On February 24, 2011, the Department of Defense (DOD) announced the Boeing Company as the winner of a competition to build 179 new KC-46A aerial refueling tankers for the Air Force, a contract valued at roughly $35 billion. The KC-Xs, to be procured at a maximum rate of 15 aircraft per year, are to replace roughly one-third of the Air Force's aging fleet of KC-135 aerial refueling tankers. The Air Force and the U.S. Transportation Command state that replacing the KC-135s is their highest recapitalization priority. The Administration's proposed FY2014 defense budget requested $1,558.6 million in Air Force research and development funding to continue KC-46A development and acquisition. The KC-46A acquisition program is a subject of intense interest because of the dollar value of the contract, the number of jobs it may create, the importance of tanker aircraft to U.S. military operations, and because previous attempts by DOD to move ahead with a KC-X acquisition program over the last several years have led to controversy and ultimately failed. The history of those earlier attempts forms an important part of the context for DOD's KC-X competition, particularly in defining the required capabilities for the KC-46A and designing and conducting a fair and transparent competition. The issues for Congress in FY2014 are whether to approve, reject, or modify the Air Force's request for FY2014 research and development funding for the KC-46A program, and to evaluate the fairness and transparency of the contract process. Congress' decision on these issues could affect DOD capabilities and funding requirements, and the aircraft manufacturing industrial base. In January 2013, the Air Force announced the list of candidate bases to host the first tranche of KC-46As. Three bases will be selected from the list; one to host training, and one base each from the active Air Force and Air National Guard to host operational KC-46s. The training unit and active-duty operating base will begin receiving the KC-46A tankers in fiscal 2016 followed by the Guard base in fiscal 2018. Ultimately, the Air Force will establish 10 main operating bases for the 179 tankers that it plans to buy. According to a Defense Department news release, Altus Air Force Base, Oklahoma, and McConnell Air Force Base, Kansas, are candidate bases for the KC-46A training unit. Altus and McConnell are also candidates to be the first active-duty led KC-46A main operating base, as are Fairchild Air Force Base, Washington, and Grand Forks Air Force Base, North Dakota. Forbes Air Guard Station, Kansas; Joint-Base McGuire-Dix-Lakehurst, New Jersey; Pease Air Guard Station, New Hampshire; Pittsburgh International Airport Air Guard Station, Pennsylvania; and Rickenbacker Air Guard Station, Ohio, are candidates to be the first Air National Guard led KC-46A main operating base. In late 2012, a number of articles and analysts posited that automatic reductions provided for in the Budget Control Act of 2011 ( P.L. 112-25 ), also called "sequestration," might cause the Air Force to default on the KC-46A development contract, because the cuts would reduce funds available to the program below the fixed price negotiated between Boeing and the Department of Defense. If enough money was cut and the tanker contract is scuttled, the Air Force would have to renegotiate the contract without any certainty it could keep its fixed-price status, said [Maj. Gen. John] Thompson, who took over the tanker acquisition program five weeks ago. "Depending on how sequestration is implemented, I might have to break my fixed price contract that I got such a good deal on," Thompson said. "I don't want to break my contract and I'm fearful that sequestration may force me to do that." The sequestration effect on the KC-46A program would have been in addition to the reduction in program funds resulting from the use of a continuing resolution for the FY2013 DOD budget. "DoD planned to spend $1.8 billion on the tanker program in fiscal 2013. However, Congress has failed to pass a new budget, leaving programs funded under a continuing resolution that leaves financial support at 2012 levels. For the KC-46 program, that means making do with just $900 million, or half of what the program office had planned for this year." The explanatory statement accompanying the conference report on H.R. 933 put funding at $1,738.5 million, a reduction of $77.1 million from the Administration request. At that level, the Air Force "would not need to modify its fixed-price development contract with KC-46-maker Boeing ... Lt. Gen. Charles Davis, the Air Force military deputy for acquisition, said." In September 2012, the government of Singapore submitted a request for information to begin evaluating the KC-46A as a possible replacement for Singapore's KC-135 tankers. On May 2, 2013, the Air Force announced that FlightSafety Services had won the competition to provide training devices for the KC-46A. "The company won over Boeing, which is developing the KC-46, Lockheed Martin, CAE and L-3 Link Simulation and Training." The deal calls for delivery of the first aircrew training device by February 2016. The $787 million contract contains options for production, training, operations and sustainment, according to an Air Force press statement. Air Force Major General Christopher Bogdan, the KC-46A program manager, was reassigned to the F-35 program in July 2012. His successor is Major General John F. Thompson. Aerial refueling aircraft—commonly called tankers—provide in-flight refueling services to bombers, fighters, airlifters, surveillance aircraft, and other types of aircraft flown by the U.S. military. Tankers enable other aircraft to deploy quickly to distant theaters of operation, and to remain in the air longer while operating in those theaters. Aerial refueling capability is a critical component of the U.S. military's ability to project power overseas and to operate military aircraft in theater with maximum effectiveness. The Air Force operates the U.S. long-range tanker fleet, the subject of this report. The Navy and Marine Corps also operate shorter-range tankers in support of tactical missions. The Air Force's current fleet of large tankers consists mostly of 414 re-engined KC-135R Stratotankers. The first KC-135 entered the Air Force inventory in 1956, and the final one was delivered in 1964. The average age of the current KC-135 fleet is nearly 51 years. The aircraft have received various upgrades and modifications over the years, including new engines. DOD states that if new tankers are procured at a rate of 15 per year, the last KC-135R would be more than 80 years old at retirement. (For a discussion of the potential longevity of the KC-135 fleet, see Appendix B ) On September 15, 2009, it was reported that: It will cost the Air Force up to $6 billion per year late in the next decade to maintain its aging fleet of KC-135 tankers, according to a senior service official… The cost of maintaining the Stratotankers will continue to rise as the next-generation KC-X tanker program continues to slip, Air Mobility Command chief Gen. Arthur Lichte said during a briefing today. The Air Force's fleet of large tankers also includes about 59 KC-10 Extender aerial refueling aircraft, the first of which entered service in 1981. The KC-10 is a much larger aircraft than the KC-135 or the KC-46A. DOD envisages replacing the KC-135 fleet in three stages. The 179 new KC-46As would replace roughly one-third of the KC-135 fleet. Tankers to be procured in the second and third stages would be designated KC-Ys (envisioned as a KC-46A continuation or follow-on) and KC-Zs (a probable replacement for the KC-10 fleet). A March 2013 GAO report states that the procurement cost of 179 KC-Xs could be about $34 billion, or an average of about $190 million per aircraft. The KC-46 is being acquired using a fixed-price incentive development contract with firm-fixed and not-to-exceed pricing or production. This contract structure effectively limits the total cost borne by taxpayers, with most of the cost growth risk placed on the contractor. The KC-46 program utilizes a fixed-price incentive development contract. The target value is $4.4 billion, with government liability limited for costs over $4.9 billion. Boeing sources confirmed that arrangement on Wednesday, saying if the costs fall in the $3.9 billion to $4.9 billion "delta," the Air Force would pay 60 percent and Boeing 40 percent. That is the contract structure and cost arrangement accepted by the Air Force, the Boeing sources said, noting the service weighed this against cost projections for the same scenario offered by Airbus's EADS. The tanker's estimated development costs are currently around $900 million higher than the February 2011 contract award value, but the USAF is liable for only about $500 million of this total. The remaining $400 million is Boeing's responsibility. [T]he contract has a mechanism to vary production rates. For example, in years three, four and five, the USAF has the option of buying between nine and 18 jets and would still get good prices, (program executive officer Maj. Gen Christopher) Bogdan says.