain could shorten the exploratory process by at least five years.

Next Best Alternative

Phillips’s next best alternative is to use the L

- 100 supply chain fro m Deadhorse to the test wells. This alternative allows for drilling only one test well a year within the environmentally established drilling window of mid

- December to mid

- April, as opposed to drilling two or more test wells a year with the BC

- 17X in the supply chain.

Analysis

Since the wells in this case study are test well and not producing wells, we have not attempted to place any value on accelerated oil production. However, since it can take as many as ten years to move from the discovery of a fiel d and the drilling of test wells to the production of oil, one can easily make the case that any reduction in the duration of test

- well drilling provides an opportunity to bring the oil to market faster. If the test wells proved the field to be productiv e, the BC

- 17X logistics plan would enable Phillips to bring the oil to market many years earlier and thus generate significant accelerated oil revenues.

The present logistics cost for the 480 L

- 100 flights required to construct one test well is about $3

m illion. (This included in the $25 million per

- well cost.) For two test wells, the L

- 100 flights cost about $6 million. This means that the non

- logistics cost of building two test wells is approximately $44 million. Since the BC

- 17X flights needed to co nstruct two wells in one season cost about $5 million, the total cost of these two wells is $49 million, or $24.5 million per well. Thus, looking only at the aircraft price and not including any operational savings, the time

saving BC

- 17X logistics plan a ctually costs approximately $0.5 million less per well than the lengthier L

- 100 supply chain. A Phillips Alaska drilling rig construction site in the National Petroleum Reserve.81 Disclaimer on Cover applies Project Name National Petroleum Reserve Alaska Test Drilling Project Description Drill 10 test wells Project Owner Phillips Alaska Project EPC Company Phill ips Alaska Project Logistics Company None Project Cost $250 M Project Duration 10 years w/o BC

- 17X 5 years w/ BC

- 17X Freight Description Drilling rig, equipment, and drilling materials. Flight Origin and Destination Deadhorse to drilling site (plus ferry flights from Houston to Deadhorse) Air Cargo Duration 5 years BC

- 17X Operational (Fly) Days 185 days BC

- 17X Committed (Contracted) Days 185 days BC

- 17X Schedule 20 days at the beginning and 17 days at the end of each drilling

s eason (December 15 through April 15) for three years; 4 flights per day, 7 days per week Average BH per RT Flight 1.6 BH Estimated BC

- 17X BH 1195.5 BH including 171.5 BH of ferry flights Possible Type of Contract For project flights: long

- term daily co ntract that includes fixed costs, margin, and an hourly rate for each block hour in excess of a specified number For ferry flights: long

- term hourly contract that includes fixed costs and margin Total Cost of BC

- 17X to Project 165 days at $137,000 171.5 BH at $20,000 (fuel savings of $192,500) Total Cost = $25.8 M Cost of Airfield Upgrade Ice air strip included in Project Cost Cost of Airfield Maintenance None Delta Cost of BC

- 17X to Project $25.8 M cost of BC

- 17X (31.2) less transp ortation savings Delta cost to the project =

- $5.4 M Transportation Cost w/o BC

- 17X $31.2 M Transportation Cost w/ BC

- 17X $25.8 M Cost Benefit $70.3 M Months

- to

- Completion Savings 60 months plus 25 days each drilling season Capital Interest Benefi t/ Return on Capital Invested Benefit $37.5 M @ 3%

Accelerated Product Benefit None. Savings are in costs and in completing an additional test well each drilling season Project Construction Cost

— w/o BC

- 17X $250 M Project Construction Cost

— with BC

- 17X $250.0 M project cost (5.4) negative delta cost (70.3) less cost benefit (37.5) less capital interest benefit Project cost with BC

- 17X = $136.8 M BC

- 17X Revenue per Operating Day $137,000 (Ferry charged at $20,000 per BH for 171.5 BH’s = $3,430,000; over 20 days, this is $172,000 per day; for the entire project is this is an average of $141,000 per day) BC

- 17X Revenue per Committed Day $137,000 (Ferry charged at $20,000 per BH for 171.5 BH’s = $3,430,000; over 20 days, this is $172,000 per day; for the entire project is this is an average of $141,000 per day) Net Benefit $70.3 M cost benefit 37.5 capital interest benefit

5.4 negative delta cost of BC

- 17X Net benefit to the project = $113.2 M

Conclusion

On a per

- well basis, the BC

- 17X supply chain is faster and less expensive than the L

- 100 supply chain. Assuming that it takes ten test wells to fully assess the field, using the BC

- 17X would enable Phillips to determine the potential value of the field five years faster for $113.2 million less than their present logistics plan.82 Disclaimer on Cover applies Letter of Agreement83 Disclaimer on Cover applies 

### 3.2.4 SAM Project Market Case Study Summary

While the BC

- 17X provides unique benefits in each case study, it is possible to make a few
genera lizations about the benefits of the BC

- 17X to the SAM Project Market. In all the case studies, the aircraft’s primary benefit to the project is speed. The BC

- 17X reduces project durations by replacing slower surface logistics systems, delivering equipmen t and materials closer to the project site, helping to maintain an uninterrupted construction schedule, and/or delivering more cargo per round

- trip flight than the present air logistics system.

The speed that the BC

- 17X brings to each project creates valu e in four tiers. In the highest tier are projects such as NPRA in which the use of the BC

- 17X is economically justified by the transportation

- cost savings alone. Since the BC

- 17X allows Phillips to drill more than one test well per drilling season, its p er

- well transportation costs are actually lower with the BC

- 17X than they are with the L

- 100. One of the eleven SAM Project Market Case Studies, about nine percent of the sample, is in this tier.

For the projects in the second tier, it is necessary to ta ke into account the operational cost savings from the reduced project duration for the BC

- 17X logistics system to create value. For example, shortening a project’s duration decreases its labor and consumables costs. The Sakhalin I, Sakhalin II, Mackenzie Delta, and Chad

- Cameroon case studies, 36 percent of all the SAM Project Market Case Studies, are in this tier, making it the largest tier of BC

- 17X project value.

For projects in the third tier, one has to include both operational cost savings and capit al interest savings to justify the use of the BC

- 17X. In addition to generating operational cost savings, reducing the project duration reduces the cost of interest payments on the project financing because the original investment can be recouped more qui ckly. Three of the eleven SAM Project Market Case Studies (the Wabu Gold Mine, the Kashagan Oil and Gas Field, and the In Salah Gas Field), about 27 percent of the sample group, are in this tier.

Projects that require operational cost savings, capital in terest savings, and accelerated product benefits for the BC

- 17X

- logistics system to be economically rewarding make up the fourth and final tier. Three case studies, 27 percent of the sample, fall into the fourth tier

— the Oman LNG Refinery, the Villano Pip eline, and the Tan Jung Power Plant.84 Disclaimer on Cover applies 

### 3.3 The BC

- 17X SAM Project Market Forecast

3.3.1 Forecast Methodology

The SAM Project Market Forecast is based on a data survey that relies on relationships between accumulated data from a global project market data base and key characteristics identified by the case studies. For example, the case studies identify specific transportation tasks the BC

- 17X could accomplish, the types and quantity of equipment the BC

- 17X could air deliver, the types of austere environme nts that recommend the BC

- 17X, and the overall percentage of the total project cost that is represented by the cost of using the BC

- 17X.

The forecasting process is divided into three phases. The first phase of the forecast identifies the quantity and cos t of large construction projects that could potentially profit from using the BC

17X. Whereas the case studies describe individual BC

- 17X

- eligible projects that typify the SAM, this data survey identifies all the BC

- 17X

- eligible SAM projects in the select ed project market database that are currently in operation or will be in operation during the next nine years. The number of these projects is determined by using the key characteristics of successful BC

17X SAM projects established by the case studies to filter a database of global projects.

The second phase of the forecasting process uses the data on BC

- 17X

- eligible projects from the first phase to determine the current value of the BC

- 17X SAM Project Market. Again using the case study data as a star ting point, the first market estimate describes the BC

- 17X SAM Project Market by calculating the percentage of the total cost of BC

- 17X

- eligible SAM projects that could potentially be spent on the BC

- 17X, both overall and by project category. Additionally , to confirm the primary market estimate, a complementary ocean

- borne cargo analysis uses a weight

- based assessment similar to the original Boeing analysis of ocean

- borne cargo. This updated ocean

- borne cargo study, however, uses the case studies as the m arket motivation in selecting the appropriate percentage of all BC

- 17X

- eligible cargo that has the potential to be moved by the aircraft.

Once the current BC

- 17X SAM Project Market was estimated, it was possible to forecast what that market might look lik e in the future. The third phase of the forecast uses the relationship between the world Gross Domestic Product (GDP) and the growth trend in worldwide large construction projects inferred from the survey of historical data to create a ten

- year forecast o f the BC

- 17X SAM Project Market.

Before moving on to the market forecast results, it is important to make some five additional points. First, the forecast methodology assumes that, in the absence of historical market data for the SAM Project Market, i t is reasonable to use a parametric analysis based on the key characteristics identified in the case studies. The justification for this assumption is that since the case study results validate the value of the BC

- 17X to the case study projects then simil ar projects exemplifying the key case study characteristics should produce similar results. Second, the forecast methodology also assumes that stakeholders in large construction projects typified by the SAM Project Market Case Studies will be motivated to pay a premium for the BC

- 17X because of the resulting financial benefits. This assumption is justified because traditional market forces apply to the SAM Project Market, and savings and accelerated product benefits are compelling market factors. Third, the forecast only describes the BC

- 17X SAM Project Market. The SAM Supply

- Chain Market, SAM Special Mission Market, and HOM described later in this85 Disclaimer on Cover applies report represent additional sources of BC

- 17X revenue that are not included in this analysis. Fourth, the forecast is intentionally conservative because the BC

- 17X case study prices are conservative estimates (see the explanation of the data analysis chart line item “ Total Cost of BC

- 17X to Project” in Section 3.2.1: Case Study Methodology) . Finally, the meth odology of each phase of the forecast will be described in greater detail as the forecast progresses.



### 3.3.2 Forecast Results

3.3.2.1 Phase One: Identifying the Quantity and Cost of BC

- 17X

- Eligible SAM Projects

The first step in identifying projects elig ible for BC

- 17X operations was to develop a list of projects that met the criteria for BC

- 17X eligible SAM projects. A search was conducted of possible data sources, and the Worldwide Projects, Inc. (WWP) database was chosen because it was the most comple te with regard to the quantity and characteristics of the projects described. While there are many sources of data on existing large construction projects, the WWP database is one of the few that is both comprehensive and provides historical and forward

- lo oking data. 41

41 Worldwide Projects, Inc., Database, The Calendar Year 2002 WWP database identifies new projects for which contracts have been announced or for which the total project cost is known and a prime contractor has been named. WWP generally only accumulates data on large projects, a preponderance of which are categorized as pipeline, oil and gas development, infrastructure, or mining projects. The infrastructure projects in the CY2002 database include water and sanitation projects, ground transportation projects, power

- generation pr ojects, and waterways and airport construction projects. Other large construction projects, such as computer chip manufacturing plants, petroleum product plants, and large steel and other metal manufacturing plants, are identified as well. As can be seen in the original case study prospects list in Appendix D, the initial data collection included many of these kinds of projects. In addition, the WWP database is particularly suitable for the purposes of this analysis because it only includes projects with a construction period of one year or longer and a total cost of at least $20 million. The vast majority of the projects in the CY2002 database have a total cost that exceeds $50 million.

Forecast Figure 1 describes the process used to develop a databa se of BC

- 17X

- eligible projects. The WWP database service lists the latest announced projects each month, although the amount of information available on each project varies. For the purposes of the forecast, data was collected on all the projects announc ed in CY2002. Projects that were identified as feasibility studies conducted by the US Trade and Development Agency were excluded, since they did not meet the criterion of being in a late stage of planning or under contract. While all the projects for wh ich data was collected were announced in CY2002, their start dates, completion dates, and projected durations vary. They all, however, will be in some stage of operation in the nine

- year period from 2003 to 2011.

http://www.worldwide

- projects.com , 1997

- 2002. Historical data from 1997 through 2000 was obtained in bulk; data for 2002 was provided by a monthly subscription to the database.86 Disclaimer on Cover applies Though many projects had the potential to be good candidates for BC

- 17X utilization, a set of criteria had to be established to identify projects that had specific, defensible reasons to benefit from the BC

- 17X. As previously noted, this was accomplished by looking at key charac teristics of the SAM Project Market case study projects

— specific attributes that were common to all the case study projects that enabled them to potentially profit from inserting the BC

- 17X into their logistics chains. The projects identified by the CY200 2 WWP database were screened twice. The screening criteria in each round were as follows:

Screening Criteria (1 st Filter): The following criteria were derived from the case studies and used to identify projects in the CY2002 database that could be consi dered suitable for the BC

17X:

1. The total cost of the project is equal to or greater than $100 million. Since the cost of the BC

- 17X is relatively substantial (compared to traditional surface logistics), a project with a total cost of less than $100 milli on probably could not economically justify BC

- 17X utilization.

2. The project has a short austere runway environment component. (See the definition of a short austere airfield in Section 2.1.) This could mean either that there is a short austere
runway ver y close to the project site or that it would be economically reasonable to prepare a short runway and onload/offload area at the project site. (See the Wabu Gold Mine case study in Section 3.2.3.3.)

3. The project is in a late stage of planning or under con tract.

4. A contractor or overall project manager has been identified. In large construction projects, work often begins once a prime contractor has been identified, even if a contract has yet to be signed.

5. The project requires the transportation of heav y and/or outsize equipment or cargo loads.

6. The duration of the project is one year or more. 1st Filter = $100M, Austere Air Field Environment, Duration> 1 Year, Some Outsize Cargo



### 45% 2003

- 2011 World Wide Projects Data Energy, Infrastructure, Mining

Infrastructure: Power Plants Only, Refined Selection Process, Eliminated Duplication Percentage Of Original Projects Used Final Percentage Of Original Projects Used 2d Filter



### 27% BC

- 17X Eligible Projects 491 Projects 289 Projects $702B $390B 

### BC

- 17X Eligible Project Identification

Forecast Figure 187 Disclaimer on Cover applies 7. The project must be in operation during the nine

- year period from 2003 to 2011, since it is expected that a BC

- 17X operation would not begin until 2008.

8. The proj ect has to be in one of the following project categories:

a. Energy projects i. Pipelines ii. Oil and gas development iii. Refineries and liquid natural gas production facilities b. Infrastructure projects i. Power generation ii. Transportation (roads and railroads) iii. Airports, seap orts, and waterways iv. Water supply and sanitation

c. Mining projects d. Other construction projects i. Factories ii. Petrochemical products plants iii. General construction (war damage and natural disaster recovery)

Of the approximately 1,080 projects in the CY2002 database , the first screening identified 471 potential BC

- 17X

- eligible projects. These projects have a total project cost of over $700 billion and represent 45 percent of the total number of projects in the CY2002 database. Though it was clear that all the proje cts selected by the first filter could probably use the BC

- 17X for some of their transportation needs, it was also implicit in the case studies that the opportunity should exist to schedule or plan for BC

- 17X air cargo service during the course of the proj ect. This aspect of the SAM Project Market Case Studies distinguishes them from one

- off cargo delivery air cargo opportunities. It was clear, therefore, that being able to schedule or plan for BC

- 17X utilization should be an additional selection criterio n. Furthermore, an examination of the historical WWP databases (1997

- 2001) revealed that there were a number of duplicate projects

— projects that had been announced in previous years. To refine the survey data and take these factors into account, a second screening was conducted.

Screening Criteria (2 nd Filter): To achieve a more representative database of BC

- 17X

- eligible projects, the following, more restrictive criteria were used as a second filter:

1. The project has not been announced in a previous ye ar (eliminating duplicate projects in the CY 2002 database).

2. The project planning process is mature enough to indicate that it will actually be executed, making it possible to schedule or plan to use BC

- 17X air cargo service.

3. The austere airfield environ ment component of the project is not uncertain.

While more restrictive project categories were not a criterion in the second screening, removing projects where the austere element was not as prominent or where the value of the austere element was more que stionable (criterion 3) significantly reduced the infrastructure category and eliminated the “other construction” category. After the second filtering, the BC

- 17X

- eligible projects were in the following categories:88 Disclaimer on Cover applies a. Energy projects i. Pipelines ii. Oil and gas development iii. Refineries and liquid natural gas production facilities b. Infrastructure projects i. Power generation

c. Mining projects

(Note that all the SAM Project Market Case Studies fall into one of these categories

— the SAM Supply

- Chain Market and Special Missi on Market Case Studies presented later in this report are not included in this forecast.)

The second screening reduced the number of BC

- 17X

- eligible projects to 27 percent of the original 1,084 projects in the CY2002 database, or 289 projects with a total project cost of $390 billion. Again, it is worth mentioning that these 289 projects are the subset of the original 1,084 projects that is most similar to the set of projects analyzed in the case studies and are thus most likely to benefit from BC

- 17X uti lization. The projects excluded by the filters, however, are by no means projects in which there would not be opportunities to use the BC

- 17X

— they are just not included in the SAM Project Market Forecast. It is entirely possible that these projects would , for example, benefit from being able to use one

- off BC

- 17X charters in the event of critical failures in their original logistics plans.

