Boeing refueling jet gets much-needed momentum with $2.1 billion deal
Washington Business Journal Online 01/30/2017
Author: James Bach
2017 American City Business Journals, Inc. All rights reserved
The new year is proving to be good thus far for The Boeing Co.'s (NYSE: BA) once-beleaguered tanker replacement, with the program gathering momentum in the wake of a $2.1 billion contract win Friday to build 15 more KC-46As.It represents the third contract for deliveries of the refueling aircraft and follows a $2.8 billion deal inked in August for a total of 19 planes. This means Boeing is currently on contract for 34 of the planned 179 KC-46As.
Boeing, a Chicago-based company, has about 2,700 employees in the Greater Washington area. Its defense business, which accounted for $29.5 billion of the company’s $94.6 billion in revenue in 2016, moved its headquarters to Arlington from Hazelwood, Missouri, earlier this month.
Since the contract was first awarded in 2011, the tanker has been an unexpectedly frustrating program for Boeing. Once considered a relatively low-risk program of converting a commercial 767 jet to a military refueling tanker that would replace the KC-135, KC-46 development has been marred by cost overruns and delays.
Because of the perceived low risk of the undertaking, the contract for development was fixed price. Unlike a cost-plus contract, Boeing would bear all the risk and have to swallow any cost overruns. In July 2014, Boeing took a $272 million after-tax charge on the program, and those only added up in the two years to follow. In July 2015, Boeing took another $536 million charge, with two more in 2016 totaling $549 million.
The final charge that came in July — and totaled $393 million — was expected to be the last as the program was moving into production. But last week the company reported it took a pre-tax charge of $312 million. The company’s commercial business absorbed $243 million of that total, while the defense business was saddled with the remaining $69 million.
Over the course of the program’s history, the KC-46’s problems could be traced to issues with the aircraft’s wiring and aerial refueling systems and a fuel contamination incident, sparking a 14-month delay, the U.S. Government Accountability Office reported in November.
Despite these struggles, analysts I spoke with expected 2017 would be the year the program “hit stride”— with this recent contract reinforcing that notion.
“I think that that ought to be a program positioned to do much the same, pick up a lot of momentum this year,” Ben Harper, a partner and head of Boston-based Fairmont Consulting Group LLC’s aerospace practice, told me earlier this month.