Reference_AAR_Q_and_A.docx

Reference: FedBizOps posting for N00421-16-R-0032 dated Aug 1, 2017

For the purpose of finalizing the acquisition strategy for the CAS Air to Air Refueling procurement, what are the minimum number of annual flight hours that would be required for your company to submit a proposal in response to the planned solicitation for these services?

Any contractor will have to procure capital from commercial sources to pay for equipment, aircraft modifications, spare parts, employees, facilities, training and other expenses in order to have the 'Readiness' to commence certification and monthly operations. This capital investment will have to be repaid on a set term with interest. In general, the longer the term (contract length) to amortize the repayment, the lower the monthly capital recovery cost to the contractor. The value to the US Government in allowing contract amortizing over 10 years will provide roughly 40% lower monthly capital recovery costs versus a 5 year period. This value would be directly translated into lower flight hour costs and/or a lower readiness CLIN costs.

To make a business case the contractor team (prime, subcontractors, suppliers and lenders) will need to have an ensured minimum monthly revenue. This can come in the form of a Readiness CLIN or a minimum flight hours. In correspondence with NAVAIR last month (attached) the Government indicated its intention to offer both a Readiness CLIN and annual flight hours of 875/year. This gave our team high confidence to bid.

Should the government now decide to NOT offer a Readiness CLIN, then having a minimum annual flight hours with a monthly minimum guarantee is essential. without which building a business case will become very difficult. In general the higher the flight hour / flight minutes monthly minimum the lower the cost and higher the value is to the government. For a more detailed discussion we offer our answers from the last Industry Day questions.

CASS Professional Services (CPS) responded to a similar question posed by the Navy at an earlier Industry Day. Our answer was:

Should there be a guaranteed minimum amount of work (flight minutes, etc.)?

ANSWER: A minimum guarantee is essential to build a best value business case for a modern tanker variant. Best Industry Practices continue to replace older, higher maintenance aircraft with new aircraft at higher utilization rates. Even considering the capital costs, the new aircraft lower operating costs spread across additional hours creates compelling value.

Increasing the guarantee from 72.9 hours/month/aircraft to 83 hours yields ~10% hourly cost savings.

Raising the guarantee to 100 hours/month/aircraft yields approximately 20% hourly cost savings.

Summary Recommendation: 1000 Hours per aircraft/year minimum, 1200 recommend for best value.

The same Navy questionnaire asked about a Readiness CLIN. Our response was

Should there be a fixed monthly cost or 'Readiness' CLIN?

ANSWER: Per earlier NAVAIR guidance we have built our cost models on an hourly basis, however it makes no relative difference to us.

Detailed discussion: NAVAIR will likely evaluate two very different business models: one with end of life cycle equipment and one with modern equipment.

-A business model utilizing modern aircraft will have larger fixed capital costs (readiness) but will have significantly lower operating costs; this model achieves greater value for the USG with higher utilization rates.

-A business model utilizing older equipment will have very little fixed capital costs but very significant operating costs due to maintaining end of service life equipment . and unfortunately provide lower value by operating less reliably.

Use of a Readiness CLIN would highlight the extremes between these two models.we believe that a 100 Hr/month flight minimum CLIN would provide a more 'apples to apples' comparison.

However.post 5 July 2017, per USG guidance our business model now include both a readiness CLIN and 875 hour guarantee.

We view these aircraft as primarily dedicated US Navy assets, the number of flight hours that they fly is not overly relevant so long as there is a monthly guarantee (readiness CLIN and/or minimum hours) to ensure payments to employees, lenders and subcontractors/suppliers. However, we highly recommend that the government consider offering the longest possible contract term along with the highest minimum guarantee as it will allow us to generate a much higher total value to the Government per unit of delivered service in our proposal.