Energy: Pipelines Energy: Oil and Gas Development
Energy: Refineries/LNG Plants
Infrastructure: Power Generation Construction
Mining

Totals Africa

Pacific Rim

Middle East
Europe and Central Asia

Latin American and Caribbean

North America Region Category Dollars in Billions Dollars in Billions Number of Projects Number of Projects Total Number and Cost of Projects Worldwide

$28.6 48

$148.2

$29.2
$126.9

$54.0

$2.6 102

50 88

$17.0 2 $389.5 289 26 $102.5 $22.2 $186.0 $61.8

29 104 42

54 33 Forecast Figure 2

Energy: Pipelines Energy: Oil and Gas Development
Energy: Refineries/LNG Plants
Infrastructure: Power Generation Construction
Mining

Totals Africa

Pacific Rim

Middle East
Europe and Central Asia

Latin American and Caribbean

North America Region Category Dollars in Billions Dollars in Billions Number of Projects Number of Projects Total Number and Cost of Projects Worldwide

$28.6 48

$148.2

$29.2
$126.9

$54.0

$2.6 102

50 88

$17.0 2 $389.5 289 26 $102.5 $22.2 $186.0 $61.8

29 104 42

54 33 Forecast Figure 2

Forecast Figure 2 divides the 289 BC

- 17X

- eligible projects by region and category. The regional data is useful because it shows the worldwide project distribution and the total project cost in each region. The Pacific Rim region has by far the largest number of projects, but the Europe and Central Asia region is a close second in terms of project cost. Since thi s analysis uses total project cost to describe the BC

- 17X SAM market, the Europe and Central Asia region is nearly as rich as the Pacific Rim region in BC

- 17X SAM project opportunities. North America is represented by only two projects, the National Petro leum Reserve Alaska project and the Mackenzie Delta Gas Pipeline project (case studies discussed earlier in the report), because they were the only projects in the region in which an austere environment was a very significant factor.

Forecast Figure 3A g ives a different perspective on the filtered projects, showing how they are distributed among the five project categories (and subcategories). Forecast Figure 3B compares the percentage of the total cost of all the projects each category represents. As t he two figures89 Disclaimer on Cover applies illustrate, the project number percentage of each category is basically proportionate to its project cost percentage. The oil and gas development category varies the most between the two charts because its project costs are exceptionally la rge.

Number of Projects as a Percentage of the Total (289) by Category

15%

36%

10% 30% 9%
Energy: Pipelines

Energy: Oil and Gas Development Energy: Refinery

Infrastructure: Power Generation Mining

Forecast Figure 3A Percentage of Project Total Cost by Category

16%

48% 6% 26% 4%

Energy: Pipelines

Energy: Oil and Gas Development Energy: Refinery

Infrastructure: Power Generation Mining

Forecast Figure 3B

Percentage of Project Total Cost by Category

16%

48% 6% 26% 4%

Energy: Pipelines

Energy: Oil and Gas Development Energy: Refinery

Infrastructure: Power Generation Mining

Forecast Figure 3B
All the BC

- 17X

- eligible projects in Forecast Figure 2 were announced in 2002, but their start dates, completion dates, and project durations vary. They are, however, in some stage of operation during the nine

- year period 2003

– 2011. In order t o isolate the costs incurred during 2003, Forecast Figure 4 presents the data in an annualized form, evenly distributing the total cost of each of the filtered CY2002 projects over its years of operation and then totaling these costs across projects for ev ery year between 2003 and 2011. Although the peak year in Forecast Figure 4, the year in which the costs of the filtered projects announced in CY2002 are the largest, is 2003, this does not mean that the 2003 will be the year between 2003 and 2011 with th e costliest project work. Rather, it is the peak year of annualized operational costs for projects announced in CY2002. More projects that will occur during this same nine

- year period will be announced in the future, and another year may end up having th e highest total costs. In fact, the peak year, as well as the rest of the graph, can be expected to move to the right as time progresses (e.g., 2004 can be expected to be the peak year for projects announced in CY2004). Also, the sum of the yearly costs in Forecast Figure 4 is less than the sum of the project costs in Forecast Figure 2 because some of the projects are in some stage of operation during years outside the nine

- year window as well.

Total Project Cost BC

- 17X SAM Annualized

0 10 20 30 40 50 60 70 80 90 100

Billions 93.4 82.3 55.9 33.7 25.5 15.4 14.3 13.0 7.5 2003 2004 2005 2006 2007 2008 2009 2010 2011 $s Billions

As the current year advances the

“ peak year ” moves to the next year, since the WWP data base provides project data for the current year. Peak Year BC

- 17X Market

Forecast Figure 4 Total Project Cost BC

- 17X SAM Annualized

0 10 20 30 40 50 60 70 80 90 100

Billions 93.4 82.3 55.9 33.7 25.5 15.4 14.3 13.0 7.5 2003 2004 2005 2006 2007 2008 2009 2010 2011 $s Billions

As the current year advances the

“ peak year ” moves to the next year, since the WWP data base provides project data for the current year. Peak Year BC

- 17X Market 17X Market

Forecast Figure 490 Disclaimer on Cover applies The cost of BC

- 17X

- eligible SAM projects in 2003 is $93.4 billion, and the annualized cost values remain high through 2005. More specifically, the annualized project costs do not drop below fifty percent of the peak

- year value until 2006. It is important to stress yet again that this nine

- year graph (Forecast F igure 4) is only of the costs of projects announced in CY2002.

Forecast Figure 5 presents the same annualized cost data by project category. The project categories that extend over many years contain projects that are not planned to begin for several years, projects that will begin shortly but have extremely long durations, or some combination of the two. For example, power

- generation facilities tend to be planned years in advance and take an extended amount of time to construct, particularly in aust ere environments.

Forecast Figure 5: Annualized Cost Data by Project Category

2003 2004 2005 2006 2007 2008 2009 2010 2011
Energy
Pipelines $18.4B $ 16.9B $8.8B $3.8B $3.1B $1.3B $0.8B 0 0
Oil and Gas Development $37.4B $33.9B $25.3B $18.4B $1 3.7B $9.7B $9.6B $9.5B $5.9B

Refineries/LNG Production Facilities $7.5B $5.2B $3.0B $1.9B $1.8B 0 0 0 0

Infrastructure

Power Generation $24.0B $20.6B $16.8B $8.8B $6.2B $4.3B $3.9B $3.4B $1.6B Mining $6.2B $5.7B $2.1B $0.8B $0.7B $0.1 $0.1 $0.1 $0.1

3.3.2.2 Phase Two: Assessing the Current Value of the BC

- 17X SAM Project Market

In a market environment where no other market participants exist and the market is defined so narrowly that only one product can satisfy it, any re venue that can be attributed to that product or service defines the value of the market. Since no form of air transportation other than the BC

17X is currently capable of delivering heavy and/or outsize cargo loads to austere airfields, the BC

- 17X SAM Pro ject Market can be defined by the percentage of the total cost of BC

- 17X

eligible SAM projects that could potentially be spent on the BC

- 17X.

BC

- 17X Eligible Projects Total Costs

• Energy:

Pipelines Oil and Gas Dev Refineries

• Infrastructure:

Power Generation

• Mining Project

- Representative Case Studies Determine Percentage of Project Cost That Makes up BC

- 17X Project Market Cost to Project of BC

- 17X

Project Total Cost BC

- 17X SAM as % of Project Total Cost Data Derived From Case Studies 

### Identifying the BC

- 17X SAM Market

X 100 Eligible Projects Described by Projects Total Costs and Project Category

Forecast Figure 6

BC

- 17X Eligible Projects Total Costs

• Energy:

Pipelines Oil and Gas Dev Refineries

• Infrastructure:

Power Generation

• Mining Project

- Representative Case Studies Determine Percentage of Project Cost That Makes up BC

- 17X Project Market Cost to Project of BC

- 17X

Project Total Cost BC

- 17X SAM as % of Project Total Cost Data Derived From Case Studies 

### Identifying the BC

- 17X SAM Market

X 100 Eligible Projects Described by Projects Total Costs and Project Category

Forecast Figure 691 Disclaimer on Cover applies Forecast Figure 6 shows how the value of the BC

- 17X SAM Market was calculated. First, the BC

- 17X

- eligible pro jects identified in Phase One of the forecasting process were grouped by project category and project cost. The BC

- 17X SAM Project Market Case Studies were categorized in the same way. Within each project category, the SAM Project Market case study data was used to derive the category

- specific percentage of the case study project costs that could have been spent on the BC

- 17X. This percentage was calculated by dividing the line item “Total Cost of BC

- 17X to Project” in the data analysis chart, or the amo unt each case study might have spent on the BC

- 17X, by the line item “Project Cost” and multiplying by 100. Finally, all the category

- specific percentages were averaged and the mean percentage was multiplied by the total 2003 cost of BC

- 17X

- eligible proje cts identified in Phase One. Since the mean percentage is the percentage of the total cost of BC

- 17X

- eligible SAM projects that could potentially be spent on the BC

- 17X, the resulting dollar value represents the size of the BC

- 17X SAM Project Market for 2 003. It is statistically sound to use a case

- study

- derived percentage to analyze the larger market because the eleven case studies are 3.8 percent of the 289 filtered projects, a statistically significant percentage. Forecast Figure 7 illustrates these c alculations and concludes that the BC

- 17X SAM Project Market for 2003 has a value of at $2.36 billion.

Forecast Figure 7: BC

- 17X SAM Project Market Value

Case Studies By Category Case Study Project

Cost Case Study Total Cost of BC

- 17X to

Project BC

- 17X Market as Means of (SUM A) / (SUM B) BC

- 17X Market as a Mean of SUM of Column C Total 2003 Project

Cost BC

- 17X Market Dollar Value

A B C D E F

Oil and Gas Development

Sakhalin I $3.500B $0.076B

NPRA $0.250B $0.026B
Kashagan $9.350B $ 0.035B
In Salah, Algeria $2.400B $0.003B 0.90%
Pipeline Projects

Mackenzie Delta $2.320B $0.020B Villano Pipeline $0.350B $0.035B

Sakhalin II $1.850B $0.049B

Chad/Cameroon $3.700B $0.123B 2.79%

Refineries/LNG Plant Cons truction Qalhat, Oman $2.200B $0.031B 1.41%

Infrastructure: Power Generation Construction Tan Jung Jati B Power Plant $0.350B $0.009 2.43%

Mining

Wabu Gold Mine $0.190B $0.010B 5.11% 2.53% $93.41B $2.36B92 Disclaimer on Cover applies There are several be nefits to estimating the BC

- 17X SAM Project Market in this way. First, using the ratio of BC

- 17X expenditure to project cost establishes a mathematical tool for describing the market that is implicitly based on dollar values. Since the peak year BC

- 17X S AM Project Market size and ten

- year projection are also measured in dollars, the entire forecast development process uses the same units. Second, grouping projects by category is useful because projects in each category tend to move similar cargo, althoug h some outsize cargo, such as large earth

- moving machinery, is common to all three categories. Third, dividing the sum of Column A (Project Cost) by the sum of Column B (Total Cost of BC

- 17X to Project) within each category minimizes the impact of the ext remes in the individual case study data while still recognizing the differences between project categories. For example, even though the percentages for the In Salah, NPRA, and Villano projects would be relatively extreme if calculated individually (0.12% , 10.40%, and 10.00%, respectively), their categories are represented by mean percentages similar to the other category percentages and well within the range discussed in Section 3.2.2: SAM Project Market Background.

To determine the size of the commerc ial BC

- 17X fleet the $2.36 billion 2003 SAM Project Market would support, the market value is divided by the annual revenue per aircraft required to achieve profitability, as defined in the latest Boeing Business Case and Financial assessment. 42

BC

- 17X Market as a Mean Perce ntage of BC

- 17X Market (Column D in Table 3) Forecast Figure 8 concludes that, with an annual required revenue of $50 million per aircraft, a commercial fleet of 47 BC

- 17Xs could be supported by the 2003 BC

- 17X SAM Project Market.

Forecast Figure 8: Supportable 2003 Fleet Size

Total Project Cost BC

- 17X Market Revenue Required Per BC

- 17X

Annually Number of BC

17Xs Supported ($2.36B/$0.050B)

2.53% $93.41B $2.36B $0.050B 47

Companion Ocean

- Borne Cargo Analysis

The vast majority, if not all, of the BC

- 17X

- eligible SAM Project Market cargo is currently transported via ocean vessel at some point in its logistics chain. Therefore, to confirm the existence of the volume of cargo needed to support the 2003 BC

- 17X SAM Project Market size implied by the case study revenue, a companion ocean

- borne cargo analysis similar to the original Boeing analysis was conducted. While the Boeing analysis relied solely on the Port Import/Export Reporting System (PIERS) database (which only provides US do mestic port data) and the Department of Commerce worldwide PIERS multiplier to determine the amount of global ocean

- borne cargo that could potentially be moved via the BC

- 17X, this updated analysis references the Census Bureau Worldwide Export Database as well. More importantly, this analysis also uses the case study data as the market motivation for selecting the appropriate percentage of all BC

- 17X

- eligible cargo that have the potential to be moved by the aircraft. Additionally, the case study

- based app roach has the benefit of using actual case study data on round

- trip air distances and flight times that was not available for the earlier assessment.

42 The Boei ng Company, BC

- 17X Business Case Financial Report , April 2003. The required revenue of $50 million per aircraft is based on the latest BC

- 17X business case analysis produced by The Boeing Company’s Airlift and Tanker Division of Integrated Defense Systems . However, the required revenue is tied to a fixed internal rate of return and would therefore fluctuate with a reduction in direct or indirect costs.93 Disclaimer on Cover applies For the purposes of this analysis, three case studies were selected as representative of the BC

17X SAM P roject Market: Sakhalin I (Oil and Gas Development), Sakhalin II (Pipelines), and Wabu Gold Mine (Mining). This was appropriate because case studies in the same project category tend to use the same kinds of equipment. Refineries and power

- generation pro jects were not included because they use equipment that, for the most part, is also used by other categories of projects that fall outside the BC

- 17X SAM Project Market. The exclusion of refineries and power

- generation projects does not mean that these pr oject categories do not have BC

- 17X

- eligible ocean

- borne cargo; rather, it means that this particular study is very conservative.

The analysis began by sorting the types of equipment the BC

- 17X could have transported in each of the representative case s tudies by harmonized commodity code. Since harmonized commodity codes do not discriminate among equipment that is categorized as break

- bulk, roll

on/roll

- off, or containerized (ocean

- borne shipping categories), this approach has the additional benefit, co mpared to the previous Boeing study, of not excluding containerized cargo that may be carrying BC

- 17X eligible cargo characterized in the case studies. The harmonized commodity codes were then cross

- referenced against the PIERS and Census Bureau databases for the last two quarters of 2001 and first two quarters of 2002 (one year total) to determine the total amount of annual ocean

- borne cargo that could potentially be moved via the BC

- 17X. It should be noted, however, that some equipment is categorized by multiple harmonized commodity codes and could thus have been double

- counted. The results of this analysis are illustrated in Forecast Figure 9.

Annual Potential BC

- 17X Cargo (Currently Ocean Borne *) Available Based on Oil and Gas, Pipeline, and Mining Project Examples (Metric Tons)

455,000 681,000

369,000

0 100 200 300 400 500 600 700 800

Worldwide Oil & Gas Development (Sakhalin I) Worldwide Pipeline Construction (Sakhalin II) Worldwide Mining Projects ( Wabu Mine)

* Data derived from Port Import and Export Reports System (PIERS)

And the Department of Commerce, U.S. Census Data

Forecast Figure 9 Metric Tons of Equipment Common to Oil and Gas Development, Pipeline Construction and Mining (000s) Annual Potential BC

- 17X Cargo (Currently Ocean Borne *) Available Based on Oil and Gas, Pipeline, and Mining Project Examples (Metric Tons)

455,000 681,000

369,000

0 100 200 300 400 500 600 700 800

Worldwide Oil & Gas Development (Sakhalin I) Worldwide Pipeline Construction (Sakhalin II) Worldwide Mining Projects ( Wabu Mine)

* Data derived from Port Import and Export Reports System (PIERS)

And the Department of Commerce, U.S. Census Data

Forecast Figure 9 Metric Tons of Equipment Common to Oil and Gas Development, Pipeline Construction and Mining (000s)

The total annual ocean

- borne large construction equipment that could potentially be transported by BC

- 1 7X amounts to nearly six million metric tons. However, not all of that cargo would94 Disclaimer on Cover applies actually be available to a BC

- 17X operator. In most of the case studies, for example, only a small percentage of the total BC

- 17X eligible cargo is moved by air. Moving a ll the eligible cargo would be prohibitively expensive, and the goal of maintaining a smooth, uninterrupted construction schedule can usually be accomplished with a much lesser amount of air cargo. Consequently, to establish a more reasonable market expec tation, it was necessary to multiply the total amount of BC

- 17X

- eligible ocean

- borne equipment by a proxy for the actual market size, and, as in the primary market analysis, the selected proxy was the category

- specific percentage of the SAM Project Market case study project costs that could have been spent on the BC

- 17X (0.09 percent for oil and gas development projects, 2.71 percent for pipeline project, and 5.1 percent for mining projects). The resulting market

- derived estimate of the amount of

ocean

- bor ne SAM Project Market equipment that could be transported via BC

- 17X is slightly more than 1.5 million metric tons per year. (See Forecast Figure 9.)

This does not mean, necessarily, that the BC

- 17X would replace ocean shipment for this cargo, but that, once the cargo reached its destination, the BC

- 17X could be used to shuttle it to the austere project site. This assessment also does not suggest that, if available, the BC

- 17X would definitely transport all the existing BC

- 17X

- eligible ocean

- borne cargo

— it only suggests that it could. Additionally, this number does not include similar cargo that moves only via surface transportation and never travels on an ocean vessel, nor does it include possible cargo from refineries and power

- generation plants.

Boe ing’s original conclusion was that there are approximately 240 thousand metric tons of annual BC

- 17X

- eligible cargo, which would support around 3,800 one

- way BC

- 17X missions. The larger number in this assessment is the result of including cargo specifical ly associated with the SAM Project Market and not limiting the eligible cargo to just HOM equipment. While the SAM Project Market does have an outsized component, this approach does not exclude items such as transmission and drilling pipe which, individua lly, are not outsize.

