Risky business

This first appeared as a Comment in the 8 July issue of Flight International

Boeing’s KC-46A is a commercial derivative which re-uses sections of proven airframes and other commercial systems, plus various military equipment with an advanced state of technical maturity.
This seemingly low-risk formula persuaded US ­acquisition officials to eschew a “cost-plus” development contract, under which a supplier is reimbursed for any unforeseen overages until the programme is well into the production stages, and to instead impose a fixed-price development contract. Boeing accepted, but only after expressing some initial reservations.
As the KC-46A nears entering its flight test phase, the experiment with fixed-price development on such a military system will be interesting to watch.
The US Government Accountability Office says the airframer has used up all but about $75 million of the funds available under the original development deal – at least three years before the development phase is due to be completed. The watchdog has warned that this schedule may have to be extended by between six and 12 months to complete all the required tasks. That means Boeing could be exposed to extra costs totalling hundreds of millions of dollars, if there is a delay.
So far, company officials are confident that they are on track to complete development on time, although they offer several cautious disclaimers, too.
If Boeing should fall behind, the most important question is: How much risk is it willing to absorb?
The company is no stranger to aircraft projects going awry, leading to exorbitant development costs: the 787 programme is a case in point. But the Dreamliner has dozens of buyers and hundreds of potential customers, so Boeing knows it can still turn a profit eventually.
The US Air Force plans to buy 179 tankers over the next 15 years to replace hundreds of KC-135s. There are other potential KC-46A buyers, but none approaching the scale of the domestic requirement. So Boeing is highly exposed to any shift of demand by its current single customer – a business model that would be unlikely to please the boards of most public corporations.
That means Boeing is forced to absorb all the risk of cost overruns in the development phase, while having no assurance that the US military will follow through in the production phase. It of course accepted this ­arrangement, so it is too late to withdraw now.
In the end, however, the KC-46A could become a case study for how not to structure a military aircraft development deal.

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