Using logic similar to that of the original Boeing analysis but incorporating SAM Project Market

case

- study derived flight distances and times, the updated conclusion (that there are 1.5 million metric tons of annual BC

- 17X

- eligibl e cargo) would provide business for a commercial fleet of about 48 BC

- 17Xs. 43

3.3.2.3 Phase Three: Calculating a Ten

- year BC

- 17X SAM Project Market Forecast This fleet estimate is not in addition to the revenue

- based estimate

— it is a rough, complementary weight

- based estimate used to check the conclusions of the primary

revenue

- based estimate by using a different methodology and comparing the results.

Having calculated the 2003 BC

- 17X SAM Project Market, the next step was to forecast the future of this market. The methodology for this phase of the forecast, illustrated in Forecast Figure 10, consists of two separate approaches, both based on the idea that the BC

- 17X SAM Project Market will follow the same trends as the Project Market in general. The fi rst approach is an analysis of the historical data in the WWP database that establishes a historical growth rate for the Project Market and assumes that the BC

- 17X SAM Project Market growth rate will follow the same trends. The second approach, which is s omewhat more conservative and refined, forecasts the BC

- 17X SAM Project Market along with world GDP.

43 This calculation is based on the case study

- derived assumption that each round

- trip BC

- 17X flight take s an average of six block hours.95 Disclaimer on Cover applies Historical Data Survey

One way to predict the future performance of a market is to look at its past performance. Since the BC

- 17X SAM Project Market does not yet exist, this can only be done by looking at the past performance of a similar market, and it is reasonable to assume that the trends in the BC

- 17X SAM Project Market will be similar to the trends in the more general Project Market.

The past performance of the Project Market was measured by surveying historical data from the WWP database. The years 1997 to 2002 were selected as the period of analysis because those were the years with the most complete available data. 44 Data prior to 1997 was not available. The project data was grouped by month; each data point in Forecast Figure 11 represents the total cost of all the projects announced in a single month. For example, the total cost of all the projects reported for the month of May 1998 was slightly over $30 billion.

Forecast Figure 11 also shows the result of a simple linear regression

— indicating that the Project Market growth rate over the six

- year period 1997

– 2002 was approximately six percent. Many factors have contributed to this grow th rate, including the opening of the Confederation of Independent States (CIS) and the Russian Federation (the former Soviet Union) to global commerce and the developing world’s increasing need to build its infrastructure and access its natural resources. The 2003 issue of Global

44 Although the 1997

– 2001 WWP dataset was very comprehensive, some data points were missing and a mathematical regression was preformed to approximate them. BC

- 17X

SAM Market BC

- 17X SAM Market

- Based Forecast Analysis

1997

- 2001 Worldwide

Projects Historical

Trend Analysis 1997

- 2001 Historical Project Trend Data Comparison with World GDP Forecast Worldwide Cargo Forecast Data Analysis From Boeing Forecast Boeing World Wide Cargo Forecast Comparison with World GDP

BC

- 17X 10 Year Forecast as a Function of World GDP 10 Year Trend 

### BC

- 17X SAM 10 Year Forecast

Forecast Figure 10

Trend Analysis of Total Project Costs by Month (Year 2002 Dollars)

$0 $10 $20 $30 $40 $50 $60 $70 $80 $90 $100

1997 1998 1999 2000 2001 $ Billions

2002

Previous Years Worldwide Projects, Inc. Data Approximately 6% Annual Increase Trend Analysis of Total Project Costs by Month (Year 2002 Dollars)

$0 $10 $20 $30 $40 $50 $60 $70 $80 $90 $100

1997 1998 1999 2000 2001 $ Billions

2002

Previous Years Worldwide Projects, Inc. Data Approximately 6% Annual Increase

Forecast Figure 1196 Disclaimer on Cover applies Economic Prospects and the Developing Countries, a publication by The International Bank for Reconstruction and Development of the World Bank, indicates that cross

- border trade and direct foreign investment in developing countrie s have greatly expanded over the past three decades. 45

45 The World Bank, Global Economic Prospects and the Developing Co untries, 2003, p. xiv. Since a significant number of large construction projects are in developing regions of the world, this has created, and will continue to create, many new opportunities for growth in the Project Market.

Gross Domestic Product

- Based Forecast

In addition to providing insight into the Project Market’s past growth, the historical data survey also provided a way to compare the Project Market’s year

- to

- year performance with variations in global GDP and thus determine whether GDP has been a reliable indicator of the market’s past performance.

Prior to analyzing the data, it is important to understand why fluctuations in the Project Market, and thus in the BC

- 17X SAM Project Market, might follow global GDP. Worldwide GDP is a measure of the total output of goods and services produced by labor and capital in the global economy, large construction projects included. Since the aggregate Project Market represents only one segment of the goods and services used to calculate global GDP, the two might not move together exactly, but it is reasonable to assume that they will move together generally. This argument is especially robust because of the extremely large scale and cost of project work. GDP is also consid ered to be a measure of the general health of the economy, and if the economy is doing well generally, it is logical that the Project Market will also be doing well (and vice versa). This is particularly true for the SAM Project Market because the more ch allenging, more austere projects are more likely to be undertaken when the economy is generally healthy.

Tying global GDP to the air cargo business (the approach Boeing used in its World Air Cargo Forecast 2002

- 2003 ) is a generally accepted methodology for predicting growth in air cargo markets. Though Boeing’s forecast has decades of data collection and market experience behind it and the BC

- 17X SAM Project Market is just beginning to be defined, there are enough similarities between the air cargo ser vice the BC

- 17X could provide and the air cargo market in general to justify a similar forecasting methodology. Consequently, if world GDP is a reasonably good predictor of the future health of the general air cargo market (as Boeing’s forecast concludes) , and if trends in the Project Market have historically followed trends in global GDP (as the analysis below will reveal), it follows that the future of the BC

- 17X SAM Project Market can be linked with world GDP as well.97 Disclaimer on Cover applies Annual Variation in Total Project Costs Compared to World GDP ( Project Costs in Year 2002 Dollars)

$0 $10 $20 $30 $40 $50 $60 $70 $80 $90 $100

1997 1998 1999 2000 2001 $ Billions

2002

Previous Years Worldwide Projects, Inc. Data - 1

- 2

- 3 0 4 % Annual Real GDP Change*

3

2
1 Annual Total Project Costs

Forecast Figure 12 GDP Data from Boeing World Air Cargo Forecast 2002 / 2003 and The World Bank

As expected, when the Project Market’s historical variations over the period 1997

- 2001 were compared with the fluctuations in GDP during the same period, it was found that the highs and lows generally corresponded. (See Forecast Figure 12.) The declines in 1998 and 1999 reflect a do wnturn in the Asian economy. Since a large amount of project business is in the Pacific Rim region, the project market is sensitive to its economic health. The reduced world GDP in 2001 can be in part attributed to the terrorist attacks of that year beca use the increased sense of risk and lack of consumer confidence that had begun to be felt before the attacks were exacerbated by the events of September 11. 46

With the general relationship between world GDP and the BC

- 17X SAM Proj ect Market identified, the final step in the forecast was to research the appropriate growth rate. Boeing’s World Air Cargo Forecast 2002

- 2003 is projected through 2021 and forecasts that global GDP will increase at a rate of 2.9 percent annually. Although, clearly, there is no precise correlation between the highs and lows of the Project Mark et and the world GDP, using GDP, combined with predictions of modest growth in the world economy, to give a sense of direction for the BC

- 17X SAM Project Market is not unreasonable.

47 Duri ng that same period, Boeing anticipates that Asia will be the fastest

- growing region with an annual regional GDP growth rate of 3.2 percent. The World Bank GDP forecast is similar, projecting global GDP to increase by 2.5 percent in 2003 and 3.1 percent i n 2004. 48 For developing nations (excluding China and India), the World Bank forecasts GDP growth of 4.0 percent in 2003 and 4.9 percent in 2004. 49

46 The World Bank, The Global Economic Prospects , 2003, p.16. As a reasonable compromise, our forecast used Boeing’s estimate of 2.9 percent annual GDP growth to predict the long

- term growth of the BC

- 17X SAM Project Market

.

47 The Boeing Company, World Air Cargo Forecast 2002

- 2003

,

http://www.boeing.com/commercial/cargo/flash.htm l , 2002, p.12.
48 The World Bank, The Global Economic Prospects , 2003, p.3.
49 Ibid.98 Disclaimer on Cover applies Forecast Figure 13 illustrates what an annual BC

- 17X SAM Project Market growth rate of 2.9 percent means in terms of the size of this market over the next ten years. Phase Two of the forecast estab lished that the 2003 BC

- 17X SAM Project Market has a value of approximately $2.36 billion and would support a fleet of 47 aircraft. (See Forecast Figures 7 and 8.) If the BC

17X SAM Project Market grows at 2.9 percent annually, by 2012 it will have a val ue of $3.05 billion and will support a fleet of about 61 BC

- 17Xs.

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0

$ Billions 2.36 2.43 2.50 2.57 2.65 2.72 2.80 2.88 2.97 3.05 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 $s Billions

2.9% Increase in GDP 30% BC

- 17X in BC

- 17X Market Growth BC

- 17X SAM Project Market Ten

- Year Forecast Trend

Supports 47 BC

- 17Xs* Supports Fleet Size of 61 BC

- 17Xs*

* Required annual revenue of $0.050B BC

- 17X Market Entry with 10 Aircraft Phased In From 2008 to 2011

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0

$ Billions 2.36 2.43 2.50 2.57 2.65 2.72 2.80 2.88 2.97 3.05 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 $s Billions

2.9% Increase in GDP 30% BC

- 17X in BC

- 17X Market Growth BC

- 17X SAM Project Market Ten

- Year Forecast Trend

Supports 47 BC

- 17Xs* Supports Fleet Size of 61 BC

- 17Xs*

* Required annual revenue of $0.050B BC

- 17X Market Entry with 10 Aircraft Phased In From 2008 to 2011

Forecast Figure 13

The market for the BC

- 17X described here will not, of course, be immediately serviceable by a potential BC

- 17X operator because Boeing, due to various timing issues related to the CAMA A initiative, will not be able to deliver the first BC

- 17X until 2008 and the tenth aircraft will not be complete until the end of 2011. 50

50 The Boeing Company, Airlift and Tanker Division, Business Development, Fleet Plan, “Financing Assumptions,” 4 April 2003, p. 9. By that time, the market can be expected to be large enough to support more than seventy aircraft. With too few airc raft to meet the demands of the large potential market, the initial BC

- 17X operator will have the option of expanding its fleet or leaving an opening for competing BC

- 17X operator.

# Risk Reduction Report on the Short Austere Market

Section 4:

Addition al Sources of Revenue100 Disclaimer on Cover applies 

## 4. Additional Sources of Revenue

Though the BC

- 17X SAM Project Market Forecast is the most important piece of the BC

- 17X market analysis, it is not the only piece. As indicated in Chart 3.1

- 4 (which was previously presented in Se ction 3.1: Overall Methodology), the total BC

- 17X market also includes the SAM Supply

- Chain Market, the Special Mission Market, and the HOM. In this study, the SAM Supply

- Chain Projects and Special Missions are described by additional case studies and
rep resent additional sources of revenue for the BC

- 17X, but, due to the differing nature of their value calculations and the fact that they are not as exclusive to the BC

- 17X as the SAM Project Market, they have not yet assigned a specific numeric value in th e overall market analysis. Since the HOM business was previously analyzed in the November 2000 CAMAA Report, the results are presented but described only briefly.

Chart 3.1

- 4



### 4.1 SAM Supply

- Chain Market

As noted in the initial definitions, the SAM S upply

- Chain Market is the market for transporting heavy and/or outsize equipment and material loads to austere airfields as part of an ongoing logistics supply chain.

The following two examples of potential BC

- 17X Supply

- Chain projects were selected in the same way as the SAM Project Market Case Studies. (See Section 3.2.1: Case Study Methodology.) They were, however, analyzed differently due to the differing nature of their value calculations. Each SAM Supply

- Chain case study contains a description o f the data source company, a description of the mission, an outline of the present logistics, an outline of a proposed BC

- 17X logistics strategy, a conclusion, and a letter of agreement from the data source
company. 51

51 Some of the case studies do not include letters of agreement either because of the amount of time needed to clear such a document through the legal departments of the data source companies or organizations or because the case study analysis was conducted before it was decided to request letters of agreement. No attempt has been made in this secti on to quantify the SAM Supply

- Chain Market 

# BC

- 17X Extended Market

Heavy Outsize Market Short Austere Market

Project Market Supply Chain Special Mission One

- Off Charter

Oil and Gas Pipelines Refineries Power Plants Mining Raytheon Polar Services Sodium Cyanide

Distribution Aerial Firefighting

Spent Nuclear SAM Market

Forecast Based On Project Market

Sudanese Aid

Fuel Kabul Embassy101 Disclaimer on Cover applies in the same way as the SAM Project Market. The goal is simply to describe the market by showing how the BC

- 17X could be used in specific supply

- chain projects. As with the SAM Project Market Case Studies, these case studies are just summaries of the complete analyses, which can be found in Appendix K.


### 4.1.1 Raytheon Polar Services’ Transport Service to Antarctica

Data Source Company

Raytheon Polar Services, headquartered in Denver, is a division of Raytheon Te chnical Services, which is itself a division of The Raytheon Company, a $20

- billion organization with over 100,000 employees. Specifically formed to address the logistics needs of the National Science Foundation’s Office of Polar Programs, Raytheon Polar Services is responsible for all passenger and cargo movements between the United States and Antarctica.

Mission

Raytheon Polar Services has a ten

- year contract with the US government to provide all logistical support to Antarctica. They are also respons ible for science, operations, and maintenance services at three Antarctic locations

— McMurdo Station, Amundsen

- Scott South Pole Station, and Palmer Station.

The southbound Antarctic shipping season lasts roughly five months, beginning in the first half

o f October and ending in the first half of March. All southbound shipments are initially consolidated at Port Huemene, California.

Present Logistics

Raytheon Polar Service’s total transportation budget of approximately $15 million per year is divided between ocean and air movements. For ocean movements, they arrange one annual containership (500 TEU) voyage from Port Huemene to McMurdo Sound. The roundtrip voyage takes 73 days, and, because there is less than one month from the time the vessel arrives in McMurdo Sound to the close date for the shipping season, most of the cargo is orders for the following season. The

ocean ves sel transported 14.9 million pounds southbound during the 2000/2001 shipping season and 11.7 million pounds southbound during the 2001/2002 shipping season.

Since there is currently no commercial air cargo service to Antarctica, air service from Christchu rch, New Zealand to McMurdo Sound has been provided primarily by the USAF. (The cargo is consolidated at Port Huemene and moved to Christchurch either by regular A Raytheon study ship navigates through ice flows on the way from Christchurch, New Zealand to McMu rdo Sound, Antarctica.102 Disclaimer on Cover applies commercial air service or commercial ocean service.) In general, Raytheon Polar Services
req uires about one hundred sorties per shipping season, approximately broken down as follows: thirty percent C

- 141, thirty percent L

- 100, thirty percent LC

- 100, and ten percent C

- 17. However, Raytheon Polar Services’ ability to schedule and utilize the C

- 17 has been limited by the high demand for the aircraft within the USAF. In total, aircraft moved 2.6 million pounds southbound and 1.3 million pounds northbound during the 2000/2001 shipping season and 3.0 million pounds southbound and 1.4 million pounds no rthbound during the 2001/2002 shipping season. In the 2002/2003 shipping season, aircraft carried 2,675 passengers southbound and 3,001 passengers northbound.

Proposed BC

- 17X Logistics

Each roundtrip BC

- 17X flight from Christchurch to McMurdo Sound would take approximately 11 block hours.

If BC

- 17X commercial service were available, the BC

- 17X would rep lace the USAF C

- 17 on flights from Christchurch to McMurdo Sound. For the past few years, the USAF has been providing five to seven C

- 17 flights per season, generally during the early part of the shipping season in October.

In addition, since the last of the USAF’s C

- 141 fleet will be officially retired in 2006, the BC

- 17X could also carry the balance of cargo currently transported via C

- 141. During the 2002/2003 shipping season, the 39 C

- 141 flights moved approximately 700,000 pounds of southbound cargo (about 47 percent of the total southbound cargo). This same amount of cargo could be transported on only five BC

- 17X flights. The C

- 141 also moves about 2,000 passengers each season (about 65 percent of the total passengers), but, the BC

- 17X has not yet been approved for passenger transport.

There is also a possibility that some of the cargo currently moving via ocean would be shifted to the BC

- 17X. After a C

- 17 makes an ice landing at McMurdo Sound, preparations are made to drive a huge D6 Caterpillar track vehicle off the rear of the aircraft.103 Disclaimer on Cover applies Conclusion / Letter of Agreement104 Disclaimer on Cover applies 

### 4.1.2 Worldwide Sodium Cyanide Distribution

Data Source Company

Number seventy on the Fortune 500, DuPont is a global science and technology company specializing in high

performance materials, specialty chemicals, pharmaceuticals, and biotechnology. With operations in more than seventy countries and about 79,000
emp loyees, DuPont earned $24 billion in revenues in 2002. DuPont Chemical Solutions is a segment of DuPont Safety and Protection, the organizational division focusing on specialty and industrial chemicals, nonwovens, aramids, and solid surfaces.

Mission

DuPont Chemical Solutions is the world’s largest producer of sodium cyanide, a chemical that can leach gold from unrefined ore. Traditionally, gold ore must be shipped from the mine to a processing plant to be purified, but the sodium

- cyanide leaching process allows the ore to be purified at the mine site.

The business’s customers are mining companies with gold mines thro ughout the world. Most of the mining sites (where the leaching process takes place) are in remote area with very limited access. They are generally not near large cities, seaports, or major airports.

Getting the sodium cyanide to the remote mine sites p resents a logistics challenge for DuPont. The problem is further complicated by the hazardous nature of the product. Furthermore, because of the worldwide threat of terrorism, the security of this product has become a high priority. The present logistic s supply chain puts the product at risk because it involves many stages of transport and multiple transfers between different modes of transportation.

Present Logistics

The sodium cyanide produced for the mining companies is in the form of pellet briquet tes that are shipped in special sealed containers called FLO

- BINS. The current distribution strategy is to move the product in twenty

- foot ocean containers by truck and rail from the manufacturing plant in Memphis, TN to seaports in New Orleans, Charlesto n, Los Angeles, Oakland, and Seattle. The product then travels in via ocean to various destination seaports and via rail, truck, or barge to the austere inland mine sites.

If the price of gold increases steeply in a short period of time, the demand for sodium cyanide increases rapidly as well. In the past, such sudden increases in demand have required DuPont to transport the product to the mine sites via air. This plant in Kwinana, Australia is designed to convert liquid sodium cyanide to a solid form for distribution to remote

consumers.105 Disclaimer on Cover applies The product is sold FOB Memphis, and, even though DuPont technically pays the transportatio n companies, it rebills all the transportation expenses (including security and the costs of the nonreturnable FLO

- BINS and ocean containers) to the purchaser.

DuPont estimates that it ships approximately 30 kilo tons (66.2 million pounds) of sodium cyani de in 1,209 twenty

- foot containers from its plant each year, or about five containers per day. The volume of sodium cyanide shipped to each mine ranges from 500 tons (1.1 million pounds or twenty containers) to 10,000 tons (22.0 million pounds or 480 cont ainers) per year.

Proposed BC

- 17X Logistics

With a maximum payload of 170,000 pounds, the BC

- 17X could carry three twenty

- foot containers and five loose FLO

- BINS of sodium cyanide per trip. This equates to a net sodium cyanide payload of 143,299 pounds per BC

- 17X flight. Since the present IATA regulations for restricted articles on cargo aircraft only allow ten pounds of hazardous material per container (but an unlimited amount per aircraft), a BC

- 17X operator would have to file an exemption to move the twenty

- foot containers and FLO

- BINS. It would probably be possible to obtain the exemption because of the unlikelihood that the sealed containers would leak. When an entire twenty

- foot container fell off a ship at sea, there were no reports of contamina tion.

As a representative example of moving one BC

- 17X payload’s worth of sodium cyanide from Memphis to an inland Uzbekistan mine site, a model was created in which the BC

- 17X would have replaced just the portion of the logistics chain from the destinati on seaport (in this case, Naples) to the mine site. For an additional $1.72 per pound of sodium cyanide ($2.22 per pound versus $0.50 per pound), the combination ocean/BC

- 17X logistics system could have delivered the 143,299 pounds of sodium cyanide to th e mine site 49 days faster than the present logistics system.

The BC

- 17X could also be incorporated into a more comprehensive gold mine supply plan. For example, in the Wabu Gold Mine case study (Section 3.2.3.3), the BC

- 17X logistics system reduces the total construction time by approximately two years, generating accelerated revenue for the mining company and allowing it to take better advantage of the gold price cycle. It is possible that the BC

- 17X could also be used throughout the life of the mine t o bring in sodium cyanide and other consumables and to bring out processed gold and equipment in need to repairs.

Conclusion

Despite the present logistics system’s high cost of security, it is still vulnerable to terrorist activity because it involves many stages of transport and requires multiple transfers between different modes of transportation. By reducing the total transit time and eliminating many of the transfers, the combination ocean/BC

- 17X logistics system would result in faster, more secure delivery of the sodium cyanide to the mine sites. This in turn would allow the gold

- mining companies to generate revenue faster and react more quickly to the changing price of gold (particularly in the case of a sharp, rapid price increase). In addition , while shipping the sodium cyanide via ocean may still be the least costly method of transporting this low

- priced commodity, the last leg of transit from the seaport into the austere mine site may be best accomplished via air, and the BC

- 17X is the only a ircraft that can fly such heavy loads into such austere airstrips.106 Disclaimer on Cover applies Letter of Agreement

While the DuPont representative concludes that a BC

- 17X operation would be too costly for DuPont to operate independently, he does support the idea of being able to o ffer a high

- security option to clients and the possibility of partnering with a mining company. Moreover, he strongly supports bringing the BC

- 17X to the commercial marketplace.107 Disclaimer on Cover applies 

### 4.2 Special Mission Market

The next subcategory of the BC

- 17X market is the Special Mission Market, the market for transporting heavy and/or outsize equipment and material loads that emerges as a result of humanitarian concerns, environmental regulations, national security needs, or international law. Economic benefits, whil e they may exist, are secondary rationales for using the BC

- 17X. The missions in this market may or may not include an austere airfield component.

The methodology of the following Special Mission Market examples is the same as that of the SAM Supply

- Chai n Market examples. (See Section 4.1: SAM Supply

- Chain Market.) The format of the Special Mission Market Case Studies is similar to that of the SAM Supply

- Chain examples. Again, we are not trying to quantify the SAM Special Mission Market in the same
way as we did the SAM Project Market because the primary value of the BC

- 17X in these cases is not monetary. We are simply presenting some examples of the kinds of special missions for which the BC

- 17X would be appropriate. The full analyses for most of the following case studies can be found in Appendix L.


### 4.2.1 Aerial Firefighting

Data Source Organizations

The United States Forest Service (USFS) and the Bureau of Land Management (BLS) are the primary US government fire

- suppression agencies, and they receive the bulk of the federal wildfire suppression and preparedness budget

— $1.5 billion in 2003. They also contribute the majority of the equipment, personnel, and technologies used to fight large fires. The Federal Emergency Management Agency (FEMA) helps to manage and coordinate firefighting activities as well.

Mission

Since 1991, an average of 101,000 wildfires has destroyed over 4 million acres of wildland and property in the United States each year. Although the number of wildfires per year has decreased, the severity of the fires has increased, thanks to a combination of more frequent droughts, a buildup of fuels

, and the growth of the Wildland Urban Interface (WUI) over the past ten years. The WUI, defined as the border between rural and residential areas, has grown over the past several years and exposed more wildlife, people, and property to risk from wildfire s. If wildfires continue to become more severe, the losses per acre, the number of human and animal casualties, and the costs of putting out fires are likely to increase. During the last ten years, the number of wildfires in the United States has decreased, but their severity has increased significantly.108 Disclaimer on Cover applies Graph 4.2.1

The two most devastating fire seasons in the past 50 years were in 2000, when over 8 million acres were lost, and in 2002, when 7 million acres were destroyed. The losses resulting from those fires are estimated to have been in excess of $2.7 billion per year. On a per

- acre basis, North Americ a leads the world in value lost from wildfires.

Aerial suppression of wildfires is largely carried out by the airtanker 52

In the beginning of 2002 there were 41 aircraft deployed under contract with either the USFS or the BLM at airtanker bases in the United States. The average age of the fleet was 45 years, and the average airtank er capacity was 2,570 gallons of retardant. Two fatal accidents in the summer of 2002 (involving an L

- 100A and a PB4Y) reduced the number to 39. Since 1992, there have been seven airtanker accidents resulting in 15 deaths, fleet of the US Forest Service, which supports ground efforts to contain wildfires. By dropping fire retardant to create fire lines , the planes help prevent the fires from spreading. However, the growing severity of many of the fires is increasing the average number of annual airtanker sorties. With the current fleet’s tack capacity limitations, direct operating costs are increasing as well.

Present Logistics

53 and over the past fifteen year s, the airtanker fleet has averaged 14.32 accidents per 100,000 flight hours. 54

In response to these accidents, the USFS permanently grounded 9 contract airtankers, five L

100As and four PB4Y

- 2s, at a cost of $1.2 million. The USFS Office of Fire and Aviation Management also formed a Blue Ribbon Panel to review the agency’s aerial program. The

52 Airtankers are fixed

- wing, twin

- turboprop aircraft that have a retardant capacity of between 2,000 and 3,000 gallons.
53 “Forest Service Planes Under Scrutiny,” The Associated Press , 7 October 2002.
54 US Department of Agriculture, USDA Aviat ion Safety Summary , 2001.10 9 Disclaimer on Cover applies 109 Panel’s report, published in December 2002, concluded that the current aerial firefighting fleet is “unsustainable,” 55 as “all large air tankers are experiencing rapid structural aging accentuated by routine overloading.” 56 According to K. Dale Roberts, an FAA Structures Designated Engineering Representative, “Currently, no engineering basis exists to assume the existing [large airtanker] fleet is safe to fly toda y, much less in years to come.” 57

The current USFS airtanker fleet cannot continu e to operate in its present state, and BC

- 17Xs, fitted with appropriate tanking systems, would be more than adequate replacements. The BC

17X can carry approximately 17,000 gallons of retardant, far more than the current fleet average of 2,570, and travel at average speeds to the drop zone of between 250 and 450 knots, depending on the altitude and the distance to the fire. Benchmarked against the L

- 100, P

- 3, IL

- 76, AN

124, and MD

- 11F using key fire

- suppression criteria, According to the Blue Ribbon Panel’s report, the only way to salvage the present fleet would be to conduct a comprehensive inspection and repair program. However, the inspection program would cost between $400,000 and $600,000 per aircraft type, the repairs would cost an unknown sum per aircraft, and there would be no guarantee that the fleet could continue to operate.

Proposed BC

- 17X Logistics

58 the BC

- 17X outperformed all other platforms. Furthermore, a simulator session conducted in June 2002 to test the BC

- 17X’s performance while dropping retardant given various mission profiles and types of terrain produced very positive results.

The BC

- 17X was operationally modeled to
sup port firefighting for a 61

- day period in July and August, the peak of the fire season in the United States when 57 percent of all fires occur. The estimated aircraft utilization was one BC

- 17X at three to four block hours per day, and the financial viabil ity portion of the model indicated that, with reasonable cost and pricing inputs, such an operation could be both immediately profitable and economically sustained in the long run (with an internal rate of return of 47 percent by the seventh year of operat ions).

Conclusion

Recent airtanker crashes have brought into question the ability of the current USAF aerial firefighting fleet to engage in safe, effective fire suppression, and the Blue Ribbon Panel’s report has declared that “all large airtankers ar e now at risk of catastrophic in

- flight structural failure.” 59

55 Blue Ribbon Panel, Federal Aerial Firefighting: Assessing Safety and Effectiveness: Blue Ribbon Panel Report to the Chief, USDA Forest Service and Director, USDI Bureau of Land Management, December 2002, p.11.
56 Ibid, p. 15.
57 I bid.
58 The criteria were each aircraft’s payload, speed, attack radius, drop performance, and required runway length.
59 Blue Ribbon Panel, Federal Aerial Firefighting: Assessing Safety and Effectiveness: Blue Ribbon Panel Report to the Chief, USDA Forest Service and Director, USDI Bureau of Land Management, December 2002, p.16. The BC

- 17X would provide a reliable alternative to the USFS’s aging airtanker fleet. A Blue Ribbon Panel was assigned to review U.S. Forest Service’s curre nt aerial program. The panel’s report indicated that the current aerial firefighting fleet is unsustainable because it is rapidly aging and experiencing structural damage accentuated by routine overloading.110 Disclaimer on Cover applies The cost of the aircraft would be approximately $3.16 per gallon of retardant discharged, a slight premiu m over existing platforms ($2.28 for the L

- 100). However, the value of land saved from wildfires using BC

- 17Xs as substitutes for the current fleet is estimated to be between $50 million and $100 million annually, depending on the utilization strategy. T hese land savings, along with the safety and reliability of the aircraft and the several million dollars in cost savings from not having to ground and repair the present fleet, provide ample reason for converting the unsustainable USFS airtanker fleet to B C

- 17Xs.111 Disclaimer on Cover applies 

### 4.2.2 Spent Nuclear Fuel Transportation

Mission

The US nuclear electric power industry has built up the world’s largest inventory of spent nuclear fuel. Currently, there are approximately 43,000 metric tons of spent nuclear fuel being stored at approximately 73 facilities in 33 states, and this quantity is growing by about 2,000 metric tons per year.

In 1982, Congress passed the Nuclear Waste Policy Act, which, along with it s subsequent amendments, mandated the development of an interim storage facility, a permanent storage repository, and a transportation system that safely links the nuclear power plants to the storage facilities. To date, over $18 billion in fees have been collected from the nuclear power industry to fund these developments (approximately $8 billion of which has been spent).

Approximately 85 percent of the US’s spent nuclear fuel is stored in facilities east of the Mississippi River. In order increase the geographic dispersion of the hazardous material, a permanent federal spent

- fuel repository is proposed for Yucca Mountain in Nevada. The US Department of Transportation has been working with the Nuclear Regulatory Commission to ensure the qualified, secu re, and cost

- effective transportation of radioactive material to Yucca Mountain.

Present Logistics

On March 27, 2003, the Nuclear Regulatory Commission’s Advisory Committee on Nuclear Waste met to discuss Yucca Mountain transportation options. The commi ttee members’ primary concerns were safety and cost, and they analyzed both trucking and train transportation in terms of each factor.

According to the committee, trucking would be the most cost

- effective method of transporting the nuclear fuel. However, they were concerned about both the number of trucks required to move the large volume of material and the fact that the trucks would have to traverse heavily populated areas on the national highway system. Trains would be more expensive than trucks (beca use the trains would have to be dedicated only to spent nuclear fuel and could not carry mixed loads), and, while they would still have to move through densely populated areas on the existing national rail system, the percentage of the population that migh t be at risk of exposure to radiation in the event of an accident was somewhat smaller. The committee therefore found trains to be the
The Nuclear Regulat ory Commission is currently examining the safety and cost of different methods of transporting hazardous spent nuclear fuel to the proposed repository at Yucca Mountain in Nevada.112 Disclaimer on Cover applies more desirable mode of transportation for spent nuclear fuel.

Proposed BC

- 17X Logistics

BC

- 17X air transportation offers several possible advantages over surface transportation. Most importantly, air transportation is, historically, the safest mode of transportation and would significantly reduce the risk of accidents en route. In addition, the BC

17X’s large paylo ad capacity could reduce the number of required trips, there are existing military airfields extremely close to Yucca Mountain that could accommodate the aircraft, the flight routes could be adjusted to bypass heavily populated areas, the short transit tim e would minimize public exposure to radiation, and since fewer individuals and less time would be involved in the transport of radioactive materials the risk of hijacking or sabotage would also be reduced.

Conclusion

Rodger Comstock, an expert on nucle ar safety who reviewed the findings of the Nuclear Regulatory Commission’s Advisory Committee on Nuclear Waste for the Council of Logistics Research, devised the following formula to calculate the public cost of each possible mode of transportation for the nation’s stock of spent nuclear fuel: Public Cost = Cost x Time in Transit x Population Exposed en Route. He concluded that, while trains are safer than trucks, air transportation is approximately one thousand times safer than either mode of surface
tran sportation.113 Disclaimer on Cover applies 

### 4.2.3 Kabul Embassy Project

Data Source Company

Exel Global Logistics, Inc., based in Houston, TX, is a global leader in supply

- chain management, providing a wide range of logistics solutions to the manufacturing and retail industrie s. Exel operates in more than 120 countries, employs about 67,000 people in 1,600 locations, and had a 2002 turnover of approximately $7 billion.

Mission

The United States Embassy in Kabul, Afghanistan’s capital, has been empty since 1989, when the civil war that followed the USSR’s agreement to withdraw from Afghanistan caused most foreign diplomats to leave the country . During the war, the US Embassy buildings were hit by rocket fire and looted, and one of the Embassy annexes was burned. Only after the Taliban government, which by 1996 controlled 90 percent of the country, was removed by allied forces in October 2001 was it considered safe to begin rebuilding the Embassy and re

- establishing the US presence in Afghanistan.

The Embassy project is a $115 million contract to restore, rebuild, and update the existing Embassy facilities in Kabul, focusing mostly on the main three

- story building. The
two

- year

- plus project has been awarded to a confidential engineering, procurement, and construction company, and fieldwork is expected to commence in the summer of 2003. Exel Global Logistics was asked to bid on the forwarding services to move construction and refurbishment materials from the United States and a few foreign locations to the Embassy jobsite in Kabul.

It is estimated that over 2,000 twenty

- foot ocean containers of freight will have to be moved from the US to the Embassy jobsite. Approximately 400 of the containers are expected to be classified as “Controlled Access Products” and will require specific security procedures. There will also be a number of pieces of rolling stock to be moved, such as cars, trucks, bu ses, and some construction equipment. Kabul is located in east central Afghanistan at an elevation of 5900 feet, making it one of the h ighest capital cities in the world.114 Disclaimer on Cover applies Present Logistics

About thirty percent of the material is expedited material that will require air shipment directly from Dulles International Airport in Washington, D.C. to Kabul. As there is virtually no commerci al air service into Kabul at this time, all airfreight is expected to be moved by air charters (most likely AN

- 124s because of their ability to handle a large number of ocean containers per flight). Other airfreight that does not need to go directly to Ka bul will be flown commercially into Karachi, Pakistan and transported to Kabul by truck. The exact mix of air charter and commercial airfreight is not known at this time. All ocean freight will move from its point of origin (mostly Port Baltimore) to the seaport in Karachi, and then to the jobsite in Kabul by truck.

It is estimated that there will be over thirty million pounds of ocean freight (1,600 twenty

- foot containers plus rolling stock) and eight million pounds of airfreight. The total transport ation cost is estimated at $10 to $14 million, depending on the mix of air charters and commercial freighters.

Proposed BC

- 17X Logistics

Under the Fly Amer ica Act, an American BC

17X operator should have preference over a non

US AN

- 124 operator on government projects; thus the BC

- 17X could replace the AN

- 124 in the overall logistics plan. It is estimated that it would take approximately 35 AN

- 124 charter fl ights to move the eight million pounds of airfreight. While it would take about 47 BC

- 17X flights to carry the same eight million pounds of freight, the USAF could use the return flights to haul freight and/or passengers back to the US. The AN

- 124 is
not permitted to haul US equipment on return flights from Afghanistan to the US.

Additionally, the security of the Controlled Access Products freight is extremely important and must be given every consideration. Using the BC

- 17X would allow the US to have total control of this freight throughout the entire logistics process.

Conclusion

The current program to rebuild the US Embassy in Kabul will be extremely difficult to carry out because of the complexity of moving equipment and materials into the region and the need to protect them during the construction process. While the BC

- 17X cannot carry quite as much freight per flight as the AN

- 124 and would be somewhat more expensive, it would offer several advantages, including compliance with the Fly America Act, the ability to carry US military equipment and personnel on return flights, and a high degree of security and reliability for the confidential air shipments. The U.S. embassy in Kabul has been abandoned since 1989 but will now be rebuilt and restored.115 Disclaimer on Cover applies Letter of Agreement116 Disclaimer on Cover applies 

### 4.2.4 Humanitarian Relief to the Sudan

Data Source Organization

Set up in 1963, the World Food Programme (WFP) is the United Nations’ front

- line agency in the fight against global hunger, providing food and other humanitarian aid to regions of famine throughout the world. In 2001, the WFP sent $1.74 billion in food a id to 77 million people in 82 countries, delivering 4.2 million metric tons of food by sea, air, river, road, and rail. The WFP has a staff of approximately 2,600, most of whom are field workers, and about 600 people work at the organization’s headquarter s in Rome. Funded entirely by voluntary contributions of cash, food, and basic items needed to grow food, the WFP has the largest budget of any major UN agency. US government and private sources contribute about 73 percent of its total annual budget.

Pr oject

The Sudan is the largest country in Africa, slightly more than one

- quarter the size of the United States, and home to over 34 million people. Even in good years there are inadequate supplies of potable water, and agriculture is threatened by both soil erosion and desertification. Three years of recurrent drought have exacerbated the problem.

Two decades of civil war have also crippled the country ’s economy, leaving 2.9 million Sudanese dependent on food aid for survival. According to Kenneth Hackett, executive director of Catholic Relief Services, one of the largest relief organizations in the world, “What we see now in Africa is a looming food crisis of great proportions.” 60

Another important factor in Sudan, as in many other

war

- devastated regions, is the large number of land mines scattered throughout the countryside. This poses a problem for adequate food distribution, since allowing large n umbers of the starving population to travel on foot to major distribution centers would result in numerous deaths; instead, the food must be brought directly to the needy villages.

The WFP’s relief operation in the Sudan was selected as the main focus of this case study because the problems there have been ongoing for many years, the region needs large volumes of food aid, and air drops from distribution centers in the main cities to outlying areas are predicted

60 “Relief Agencies Unite to Warn of Disastrous Africa Food Shortage; Organizations Plead for Nations to Provide Assistance for Millions,” The Baltimore Sun , 4 December 2002, p. 14A

. Drought and Civil War have brought widespread starvation to Sudan, the largest country in Africa.117 Disclaimer on Cover applies to continue indefinitely. Food aid to the S udan typically consists of grain, maize, sorghum, disaster supplies, and other equipment.

Another type of WFP project in which the BC

- 17X may be of use is emergency disaster relief, which occurs in two stages. First, the WFP provides immediate, first

- res ponse assistance, including food, tents, medical aid, and generators, to areas pummeled by earthquakes, floods, hurricanes, and the like. Once the initial relief supplies have been sent in, the WFP continues to provide aid during the rebuilding process.

Present Logistics

The Sudan has about 5,500 kilometers of railways and 12,000 kilometers of roads, less than 5,000 kilometers of which are paved. The majority of the roads are simply dirt tracks impassable after heavy rains, and it is this lack of reliable ground infrastructure that drives the need to airdrop food.

Grain destined for the Sudan initially travels by ship to Port Sudan on the Red Sea and to Mombass a in neighboring Kenya. The bags of grain then travel by truck to air distribution centers in Khartoum and El Obeid in the Sudan and Nairobi and Lokichokkio in Kenya. Food supplies are airlifted or airdropped from these distribution centers directly to i ndividual villages and needy

areas.

Emergency disaster

- relief materials are warehoused in Brindisi and flown directly to areas of need. Immediate first

- response provisions generally require 30 to 50 flights per year, while recurring emergency relief to places like Afghanistan, Bosnia, and Rwanda can take up to 200 flights per year.

To support its various operations, the WFP maintains a leased, aging airfleet made up of L

- 100s, IL

- 76s, and AN

- 12 that is frequently delayed by maintenance problems. In th e long term, at least part of the present fleet will have to be replaced.

BC

- 17X Logistics Plan

At the very least, the BC

- 17X could replace the IL

- 76s and L

- 100s in the Sudanese supply chain, and it may be possible for it to replace the AN

- 12s as well. While the BC

- 17X costs more per metric ton than the IL

- 76, it is approximately equivalent in cost to the L

- 100, and it can carry significantly more weight than both. With its short, austere airfield capability, the BC

- 17X could create additional value by flying directly from Mombassa to the various drop sites, eliminating the need for trucking. The BC

- 17X could also be used for emergency disaster relief during downtime from scheduled projects. Sudanese men unload bags of maize from a World Food Programme humanitarian airdrop.118 Disclaimer on Cover applies Realistically, the WFP would probably not have the resources to operate a BC

- 17X on its own, but might be able to do so on a part

- time basis. For example, if a BC

- 17X was being used on a large construction project near a relief site (such as the Chad

- Cameroon Petroleum Development and Pipeline Project described in Section 3.2.3.10), the WFP could rent space on the plane, or entire flights during the project’s air cargo downtime. Operating the aircraft in this way would greatly reduce the cost to the WFP.

Conclusion

Since the BC

- 17X can carry 2.2 times the weig ht of the IL

- 76 and 4.1 times the weight of the L

100, having the aircraft available would give the World Food Programme a number of options: it could deliver more food to the same locations, it could deliver the same amount of food to more locations, or i t could deliver the same amount of food to the same locations in less time than the present supply chain. Considering the rampant famine in the Sudan, this would have some value in terms of human life that would offset the higher cost of the BC

- 17X.

Sinc e cost is a much less important issue for the WFP’s emergency disaster relief than it is for recurring grain distribution, the WFP believes there is a definite place for the BC

- 17X’s large payload and austere landing capabilities in emergency humanitarian operations.



### 4.3 Heavy Outsize Market

The final segment of the BC

- 17X Extended Market is the Heavy Outsize Market (HOM), the market for transporting individual cargo pieces that are too heavy for and/or too large to fit on conventional commercial wide

- bo dy passenger/cargo aircraft. While the BC

- 17X is more expensive than the similarly outsize

- capable AN

- 124, a BC

- 17X operator could reasonably expect to capture some portion of the HOM currently being serviced by the aircraft. For example, the Fly America Act and US cabotage regulations would require potential US customers to favor an American BC

- 17X operator over a non

- US AN

- 124 operator when moving cargo originating in the United States or paid for by the US government. The BC

- 17X would also carry some of the freight presently moving on military C

- 17s because, while the US government can carry commercial freight if no commercial carrier is capable of moving it, the US government is prohibited from competing for commercial cargo with a commercial carrier.

The November 2000 CAMAA Report analyzed the BC

- 17X’s potential in the HOM, concentrating mostly on one

- off charters, and concluded that the 2003 BC

- 17X HOM would support approximately four aircraft. By 2012, the HOM could have the potential to support as many as ten BC

- 17Xs. 61

61 The number of BC

- 17Xs potentially supported by the HOM is lower than the number reported in the November 2000 CAMAA Report because duplicate SAM business was removed. These numbers were derived from Phase I Tables A

- 13 (Utilization Rates and Aircraft Demand) and A

- 14 (Revenue Forecast). The combined SAM Project Market and HOM has the potential to support 51 BC

- 17Xs in 2003 and 71 BC

- 17Xs by 2012. Upward adjustments of the total supportable fleet size may be made as the Special Mission Market and the SAM Supply

- Chain Market become more defined.119 Disclaimer on Cover applies

# Risk Reduction Report on the Short Austere Market

Section 5: Implementation Issues for a Prospective BC

- 17X Operator121 Disclaimer on Cover applies 

## 5. Implementation Issues for a Prospective BC

- 17X Operator

5.1 Summary of the Possible Financ ial Return of a Ten

- Aircraft Fleet

To provide an example of the kind of financial return a potential BC

- 17X operator could expect, Boeing conducted a detailed financial analysis for the Council for Logistics Research using data from fifteen of the SAM ca se studies and estimates of complementary HOM business. 62 More specifically, Boeing computed the number of aircraft days required to support the fifteen case studies, selected logical and convenient hubs for the aircraft operations, and developed a fleet
p lan that filled the hours available beyond the SAM projects with HOM missions. 63

Assuming a ten

- aircraft flee t and an aircraft price of $140 million, This assured a reasonable utilization of each aircraft that optimized its profit potential. The analysis did not include US government business.

64



### 5.2 Risk the financial analysis generated an Internal Rate of Return (IRR) on the before

- financing cash flow of 18.3 percent and an after

- financing cash flow, or a Return on Equity (ROE), of 32.9 percent. Since the generat ed IRR on the before

- financing cash flow exceeds the CAMAA target of fifteen percent, there may be room for flexibility on the assumed aircraft price. The analysis concluded that SAM projects are thirty percent more profitable than HOM missions and that a SAM

- based BC

- 17X operator could be very profitable. More details on the financial analysis can be found in Appendix M.

In any new business venture there are a variety of risks that must be understood and managed. Aside from the general risks associated with creating and entering a new market (which are mitigated by detailed analyses like the studies described in this report), the most substantive risks for a prospective BC

- 17X operator are CAMAA risks, economic risks, geopolitical risks, and competitive aircraft risks. While the risks associated with the larger CAMAA project, such as certification issues and keeping the BC

- 17X production line operational, are outside the scope of this report, it is appropriate to discuss the other three categ ories of risk in greater detail. 65

62 Sodium Cyanide Distribution and Humanitarian Aid to the Sudan were excluded because these case studies had not yet been completed at the time the financial analysis was conducted.
63 The analysis assumed that all fif teen case studies were concurrently operational. While the actual case studies do not take place at the same time, this is a reasonable assumption because of the substantial size of the SAM Project Market identified in the market forecast. There is enoug h potential business to assume that a BC

- 17X operator could locate fifteen similar but operationally concurrent projects at any given time.
64 The assumption of a ten

- aircraft fleet is based on the expected Boeing delivery schedule outlined in Section 3.3.2 .3: Phase Three: Calculating a Ten

- year BC

- 17X SAM Project Market Forecast . A CAMAA committee selected the price of $140 million per BC

- 17X as a starting point for the financial analysis. This price yields an above

- average industry IRR of 18.3 percent on the before

- financing cash flow and includes maintenance as outlined in Boeing’s Maintenance Support Agreement.
65 Some of the issues involved in FAA certification of the BC

- 17X are described in footnote twelve.122 Disclaimer on Cover applies 

### 5.2.1 Economic Risks

Since the individual construction projects that make up the SAM Project Market, the largest component of the BC

- 17X Extended Market, require considerable upfront capital investment, the health of th e world economy is a critical factor in gauging the economic risks of a BC

- 17X operation. As noted in the SAM Project Market Forecast (Section 3.3.2.3), the global GDP, a measure of the health of the world economy, is strong and predicted to increase. Mo reover, the GDP in developing countries, where most SAM Projects are located, is even stronger and predicted to increase even faster.

It is important to recognize, however, that the SAM Project Market is heavily weighted in the energy sector

— of the 289 projects identified as BC

- 17X

- eligible, 70 percent are in the that sector. The more germane issue, therefore, is the health of the energy sector. While a drastic reduction in oil and gas development projects would negatively affect the BC

- 17X market pote ntial, such a situation is very unlikely.

Most current projections predict that the oil and gas development, pipeline, and refinery industries will continue to grow and that the global demand for petroleum products will not abate within the next twenty years. For example, the European Union’s continuing concern over securing adequate oil and gas supplies stems from an understanding that their demand for these products is rising (the European transportation sector is particularly voracious in its petrole um consumption) while their internal production is declining. 66 The developed world’s ever

increasing demand for oil and gas is driving new exploration of untapped reserves in remote locations in the former Soviet Union, in the Middle East, and around the world. 67



### 5.2.2 Geopolitical Risks Moreover, as developing countries in Asia, Sub

- Saharan Africa, the former Soviet Union, and the Americas continue to grow, their own demand for energy will increase. Thus, while the health of the energy sector may fluctuate temporarily, overall i t is quite secure for at least the next several decades.

There are two ways in which the risk of geopolitical unrest is relevant to a prospective BC

- 17X operator: first, it could hurt the SAM Project Market and, second, it coul d limit the number of countries the BC

- 17X operator could safely service.

In the past, regional military clashes and political unrest have curtailed investment in the start or continuation of large construction projects. For example, the past twenty ye ars of geopolitical turbulence in the Middle East have resulted in periodic fluctuations in the regional exploration and production of oil and gas. However, since demand has not declined, the general trend in the Middle Eastern petroleum industry has stil l been growth. Furthermore, the resulting inclination,

66 ETAP Programme, "Assessment of interna l and external gas supply options projects for the EU, evaluation of the supply costs of new natural gas supply projects to the EU and an investigation of related financial requirements and tools," http://europa.eu.int/comm/energy.
67 Green Paper

- Towards a European Strategy for the Security of Energy Supply, European Union Technical Document, November 2000, p. 5.123 Disclaimer on Cover applies at least on the part of the United States, to reduce dependence on Middle Eastern petroleum has driven the development of increasingly austere petroleum reserves, such as those in the Russian Federati on and Alaska, that are even more likely to benefit from the BC

- 17X.

The second issue is that a BC

- 17X operator may be reluctant to provide air cargo service to hostile environments. Generally, this should not be a problem because when one region becom es inhospitable to western commerce other regions tend to take up the slack, and very few places in world have been inaccessible for long periods of time. (North Korea and Myanmar are the most notable exceptions.) Additionally, because of their substanti al size, cost, and benefits, most SAM Project Market construction projects have the support of the national governments in the areas where they are located.

Both types of geopolitical risk are mitigated by the wide dispersion of SAM Project Market project sites. (See Map 5.2.2, in which each dot is a BC

- 17X

- eligible project.) Though most oil and gas projects are located in Asia and the Middle East, mining and infrastructure projects are distributed throughout the southern hemisphere. Therefore, if polit ical crises, hostilities, or other geopolitical problems arise in one region, there will be projects ongoing or soon to be started in a number of other regions.

Map 5.2.2

The BC

- 17X’s ability to exploit austere environments increase s the number of locations where project work is possible by opening up project sites that were previously inaccessible or prohibitively expensive to develop. If the United States is actively involved in quelling hostilities in areas where there is unrest , the BC

- 17X operator’s participation in the Civil Reserve Air Fleet will generate additional business. Once the conflict has ended, the BC

- 17X operator may benefit from infrastructure rebuilding projects.124 Disclaimer on Cover applies 

### 5.2.3 Competitive Aircraft Risks

There is alwa ys the risk that a competitive aircraft will be created in the future (although none are currently being developed with the possible exception of the A

- 400), but a prospective BC

17X operator faces little competitive risk from existing aircraft. The BC

- 17 X operator’s primary source of revenue, the SAM, can only be serviced by the BC

- 17X. For example, the BC

- 17X’s two closest competitors are the outsize

- capable AN

- 124, which cannot access short, austere airfields, and the austere

- airfield

- capable L

- 100, wh ich cannot carry the outsize freight, volume of cargo, or tonnage required to make air shipment profitable for most austere projects. It is, however, worthwhile to compare each of these competitors to the BC

- 17X in order to understand the dynamics of thei r markets and to anticipate and prepare for a possible competitive response.

AN

- 124

Since the AN

- 124’s market and capabilities were analyzed in depth for the November 2002 CAMAA Report, they will be described here only briefly. In terms of its technical specifications, the AN

- 124 has a larger maximum payload than the BC

- 17X (220,000 pounds versus 170,000 pounds), but requires a substantially larger airfield (8,200 feet long and 164 feet wide versus 4,000 feet long by 90 feet wide). The top three AN

- 124 carriers are Volga

- Dnepr (with a 69 percent US market share), Antonov (with a 29 percent US market share), and Polyot (with only a 2 US percent market share), and they operate a combined total of 23 aircraft, only thirteen of which are currently airworthy. In 2002, the organizations that purchased the most US AN

- 124 charters were the US Department of Defense, SDV, and Lockheed. As can be expected with such a customer base, the US cargo carried by AN

- 124s in 2002 consisted mostly of satellite, oil, militar y, and aircraft equipment. Globally, AN

- 124 business is divided roughly equally among ad

- hoc flights, emergency Project Market flights, and commodity flights. Aircraft availability and price are considered to be the two most important decision factors fo r customers selecting an outsize air cargo carrier.

The demand for the AN

- 124 has fluctuated with the larger economy but has generally remained stable. AN

- 124s have consistently flown between 170 and 270 US charter flights per year since 1994, and Alexey Isakin, Chairman of the Board at Volga

- Dnepr, estimates the value of the current global outsize air cargo market to be approximately $270 million per year. 68 2002 was a record year for the AN

- 124; Volga

- Dnepr, for example, doubled its tonnage and revenue in the first six months of the year, lifting over 24,000 tons at a cost of more than $80 million. Much of the increase was in humanitarian aid flights to Afghanistan. In 2003, Graham Pierce, Senior Vice

- President of Commercial Accounts for Air Foyle Heav yLift (another AN

- 124 charter operation), told International Freighting Weekly that, with demand still strong in Afghanistan, “it was difficult to find enough specialist outsize aircraft to fulfill requests for cargo” in Iraq. 69

The AN

- 124 is a relatively inexpensive aircraft, costing only about $8,000 per block hour compared to $20,000 per block hour for the BC

- 17X, and, as such, it is likely to capture the majority of the HOM that does not fall under the Fly America Act. (The specific amount of the HOM t hat the BC

- 17X could expect to service is detailed in Section 4.3: Heavy Outsize Market.)

68 Tom Zaitsev, “First Ten Months Show Extent of Volga

- Dnepr Revival,” 22 November 2002.
69 Will Waters, “Baghdad Skies Ready to Open Up for Cargo, ” IFW , 5 May 2003.125 Disclaimer on Cover applies Its strong HOM position, however, bodes well for a prospective BC

- 17X operator because it demonstrates that there is an ongoing demand for outsize air cargo services , making it all the more reasonable that there would be a long

- term demand for outsize air cargo services into austere airfields. In addition, the SAM and HOM could have synergistic effects because expanding outsize air cargo capabilities in general shoul d increase the overall demand for outsize cargo in both markets.

L

- 100 70



### 5.3 Stabilizing Factors The L

- 100 and its military variant, the C

- 130, were designed to transport freight into austere airfields. Compared to the BC

- 17X, however, the L

- 100 requires a longer runway (at lea st 5,000 feet versus 4,000 feet for the BC

- 17X) and can carry significantly less cargo. (Its maximum payload is 50,600 pounds versus 170,000 pounds for the BC

- 17X.) There are 51 commercial L

100s in existence, but only 47 are operational, and the largest commercial operators are Transafrik, Safair, and Lyden. Intense competition for market share and global infrastructure development is putting downward pricing pressure on all the operators. Many commercial L

100s are locked into long

- term contracts, suc h as those with the World Food Programme, and the rest compete in the ad

- hoc charter market. The aircraft generally does not compete for large project work, and it does not appear well suited to scheduled service.

Priced at approximately $2,500 per blo ck hour, the L

- 100 is much less expensive than the BC

17X on a block

- hour basis; however, due to the BC

- 17X’s capacity advantage, the cost per ton mile is actually lower on the BC

- 17X. Furthermore, the BC

- 17X outperforms the L

- 100 in terms of range and sp eed. Since the weight, range, and speed characteristics of the BC

- 17X make it cheaper than the L

- 100 on flights longer than 1,000 nautical miles with payloads greater than 50,600 pounds, the L

- 100 would not pose a significant competitive threat in a prosp ective BC

17X operator’s primary market, the SAM.

Economic, geopolitical, and competitive risk are concerns for any global industry, but a prospective BC

- 17X operator’s position with regard to such risks is very favorable. Any je opardy that a BC

- 17X operator might face is mitigated by the growing need for the exploitation of resources that the BC

- 17X supports, the size and geographic distribution of the SAM, and the lack of truly competitive aircraft.

In addition, early assessmen ts of the general need for the commercial capability of the BC

- 17X show that the potential market for the aircraft has a built

- in resilience associated with large construction project opportunities. Several factors are at work, among them the following:

1. High prices for oil and gas have proven constant and support continued exploration. 2. The US desire to find sources of petroleum outside the Middle East will drive exploration of more austere and primitive environments.

70 Since the L

- 100 market was not analyzed in the November 2002 CAMAA report, a more detailed description of the aircraft and its market can be found in Appendix N.126 Disclaimer on Cover applies 3. The reordering of world alliances and improved relations between the United States and its former adversaries have opened vast areas to mining as well as oil and gas recovery projects. 4. Future efforts to develop mineral resources will generally be confined to austere locations, since the easy

- t o

- get

- to areas have already been tapped. 5. Undeveloped countries taking advantage of their natural resources will build cash reserves to undertake infrastructure projects not possible before.

Armed conflict also stabilizes the amount of business available t o a BC

- 17X operator, first because of the likelihood that its aircraft will be made available to the CRAF during the conflict, and second because, once the conflict has been resolved, the aircraft can be used to distribute humanitarian aid and rebuild infr astructure.

# Risk Reduction Report on the Short Austere Market

Section 6:

Review Board Comments128 Disclaimer on Cover applies 

## 6. Review Board Comments

Draft copies of the Risk Reduction Report on the Short Austere Market were sent out for review to four respected industry expe rts: Robert Baker, former Vice Chairman of AMR/American Airlines; Klaus Knappik, Chairman of Deutsche Post Global Mail; Matthew Stacom, Vice Chairman of Cushman & Wakefield; and Ram Menen, Director of Emirates SkyCargo and a former President of The Interna tional Air Cargo Association. 71

71 For the full text of the Ram Menen letter, see Appendix O. All four Red Team members read the report and endorsed its conclusions. The following are excerpts from their reviews, grouped by category:

Analysis Reviews

“In every case study, the higher cost of airfreight adds cost e fficiency to the overall supply chain. ...The cost savings and [accelerated net benefits] could be on the conservative side.”

– Ram Menen

"US companies such as Bechtel, Halliburton, etc. are world leaders in large construction projects and are increasingly having problems finding reliable equipment for [the] urgent [transportation of] oversized and heavy material to countries that lack infrastructure (commercial airports, port congestions, paved roads, etc.)

— for example, see the oil projects in Sakhalin Isla nd. The BC

17X is uniquely equipped to overcome these problems."

– Klaus Knappik

“You have taken the very complex matter of developing a SAM forecast and made it simple enough for anyone to understand.”

– Robert Baker

“I believe your methodology is sound. ”

– Matthew Stacom

Recommendations for Further Research

“You will need to examine more of the issues relating to civil certification of the BC

- 17X and technical support in SAM locations.”

– Ram Menen

“You need to develop a five

- year penetration forecast, a business plan, and a P&L to justify financing.”

– Matthew Stacom

Recommendations for Potential Operators

“Servicing the SAM will be critical to the successful deployment of the [BC

- 17X]. ...The initial target audience will have to be project owners who will be able to see the [net] benefit of taking on higher transportation costs for a certain segment of the total supply chain. [The BC

- 17X’s entry into the commercial market] will have be driven top down.”

– Ram Menen129 Disclaimer on Cover applies “The project business lets [the ope rator] sell long

- term contracts, which are vital to the success of such a high

- cost aircraft because [the operator] can then get a higher utilization while also having the ability to pre

- sell backhauls.”

– Robert Baker

“The aircraft seems expensive, and th e company that operates it must hit the ground running and not wait for delivery of the aircraft to start signing up contracts. This will be very difficult to do within a new SAM.”

– Robert Baker

“The best [plan] would be to start with a fleet of two or t hree units to test the business model and create confidence, and then gradually increase the fleet size as per market demand.”

– Ram Menen

Overall Conclusions

“The case studies with the confirmation letters are very powerful, and it will be very hard to disagree with the forecast methodology and results. I believe that you have a winner.”

– Robert Baker

“The future energy needs of the world will continue to create major projects of the proportions that you have studied. Hence, the SAM market will contin ue to be a growth market.”

– Ram Menen

"There is a real market niche for the transportation of project

- related heavy and oversized cargo. Today, this market is almost exclusively covered by Russian equipment. The BC

- 17X is superior in technical terms and h as a broader ability to serve project

- related destinations than the AN

- 124 or IL

- 76."

– Klaus Knappik

“Your main argument is that these planes are necessary for the United States to maintain our preeminence in aircraft design and construction. The United States is becoming a ‘service provider’ to the world as we push manufacturing into other countries because of labor costs. To our ultimate demise, we are teaching the world how to put us out of the manufacturing business.”

– Matthew Stacom

“I was extremel y skeptical about the role that this aircraft could play in the civil commercial field because the cost of ownership and operation was prohibitive compared to the other civil aircraft already in service, but the ability of the BC

- 17X to operate out of shor t austere runways is its prime strength and the key to entering the commercial market. ...[The air cargo industry, myself included,] were looking at the cost that [the BC

- 17X] would add to the project without looking at the overall cost efficiency gained an d the ability to generate revenues by reducing the project completion time and pressing into operation earlier. ...Depending on the term and conditions and the way it is put into the market, there is a definite potential role for the BC

- 17X in civil [projec ts]. ...I am sure this venture will be a successful one.”

– Ram Menen

# Risk Reduction Report on the Short Austere Market

Bibliography131 Disclaimer on Cover applies 

## Bibliography

Unless otherwise noted, all information in this report was obtained from repeated conversations with va rious representatives of the case study organizations and internal analyses conducted by the SAMCS team. The following outside sources, as referenced in the footnotes, provided supplemental information:

The Boeing Company. BC

– 17X Business Case Financial Report . April 2003.

The Boeing Company. C

- 17 Globemaster III: Technical Description and Planning Guide

. 2002.

The Boeing Company. World Air Cargo Forecast 2002

- 2003

. http://www.boei ng.com/commercial/cargo/flash.html . 2002.

The Boeing Company, Airlift and Tanker Division, Business Development. Fleet Plan

. “Financing Assumptions.” 4 April 2003.

The Boeing Company, Airlift and Tanker Division, Integrated Defense Systems. MD

- 17 Ge neral Briefing Update . 1998

Blue Ribbon Panel. Federal Aerial Firefighting: Assessing Safety and Effectiveness: Blue Ribbon Panel Report to the Chief, USDA Forest Service and Director, USDI Bureau of Land Management . December 2002.

Commercial Applica tion of Military Airlift Aircraft . Final Report. 20 November 2000.

Commission on the Future of the United States Aerospace Industry . Final Report. 2002.

Department of Defense. Department of Defense Transportation Policy . March 1990.

ETAP Progra mme. "Assessment of internal and external gas supply options projects for the EU, evaluation of the supply costs of new natural gas supply projects to the EU and an investigation of related financial requirements and tools." http://europa.eu.int/comm/energy

.
Eskew, Michael L. Executive Speeches. http://www.pressroom.ups.com/execforum/speeches/speech/0,1402,38,00.h tml

. May 2002.

“Foreign Oil Firms to Stop Receiving Perks in Russia.” The Wall Street Journal . 2 April 2003.

“Forest Service Planes Under Scrutiny.” The Associated Press . 7 October 2002.

Green Paper

- Towards a European Strategy for the Security o f Energy Supply

. European Union Technical Document. November 2000.132 Disclaimer on Cover applies “Interview with Marianne Drain.” Business Information Service for Newly Independent States

. May 2002.

Northern Gas Pipelines: Mackenzie Valley Pipeline Project

. http://www.arcticgaspipeline.com/Delta%20Route.htm . 2002

. “Oil Producers Flock to Island in Russia with Fragile Ecology.” The Wall Street Journal . 4 September 2002.

“Relief Agencies Unite to Warn of Di sastrous Africa Food Shortage; Organizations Plead for Nations to Provide Assistance for Millions.” The Baltimore Sun . 4 December 2002, p. 14A.

“UPS’s Eskew Sees Logistics Golden Age Coming, Bringing Good Corporate Governance With It.” Traffic World

. 14 October 2002, p. 22.

US Department of Agriculture. USDA Aviation Safety Summary . 2001.

Waters, Will. “Baghdad Skies Ready to Open Up for Cargo.” IFW . 5 May 2003.

The World Bank. The Global Economic Prospects . 2003.

The World Bank. Global Eco nomic Prospects and the Developing Countries

. 2003.

Worldwide Projects, Inc. Database. http://www.worldwide

- projects.com . 1997

- 2002.

Zaitsev, Tom. “First Ten Months Show Extent of Volga

- Dnepr Revival .” 22 November 2002.

# Risk Reduction Report on the Short Austere Market

Biographies134 Disclaimer on Cover applies 

## Biographies

Team Biographies

William R. Boesch, Senior Project Consultant

Mr. Boesch has been a senior executive in the transportation and logistics industry for ov er 30 years. He retired as Chairman of American Airlines Cargo Division in 1998, having served as President of the Cargo Division from 1991 to 1997. In 1997 and 1998, Mr. Boesch served as Director of U.S. Aviation Policy for the White House Commission on Aviation Security. Since that time he has worked for the USAF on the Commercial Application of Military Airlift Aircraft (CAMAA) project and for private parties as a logistics consultant. Mr. Boesch served as Chairman of the International Air Transport Association (IATA)’s Cargo Executive Subcommittee and as Vice Chairman of its Cargo Committee. He has been a member of the board of Air Cargo Incorporated, Air Cargo International, The ETR Group, and The International Air Cargo Association (TIACA). Mr. Boe sch was recently appointed to the Board of Directors of Deutsche Post Global Mail.

Robert F. Agnew, Aviation and Marketing Consultant

Mr. Agnew is President and COO of Morten Beyer & Agnew and has an extensive background in aviation/marketing consulting a nd providing aircraft valuations to banks, airlines and other worldwide institutions. Mr. Agnew develops enhanced methods of securitization and insurance solutions through technical due diligence for clients in the financial and insurance industries. Pr ior to founding Morten Beyer & Agnew, he headed a company that provided consulting services to the travel, transportation and telecommunications industries. Mr. Agnew has received a Master’s Degree in Business Administration from the University of North D akota, is a former USAF navigator with the Strategic Air Command, and is a member of both the Business Practices Committee of the National Defense Transportation Association and the National Defense Transportation Association’s Military Airlift Committee.

Jeremy Akel, Airline Consultant and Government Advisor

Mr. Akel is Vice President of Business Consulting at Morten Beyer & Agnew (MBA) and has 12 years of aviation industry experience in business planning and financial analysis. He joined MBA after work ing for Andersen Consulting, where he was an Airline Consultant, advising airlines on financial restructuring after the September 11 terrorist attacks. Recently, he has been advising the US government on the viability of various airline business plans. Mr. Akel has also worked for Continental Airline’s Long Range Planning Group on competitive benchmarking and revenue management strategies, and was an Aerospace Engineer with the National Transportation Safety Board. He holds a Master’s Degree in Busines s Administration from Georgetown University and Bachelor’s Degree in Aerospace Engineering from the University of Colorado. Mr. Akel worked on the Fire Suppression Study for the SAMCS Report.135 Disclaimer on Cover applies William Alexander, Congressional Consultant

Mr. Alexander se rved 24 years in the United States Congress. He was a member of the congressional leadership for 22 years and served as Chief Deputy Majority Whip in the House of Representatives. His principal responsibilities as a congressman centered on appropriation s, including subcommittees with oversight of the Department of Justice, (including the FBI, Secret Service, U.S. Marshals, U.S. Border Patrol, and DEA) as well as the Departments of State and Commerce. Mr. Alexander was selected for numerous prestigious f oreign and domestic assignments involving national defense, trade relations, major project development, transportation, communications, and agriculture. His educational background includes a Bachelor’s Degree from Rhodes College and a JD from Vanderbilt University. Mr. Alexander has consulted on a number of the case studies conducted for the SAMCS Report.

Heather Boesch, Communications and Written Report

Ms. Boesch recently graduated with an honors degree in Economics from Harvard University and was one of the first 24 members of her class to be inducted into Phi Beta Kappa. Throughout her academic career, she has had significant experience writing, organizing and editing large research projects. A member of the SAMCS team since June of 2002, Ms. Boesc h assisted with team communication and was responsible for editing the case studies and for crafting and editing the text of the Interim and Final Reports.

Harry Bray, Boeing BC

- 17X Marketing and Financial Analysis

Mr. Bray has held various management pos itions within Boeing relating to strategic and operational planning and program cash

- flow and earnings reporting. For the past ten years his focus has been operator financial and fleet planning supporting aircraft marketing and sales. Before joining Boei ng, Mr. Bray developed business plans for and served as a member of the board of various organizations. He also participated in the acquisition and turnaround of an electronics company where he held the position of Vice President of Marketing and Sales. As a member of the Boeing BC

- 17X team, he works with potential operators to develop financial and operating plans that define the business structure and investments necessary to meet investment

return requirements.

Dennis Caren, Ocean Logistics and IT Sy stems Advisor

Mr. Caren, who collected the Freeport and Raytheon data for the case study project, has over 35 years of experience in the international transportation industry. A former Vice President of Columbus Lines/Hamburg Sud, the largest privately ow ned shipping company in Germany; he has often worked closely with large commercial shippers such as Caterpillar, John Deere, and Massey Ferguson. In the 1980s, Mr. Caren pioneered the introduction of software products and services developed by Starcom Int ernational, a subsidiary of National Intergroup, for the shipping industry. He is currently the President of Caren & Associates, whose client list includes Weyerhaeuser Corporation, Topgallant, Mid

- America Overseas, The Journal of Commerce, Netcom, Cargo Manager Systems and many of the world’s larger project forwarders and shippers.136 Disclaimer on Cover applies Shari Cohen, Airline Industry Researcher and Government Consultant

Ms. Cohen is the Director of Development for the Congressional Award Foundation and serves as the liaison between the Board of Directors Financial Development Committee and the United States Congress. Previously, Ms. Cohen served as Special Services Manager for American Airlines in Frankfurt, Germany and Washington, D.C. She researched and developed the AN

124 aircraft data that is part of the SAMCS report.

Rodger H. Comstock, Nuclear Security Consultant

Mr. Comstock is currently a principal of Executive Management Services International specializing in the nuclear security. Formerly, he held the positio n of Group Vice President at a large private

- sector nuclear security services firm. Mr. Comstock has had extensive experience with security requirements for the storage and transportation of nuclear waste promulgated by the Nuclear Regulatory Commission, the Department of Energy, and other government regulatory agencies. Mr. Comstock earned a Bachelor’s Degree in Public Administration from California State University at Los Angeles.

Jean

- Marie Depelchin, Case Study Consultant

Mr. Depelchin graduated with a degree in English Studies from Lille University in France and has over 30 years of experience in the air and sea transportation industry. Specializing in warehousing, shipping, and stevedoring, Mr. Depelchin has held a number of executive positions with in the French air transportation industry. Prior to his retirement in 2001, Mr. Depelchin was the Marketing and Commercial Manager at Bollore, handling all stevedoring operations in France and Europe. Mr. Depelchin worked with several of the European ca se study companies for the SAMCS project.

Arthur C. French, Senior Operations/Logistics Advisor

Mr. French holds a Bachelor’s Degree in International Trade and Transportation from Pennsylvania State University. During his 30

- year career with Emery Worldw ide, Mr. French, who served as Vice President of Operations, built and designed its worldwide ground and air network. As a consultant, he developed computer imaging and tracking systems for Emery and for American Airlines. His client list also includes L itton Industries, Air Express International, and EDS. As a volunteer for the International Executive Service Corporation, Mr. French also provided feasibility analyses for the conversion of Russian military air bases into civilian cargo hubs. Mr. French, currently a Program Manager at Council for Logistics Research, Inc., performed much of the analytical work for the case studies.137 Disclaimer on Cover applies Klaus Geissler, Logistics Industry Management Consultant

Mr. Geissler has 21 years of experience as an international freight forwarder involved in air/sea projects and logistics. He is the founder, Chairman, and CEO of adi Consult GmbH, a management consulting firm for the logistics industry. Previously, Mr. Geissler served as President and COO of ATEGE International in Fran kfurt, Germany. He is a member of the International Air Cargo Association (serving as Vice Chairman of the IATA/Forwarders Committee Steering Board until 1998), of Freight Forward Europe (serving as Chairman until 1998), and of the Advisory Board at Frank furt Airport Cargo Division, as well as founder and Chairman of The Challenge Group.

Ingo Granzow, Case Study Consultant

Mr. Granzow is Director of Sales and Marketing for Geis SDV Germany GmbH in Frankfurt. He also serves as a member of the Geis SDV Gro up’s Country Management

- Europe. For more than 20 years, Mr. Granzow held various executive positions at Panalpina, and has spent considerable time working in Algeria, Senegal, Singapore, Thailand, Turkey, China, Switzerland, Russia, and Belgium. Mr. Gra nzow founded a daughter company to handle all global ocean freight procurement activities of the Panalpina group. For the SAM case study project, he has worked with the European case study organizations.

Alfred G. Hutchins, Forecast Consultant

Al Hutchin s, the President and General Manager of Bucher, Hutchins, Kohler and Patterson, Inc., assisted with the analytical assessments of the project market database. Mr. Hutchins has over 25 years of experience in line management and the organizational developm ent of integrated product development teams. A recognized authority in the field of unmanned systems, Mr. Hutchins is frequently retained to advise major aerospace firms on a wide range of strategic and tactical issues.

Paul Jackson, Logistics Operatio ns, Marketing, Business Development and Strategy Advisor

Mr. Jackson has over 40 years of experience in the logistics industry. Currently the Chief Executive Officer of Triangle Management Services, a UK

- based logistics consulting firm he founded in 1984, Mr. Jackson is a regular speaker on freight, express, and mail strategy throughout the world. As an executive at British Airways, Air Express International, and Unilever, he developed comprehensive multi

- modal systems for the transportation of freight by air, sea and land. Mr. Jackson worked with the European case study organizations.138 Disclaimer on Cover applies L. Nick Lacey, Commercial Aviation Consultant

Mr. Lacey, a former Colonel in the U.S. Air Force, is an Executive Vice President at Morten Beyer & Agnew and is responsi ble for the organization’s regulatory and general consulting operations. Previously, Mr. Lacey served as the Director of Flight Standards for the Federal Aviation Administration, developing and enforcing operational and safety standards for the US

commer cial aviation industry. Prior to that assignment, Mr. Lacey was president of his own consulting firm, providing assistance on airline business plans, certification, privatization, acquisition and defense contracting. Mr. Lacey earned his Bachelor’s Degr ee at Wagner College in New York, and his Master’s Degree in Business Administration at the University of Puget Sound.

Julius Maldutis, Statistical and Airline Industry Advisor

Dr. Maldutis holds a PhD in Economics and Statistical Analysis from Columbi a University and is a former Professor of Statistical Analysis at Columbia Graduate School. A senior airline industry analyst for Solomon Smith Barney and CIBC Oppenheimer, he has long been a respected spokesperson on airline industry affairs. Dr. Malduti s recently served as President of the aerospace and airline industry’s New York

- based Wings Club.

William Murphy, Project Management Consultant

Mr. Murphy has over 30 years of experience in the petrochemical engineering and construction industry. A form er Director of Global Logistics for the oil field and engineering and construction units of Halliburton, where he worked for 28 years, he is currently the Director of Global Account Management and Business Development for the Energy sector of EXEL Global L ogistics. Mr. Murphy holds both a Bachelor’s and Master’s Degree in Mechanical Engineering from the University of Louisville. He has provided data for and consulted on several of the SAMCS project case studies.

David Patterson, SAM Project Market Foreca st

Mr. J. David Patterson is a Senior Partner and Vice President of Bucher, Hutchins, Kohler and Patterson, Inc. ( BHK&P, Inc. ), an aerospace and defense industry consulting firm specializing in acquisition management and business capture strategies. Mr. P atterson has held executive positions at Steven Myers and Associates, Inc. and t he Boeing Company , and h e was the first program director for the application of the military C

- 17 cargo aircraf t to the commercial outsize air cargo market. Prior to working i n private industry, Mr. Patterson served in the United States Air Force where he attained the rank of Colonel. He is a graduate of the NATO Defense College in Rome and has held management and leadership positions at major command headquarters, including t he Headquarters of the U.S. Air Force, the Office of the Chairman, Joint Chiefs of Staff, and the Office of the Secretary of Defense, Inspector General.139 Disclaimer on Cover applies Jack D. Patterson II, Project Data Base Regression Analysis

Mr. Patterson is a Converted Products Te chnician, R&D Engineering, for Cargill Dow LLC, where he helped develop a statistical model for the largest biodegradable plastics manufacturing process in the United States. His work includes systems design and technical and analytical support for Cargil l Dow’s North American and European Films and Rigids platform. Mr. Patterson is responsible for onsite technical consultation at customers’ facilities with regard to biopolymer sheet extrusion and related product conversion methods. He is also active in the design and commissioning of Cargill Dow’s sheet extrusion facility in Minnesota. Mr. Patterson preformed the regression analysis on the incomplete project business data.

Alvis Pauga, Forecast Consultant

Mr. Pauga, who helped analyze the Port Import and Export Reporting System (PIERS) and US Census Bureau data, is a management professional with expertise in international trade and transportation, marketing, market research, consulting, and marketing systems development. Responsible for promoting the Automated Export System (AES), which processes electronic export declarations for the US Customs and Census Bureaus, Mr. Pauga developed and ran PC

Lab workshops to teach export industry professionals how to use AES Direct, software for filing export decla rations on the internet. A recognized authority on market research and transportation analysis using international trade and commodity flow data, Mr. Pauga founded and served as the first chairman of International Trade Data Users, Inc., a nonprofit organ ization that works to improve the accuracy and availability of trade and transportation statistics.

Anne Renouf, Geopolitical Risk Consultant

Dr. Anne Renouf has twenty years of experience in domestic and international technology development financing a nd capital formation for public

- sector programs. As Chairman and Manager of several US government task forces and interagency programs for the Environmental Protection Agency, Federal Power Commission, and Federal Energy Administration, she developed inn ovative means of financing infrastructure projects. Dr. Renouf subsequently launched an inter national finance consulting firm, SaraTech Finance, a subsidiary of CSAT, whose network of international associates specializes in project financing, technology transfer and commercializa tion, and venture capital.

Dallas Sherman, Air Cargo Industry and Business Development Advisor

Mr. Sherman, who worked on the many of case studies, is a director of Tailwind International. He has over 25 years of management ex perience in international air cargo, and has assisted in the development of various emerging entrepreneurial growth ventures in the United States and Europe. In particular, he participated in the startup and development of Airborne, the worldwide expansio n of UPS, and the development of European Expedite, a wholesale express airline with service to eleven Western European countries. As a marketing executive for American Airlines, Mr. Sherman specialized in domestic and international sales and market expan sion, aircraft leasing and purchase, and re

- engineering analyses and program implementation.140 Disclaimer on Cover applies J. Michael Stepp, Jr., Case Study Consultant

Mr. Stepp joined Morten Beyer & Agnew (MBA) in May 2002 with six years of experience in the aviation, tourism, and a erospace industries. Previously he worked for Arthur Andersen, where he was a Senior Consultant in the firm’s Airline Consulting Practice working in the airline, aerospace, and business aviation industries. Mr. Stepp specializes in operational benchmarki ng, cost management, strategic planning and business process reengineering. He holds a Bachelor’s Degree in Government from Georgetown University.

Erik van Baaren, Case Study Consultant

Mr. van Baaren joined Triangle Management Services in 1999, where hi s focus has been in the postal and express sectors, with particular emphasis on primary and secondary market research. At Erasmus University of Rotterdam, his Master’s thesis in Business Administration dealt with the feasibility of an underground logistic s system at Schiphol Airport. After graduation, he continued to work on this and other research projects as a full

- time employee of the university. Mr. van Baaren, who speaks Dutch, English, French and German, has done case study field work for both Phas e One and Phase Two of the SAM case study project.

Dick Warden, Gold Industry Consultant

For over 25 years, Mr. Warden was the Senior Portfolio Manager for a major gold investment fund at IDS/American Express. His opinions are highly respected in the gol d industry, and Mr. Warden was asked by Freeport McMoRan Copper & Gold, one of the case study companies, to fly to Indonesia to look over their regional mining operations. Mr. Warden worked with Mr. Caren on the Wabu Mine Case Study.

Roger Whitehead, Air field Analysis Study

Mr. Whitehead has fourteen years of operational experience as a USAF meteorologist and twenty

- four years of experience in command and control, radar, weather

- systems development, planning, and acquisition management, and systematic sof tware reuse theory and application. He served in the USAF for 21 years, retiring as a Lieutenant Colonel. As a member of the Council for Logistics Research team of associates, Mr. Whitehead has conducted a number of technical studies for the SAM case stu dy project, including reports on austere airfields, the use of the AN

- 124, and potential commercial business opportunities for the BC

- 17X. He has a Bachelor’s Degree in German from the University of Maryland, a Master’s Degree in Meteorology from the Univ ersity of Oklahoma, and a Bachelor’s Degree in Mathematics from Washington State University.141 Disclaimer on Cover applies 

### Review Board Biographies

Robert W. Baker

Mr. Baker held a variety of senior positions during his 35

- year career at American Airlines, including Senior Vice Pres ident

- Information Systems, Vice President

- Southern Division, Vice President

- Freight Marketing, Vice President

- Passenger Sales and Advertising, and Vice President

- Marketing Automation Systems. In 1985, Mr. Baker was promoted to Executive Vice President and became responsible for much of the company’s operations. Mr. Baker was elected Vice Chairman of AMR/American Airlines in January 2000, and he retired in 2002. He received a Bachelor’s Degree in Economics from Trinity College, a Master’s Degree in Busine ss Administration from the Wharton School of the University of Pennsylvania, and an Honorary Doctorate from Embry

- Riddle Aeronautical University.

Klaus Knappik

Currently the Chairman of Deutsche Post Global Mail and a member of the Management Board of De utsche Post, one of the largest logistics companies in the world, Mr. Knappik has worked in the logistics industry for more than 30 years. He served as Chief Executive Officer and President of SAirLogistics (part of the Swissair Group) and President of Ja cky Maeder Ltd. International Forwarding. Mr. Knappik also served as Chief Operating Officer of Danzas Corporation. In addition, Mr. Knappik has been a Member of the Board at Swiss Post, Cargolux Airlines, and Panalpina World Transport and the Vice Chair man of the IATA Cargo Committee. Mr. Knappik is highly respected in the logistics industry and provided valuable feedback throughout the SAM case study project.

Ram Menen

Mr. Menen, the Director of Emirates SkyCargo, began his aviation career at Kuwait Airways in 1976 and later joined British Airways, where he set up their Kuwaiti cargo program. In 1984 he was recruited by Al Ghanim/Al Qutub Shipping Agencies to open an airfreight forwarding unit in Dubai. A year later, Mr. Menen helped launch the carg o division of Emirates Airlines, Emirates SkyCargo, which for 18 years has been internationally recognized for its operational excellence. An active participant in cargo industry affairs, Mr. Menen is one of the founding members of The International Air C argo Association (TIACA), serving as Vice President in 1993/94 and as President, CEO, and Chairman of the Board in 1995/96. Today, he is a trustee of the organization and a member of its President’s Council. In March 2000, International Freighting Weekl y (IFW) presented Mr. Menen with their Lifetime Achievement Award, and Air Cargo News USA named him “Cargo Executive of the Year” in 2002.142 Disclaimer on Cover applies 1 42 Matthew Stacom

As Vice Chairman of Cushman & Wakefield, Inc., Mr. Stacom has played an integral role in the de velopment, sale, and leasing of commercial properties in major cites throughout the United States, including the Sears Tower in Chicago, for which he was the project manager, supervising the construction of the four

- million square foot building, and the ex clusive rental and management agent. Mr. Stacom is a graduate of Lehigh University and the New York Graduate School of Business and a two

- time winner of the Real Estate Board of New York’s “Most Ingenious Deal” Award.The Boeing Company 2401 E. Wardlow Road Long Beach, CA 90807 (562) 593-8933

C1-0AE1-BC17-06-0103 22 March 2006

To: Mr. Mansour Rafat Program Manager, BC-17 Federal Aviation Administration LAACO Northwest Mountain Region Los Angeles Aircraft Certification Office 3960 Paramount Boulevard Lakewood, CA 90712-4137

Subject: Petition for Exemption from 14 CFR Part 21 Section 21.27(a) for Boeing Model BC-17 Freighter Aircraft

This letter transmits the following enclosures:
Record Summary Conformity Request Record of Discussion Petition for Exemption Certification Plans Issue Paper Responses BC-17 Main Configuration Differences Between Used and New Aircraft

The DER has verified, in accordance with establis hed procedures, that the data listed on FAA Form 8110-3 are in compliance with the applicable sections of the regulations identified on the 8110-3.
The DER recommends your approval of the data listed on the 8110-3. The DER approved the data listed on the 8110-3.

The enclosed data are being sent for:
FAA approval FAA acceptance of DER approved data FAA concurrence FAA action FAA comments FAA information only

The enclosed data which are considered to cont ain proprietary information are identified with a proprietary legend. Upon completion of your review, the FAA should place the data in the repository located at the Boeing 1 / BC-17 facility in Long Beach, California.

Sincerely,

[signature on original on file]

Robert P. Ciesla BC-17 Program Manager

Enclosures: A , B & C

1 McDonnell Douglas Aircraft Company, the Applicant, is a wholly-owned subsidiary of The Boeing CompanyC1-0AE1-BC17-06-0103 22 March 2006 Enclosure A

BOEING PROPRIETARY Copyright © 2006 The Boeing Company Unpublished Work All Rights Reserved FOR OFFICIAL USE ONLY. This document contains information EXEMPT FROM MANDATORY DISCLOSURE under the FOIA. Exemption 4 applies. 

### RECORD SUMMARY

SUBJECT: Petition for Exemption fro m 14 CFR Part 21 Section 21.27(a) for Boeing Model BC-17 Freighter Aircraft

REFERENCE: 1) Boeing letter C1-0AE1- BC17-05-0103 “Applications for Extension
of Type Certificates for Boeing BC-17”
2) Boeing letter C1-0AEO-BC17-05-0101 “Application for Extension
of Type Certificate and Revise d Certification Basis for BC-17”
3) FAA Exemption No. 319, issued 04/23/64

Enclosure Title of Enclosure

B Petition for Exemption from 14 CFR Part 21 Section 21.27(a) for Boeing Model BC-17 Freighter Aircraft

C BC-17 Configuration Differences Between The “Used” and “New” AircraftThe Boeing Company 2401 E. Wardlow Road Long Beach, CA 90807 (562) 593-8933

C1-0AE1-BC17-06- 0103 22 March 2006

To: Federal Aviation Administration Northwest Mountain Region Transport Airplane Certification Directorate

Attention: ANM-114 1601 Lind Avenue, S.W. Renton, WA 90855

Subject: Petition for Exemption from 14 CFR Part 21 Section 21.27(a) for Boeing Model BC-17 Freighter Aircraft Reference: 1) Boeing letter C1 -0AE1-BC17-05-0103 “Applications for Extension of Type Certific ates for Boeing BC-17” 2) Boeing letter C1-0AEO-BC17-05-0101 “Application for Extension of Type Certificate and Revised Certification Basis for BC-17” 3) FAA Exemption No. 319, issued 04/23/64

Pursuant to the Federal Aviation Administration procedures for processing
petitions for rule making (Title 14 CFR Part 11 Subpart A), The Boeing
Company, manufacturer of the McDonnell Douglas C-17/BC-17 model aircraft,
hereby files subject petition for an ex emption from the requirements of FAR
21.27 (a) for a commercial derivative of the C-17 identified as the Boeing Model
BC-17 Freighter Aircraft.

Substance of rule from which relief is sought:
Part 21 Section 27 – Issue of type certificat e: surplus aircraft of the Armed Forces
states in 21.27(a) that “Except as provide d in paragraph(b) of this section an
applicant is entitled to a type certificat e for an aircraft in the normal, utility,
acrobatic, commuter, or transport category th at was designed and constructed in the
United States, accepted for operational use, and declared surplus by, an Armed
Force of the United States, and that is shown to comply with the applicable
certification requirements in para graph (f) of this section.”C1-0AE1-BC17-06-0103 22 March 2006 Page 2 of 8

Nature of extent of relief sought:
Relief is sought to allow certification of the Model BC-17 Freighter Aircraft under
14 CFR 21.27 without the need for the aircraft to be accepted for operational use
and declared surplus by the an Armed Force of the United States ( specifically the
United States Air Force).

Description of aircraft covered:

The BC-17 is a demilitarized version of the USAF’s C-17, an aircraft that provides
the USAF with a complete air mobility p ackage: flexibility, speed, room for heavy
and outside cargo and landing capab ility into short and/or austere fields. The aircraft
is powered by four Pratt & Whitney F117- PW-100 turbofan jet engines, essentially
the same PW2000 series powerplant as cert ified on the Boeing Model 757 aircraft.
The flight deck features tw o Head-Up Displays (HUDs) that serve as Primary Flight
Displays and are designed to enhance th e aircraft’s flight safety by providing
primary flight information in a heads up environment.

Although designed and utilized fo r military transport in U. S. Department of Defense
(DOD) operations, a much more harsh opera tional environment than is typically
experienced by commercial aircraft, th e C-17 has been used in numerous
humanitarian and disaster relief applicat ions around the world. The unique design
features of the C-17/BC-17 make it ideally suited to provide commercial cargo
delivery capabilities not available in any ot her airplane type certified by the FAA.

Information provided in support of petition:

Since the BC-17 is the commercial deri vative of the USAF’s C-17 Globemaster
heavylift airlifter, it is not entitled to certification under 14 CFR 21.27(b). Type
Certificate applications have been submitted and extensions requested by the

reference No. 1 and No. 2 documents.C1-0AE1-BC17-06-0103 22 March 2006 Page 3 of 8

Airlift capability is crit ical to the DOD’s strategy fo r protecting U.S. national
security interests around the globe. The C-17 today plays an important role in DOD
operations, enabling the Armed Forces to pe rform previously impossible tasks – to
transport oversized, heavy equipment and large quantities of material to places
where it is most needed and, that in the pa st, could not be served by large aircraft.

The C-17 was designed, built and tested to a rigorous set of standards specified by
the USAF. It entered operat ional service in June 1993 a nd has a long and enviable
safety record. It continues to prove it s airworthiness in difficult operational
conditions in the ongoing war on terrorism. It s rugged design enabled the aircraft to
bring the crew home safely in spite of sever damage suffered in a missile attack.
The C-17 has proven to be a highly reliabl e aircraft; demonstrating mission-capable
rates exceeding the USAF’s minimum performa nce specification and that far exceed

that for other airlifters in the USAF i nventory. The BC-17 is the beneficiary of the
C-17’s demanding design requirements and outstanding service history.

There is an ongoing debate about the need fo r additional airlift capacity in the U.S.
military and the kinds of aircraft require d. The C-17 is currently in production and efforts are ongoing to secure a follow-on c ontract for aircraft beyond ship number
180. The Congressional Defense Committees have recognized the value of filling
whatever heavy, outsize lift is required with the most cost effective fleet structure,
including better use of the Civilian Reserve Air Fleet (CRAF). To that end, the
Secretary of the Air Force was direct ed in the FY05 Defense Appropriations
Committee Report to provide a report on expanding the CRAF with heavy outsize
cargo capacity without the n eed for government investment or substantial

involvement.

The USAF determined that the basis of a successful CRAF program relies on four
key factors. First, the CRAF must satisfy a portion of the wartime requirement for
outsize airlift, a capacity that does not cu rrently exist in the CRAF fleet. Second, the

outsize aircraft must be available and certi fied for commercial use. Third, a solidC1-0AE1-BC17-06-0103 22 March 2006 Page 4 of 8

commercial market for outsize aircraft must exist. Fourth, industry must be willing
to invest in and manage this new U. S. Business. Industr y validated studies
conducted by USAF consultants provided ev idence that there is a viable commercial
outsize air cargo market for the BC-17. An Air Mobility Command assessment

indicated that at least 10% to 12% of the DOD wartime outsize cargo requirement

could be satisfied w ith a CRAF carrier.

The key to enticing commercial comp anies to acquire the BC-17 for CRAF
missions, as well as commercial operations, is affordability. The C-17 is an
expensive aircraft by commercial standa rds considering its payload – range
capability. Based on previous estimates, strict compliance to FAR Part 25 would
impose a severe financial burden that makes acceptance of the aircraft by the civil
market problematical. With a relatively small number of aircraft over which to
spread the development costs, the price to a commercial customer becomes
prohibitive. Utilizing FAR 21.27 for the cer tification process will minimize the
changes from the USAF configurati on, thus reducing the development and
certification cost while maintaining substant ially the same level of airworthiness.
Granting this exemption will facilitate minimizing the certification cost and schedule and result in an affordable aircraft that can fulfill the CRAF role during
contingency operations and in time of wa r. A precedent for granting an exemption
of this type can be found in reference 3 above.

Reasons why granting an exempt ion is in the public interest:

The current USAF C-17 fleet of 148 aircraft has accumulated 1,000,000 hours of
flight with an excellent safety record. The BC-17 can be expected to demonstrate
the same high level of safety when intr oduced into the commercial fleet, providing
heavy and outsize cargo carrying capability and unique short field performance for
the public sector. Today, air lift of heavy and outsized car go by freight forwarders
and operators requires the use of foreign regi stered aircraft wit hout a type certificate
of the same safety standards as would be granted by the FAA. The U.S. Government
contracted over 250 An-124 flights wort h approximately $85M from January 2002C1-0AE1-BC17-06-0103 22 March 2006 Page 5 of 8

through September 2005. The continued use of the An-124 illustrates not only the

lack of U.S. carriers with outsize airc raft, but the useful ness of commercial
augmentation when there is insufficient orga nic outsize capacity available. A U.S.
owned CRAF carrier operating the BC-17 a llows the USAF to “Buy American” and
provides U.S. industry an alternative to a Russian based monopoly in the heavy and
outsized air cargo market.

The BC-17 can be a valuable element in prot ecting U.S. national security interests.
Acting in a CRAF role the BC-17 will suppor t military operations in the global war

on terrorism. At home and around the worl d, the BC-17 will be used to provide
rapid humanitarian relief to the victims of natural and man made disasters such as
tsunamis, hurricanes, fires, droughts a nd earth quakes, freeing up the USAF C-17
fleet for more military specific missions. The BC-17’s short and austere field
capability makes it an ideal tool to facilitate the rebuilding of Iraq, furthering U.S.
foreign policy objectives. The BC-17’s abil ity to exploit austere environments

increases the number of lo cations where project work such as oil and gas
development, pipelines and refinery proj ects is possible, offsetting the loss of
projects in areas of political instability, hostilities, or other geopolitical problems.

Two other potential applications for the BC-17 that have national security
implications are the transpor tation of spent nuclear fuel and aerial firefighting. The
U.S. nuclear power industry has the world’ s highest inventory of spent nuclear fuel,
approximately 43,000 metric tons stored at approximately 73 facilities in 33 states
and growing annually by 2000 metric tons. Driven by the nation’s need to reduce
dependence on foreign oil and to reduce noxi ous emissions, the growth of nuclear
generated electricity is a ssured if the U. S. Government can provide safe
transportation and storage of the waste. Surface transport has si gnificant security
weaknesses. The majority of the rail lin es and highway routes are accessible to
would-be protesters, or saboteurs. Because surface transport is relatively slow, each
shipment has a relatively long duration, wh ich creates a relatively long duration of
threat. The BC-17 offers a vastly superior opportunity for security because airspaceC1-0AE1-BC17-06-0103 22 March 2006 Page 6 of 8

has limited access and the higher speed reduc es the duration of the threat. The BC17’s cargo handling capability and performan ce characteristics make the aircraft an
ideal vehicle to address this polit ically charged security issue.

The U.S. fire seasons are becoming more se vere due to climate changes, untreated
fuels and the growth of the wild land urban interface. Property value loss will
increase as the population grows in rural ar eas. Since the current air tanker fleet has
limited tank capacity, increased fire severity has increased the average number of air

tanker sorties. In a ddition, the existing fleet has beco me unreliable and their safety
record is unacceptable. The BC-17 is techni cally superior, has significantly greater
capacity and is safer than existing platforms. The BC-17 will provide greater
flexibility to fire-suppression managers and can deliver an annual value benefit (cost
avoidance) to the United States of between $50M and $100M annually depending
on utilization strategy. Protecting the public’s property is a benefit that is of interest

to everyone.

As the Commission on the Future of the Un ited States Aerospace Industry, Final
Report of 2002 concludes in its first reco mmendation, “the integral role aerospace plays in [the United States] economy, ...security, ...mobility, and ...values makes
global leadership in aviation and space a national imperative.” It is essential to the
United States international competitive ness in the aerospace industry (and the
commercial and trade advantages that de rive from that position) that U.S.
companies manufacture and operate aircraft such as the BC-17, that can penetrate
the relatively untapped air cargo markets of the future, service the U.S. industrial
base, and play an important role in fostering U.S. national interests.

The type certification of the Model BC -17 under FAR 21.27 prior to it being declared surplus is in the public interest because : (1) The production and sale of the aircra ft would be of direct financial
advantage to the U.S. Government ei ther as an offset in a USAF C-17
recapitalization program or as a reduc tion in the acquisition cost of newC1-0AE1-BC17-06-0103 22 March 2006 Page 7 of 8

C-17s due to the economic advantage a ssociated with a C-17 production rate

that includes the BC-17. The U.S. ta xpayer is the ultimate beneficiary.
(2) Boeing will be able to provide more effectively for solutions to any
problems posed by operational services because of the availability of
technical and production competence for an airplane that is designed for
maximum commonality with the C-17.
(3) U.S. jobs will be created for the operator and preserved for the manufacturer
by the entry of the BC-17 into the co mmercial heavy and outsize air cargo
market, generating tax revenue for the U.S. Government.
(4) The BC-17 will benefit the public by providing a safe alternative for
transport of heavy and outsize cargo while facilitating operations into two to
three times as many airports due to its short and austere field capability.

Summary of Boeing Petition
This petition addresses FAR Part 21, Secti on 21.27 (a). It requests that the Model
BC-17 be exempt from the requirement for the aircraft to be accepted for
operational use and declared surplus by an Armed Force of the United States. A
precedent exists for granting such an exemption. The BC-17 is a demilitarized
version of the C-17, an aircraft that has demonstrated, under severe operating
conditions, an outstanding safety record. Th e granting of this exemption will be in
the public interest because it will not adversely affect flight safety and will facilitate
the most cost effective development of the Model BC-17 for commercial service,
national security reasons and CRAF enhancement.

Accordingly, pursuant to the provisions of 14 CFR, section 11.25, Boeing hereby
petitions for an exemption from the requirement for the Boeing Model BC-17
Freighter Aircraft to be accepted for opera tional use and declared surplus, prior to
being eligible for certi fication under 14 CFR 21.27.C1-0AE1-BC17-06-0103 22 March 2006 Page 8 of 8

Boeing would appreciate your prompt revi ew and concurrence with this request.
Should you have any questions regardi ng this subject, please contact the
undersigned at 562-593-8933

Sincerely,

[signature on original on file]

R. P. Ciesla BC-17 Program ManagerThe Boeing Company 2401 E. Wardlow Road Long Beach, CA 90807 (562) 593-8933

C1-0AE1-BC17-06-0103 22 March 2006 Enclosure C



### BC-17 “USED” VS “NEW” CO NFIGURATION DIFFERENCES

GENERAL ASSUMPTIONS

Focusing on Class I and major Class II projects only

USED (P1-P40)

• Assumed Block 13 configur ation less Extended Range

• P1-P40 are at a minimum Block 12 configuration, and most will be modified to Block 13 by Dec 2006

• Assumed will probably get one of the heritage Block 8 aircraft (P33- P40)

NEW (P153+) Assumed Block 17 since first aircraft completion is Jun 2006C1-0AE1-BC17-06-0103 Enclosure C 22 March 2006 Page 2 of 3



### CLASS I AND CLASS II DEFINITIONS

CLASS I: Any changes to base lined confi guration documentation that has the following impact.

All proposed engineering changes to the System Specification (MDC S001), Air Vehicle Specification (MDC S002 (I), or the System Segment Support Equipment General Specification (MDC S003) which require the issuance of a Specification Change Notice (SCN).

CLASS II: Any proposed engineering change no t meeting Class I criteria that can be effected entirely by the contra ctor within the scope of the System Specification (MDC S001), Air Vehicle (MDC S002 (I), and System Segment Support Equipment General Specificati on (MDC S003) without changing the Government approved configuration ba seline. Class II changes shall be evaluated and reported via the change pro cess for their impact to the following:

a. Engineering Order Release that m eets one of the following criteria: 1. Affects form, fit, or function of the part 2. Causes a detailed part number change 3. Causes an end item (assembly) part number change 4. Causes an installation part number change b. Support Documentation c. Support Software d. Training Systems e. Spares f. Retrofit g. Life Cycle Cost (LCC) h. Support EquipmentC1-0AE1-BC17-06-0103 Enclosure C 22 March 2006 Page 3 of 3



### BC-17 CONFIGURATION DI FFERENCES BETWEEN THE “USED” AND “NEW” AIRCRAFT

“N/EAT” Nacelle redesigned the fan duct, core reverser centerbody, and engine inlet for acquisition cost savings (P40 – 5/15/98)

Composite Horizontal (P-51 – 6/25/99)

Extended Range (P-71– 2/15/01)

Fuel Venting and Contamination improves fuel gauging and reduces sumping (P100 – 3/14/03)

Communications Open System Architecture (COSA) provides the air mobility command requirements for communica tions at all crew stations using LRU open architecture intercom and co mmunication controls (P-121 – 7/02/04)

Avionics Modernization (32 components) satisfies the requirements to replace obsolete parts -- no changes in func tionality (P121, P135, P138 – 7/02/04)

Weather Radar (WxR) provides the Next Generation commercial WxR systems for replacement of th e existing APS-133 (P138 – 7/26/05)

Stab Strut project will prevent in-flight deployment, uncommanded jacking, and door linkage damage as well as to simplify system operation, training, and installation (P138 – 2/25/05)

On Board Inert Gas Genera ting System (OBIGGS) II removes current high pressure storage and replaces it with the next generation continuous flow (P138 – 7/26/05)

High Frequency Data Link (HFDL) /Required Navigation Performance Improvements (RNPI) upgrades the navigation system for GATM compliance and provides new datalink capability in HF radio system (P-153 – 6/22/06) Incorporates 16 Avionics S/W PICRs (Rev. A) Incorporates 5 Flight Control S/W PICRs (Rev. B)

Additional Takeoff and Landing Performance resulting from Messier Bugatti Brake Incorporation (P-153 – 6/22/06)

### HAL Petition Exhibit 12

From this chart below

, the reader will note that from 1970

- 2004 the number of
fatal accidents ( worldwide ) has trended downward while the number of departures has tripled from 6 million to over 22 million annually. There can be only a few key reasons for this continued improvement

- t hat would be advanced aircraft technology and better training (also a product of advanced technology aircraft simulators) which results in b e tter operational awareness and aircraft reliability.

It stands to reason that because the C

- 17 was developed in the 1980’s and put
into s ervice in the early 1990’s, this aircraft is much more technically advanced and thus safer than an aircraft developed in the 1960’s. As we previously pointed

out the C

- 17 will provide an equal or better equivalent level of safety than the military C

- 130E which was ap proved by the FAA for commercial use in 1964 via an exemption request

.

Data Source

– AirDisaster.com

– Accident Rates By Year 0 10 20 30 40 50 60 70 80

69 73 57 57 61 43 35 34 41 63 39 57 54 52 40 32 36 20 MILLIONS 

## Worldwide Fatal Accident and Aircraft

Departures Data for 1970

- 2004

No. of Accidents

No. of FltsHOMELAND DEFENSE ASSISTANT 

### SEEWARY OF DEFE~SE

2600 DEFENSE PENTAGON IASHlNGTON, 

### DC 2030 

### 1-2600



# FEB 2 

## 6 2008
Mr. Paul 

### D. Asmus Founder & 

### President Humanitarian Air Logistics P.O. Box 61088 Palo Alto, CA 94306

Dear Mr. Asmus:

Mr. McHale asked that I 

### respond to your letter and Executive Summary regarding Humanitarian Air Logistics. Your are 100 percent correct in your conclusion that the U.S. 

### Government should seek a more efficient and effective means of providing humanitarian support in response to catastrophic international and domestic disasters.

While the Department of Defense does provide a significant amount of humanitarian support in response to catastrophic international and domestic disasters, the Department is not the U.S. 

### Government lead for orchestrating the Federal response. The Department of Defense is in support of the lead Federal agency.



### I recommend that your company provide your Executive Summary to the two U.S. Government leads for humanitarian assistance: (1) Department of State for international
response and (2) 

### The Federal Emergency Management Agency for domestic response.

Thank you for the opportunity to review and comment on your proposal.

Sincerely,

Peter 

### F. Verga Principal DeputyCOMMANDER, U.S. PACIFIC COMMAND (USPACOM) CAMP H

. M

. SMITH

, HAWAII 96861

- 4028

Admiral Timothy J. Keating, USN Commander, U.S. Pacific Command Box 64028 Camp H.M. Smith, Hawaii 96861-4028

Mr. Paul D. Asmus Founder & President Humanitarian Air Logistics P.O. Box 61088 Palo Alto, CA 94306

Dear Mr. Asmus, 12 June 2009

Thank you for your letter regarding support to humanitarian assistance and disaster relief missions. To support Federal Agencies in these missions, the United States Transportation Command (USTC) provides authodzed commercial carriers to United States Pacific Command. Humanitarian Air Logistics could potentially add to existing capabilities and provide greater flexibility in choices for USTC to support these assistance and relief operations. The USTC point of contact is Ms. Margaret Leclair, SES, Director of Acquisition, and she can be reached at (618) 576-4300 or Margaret. Leclai r@ ustranscom. mil.

Sincerely, 

# b

TIMOTHY 

### J. KEATING Admiral, U.S. Navy