Boeing has taken another financial hit from its 767-based KC-46A Pegasus tanker programme, with the company reporting a $243 million pre-tax charge for cost overruns on the US Air Force project.
The company celebrated the launch of its fourth and final test model this week and can expect to deliver 179 KC-46A to the US Air Force through 2027, but this latest charge – which many analysts had been predicting – brings the total amount Boeing has paid for tanker-related cost overruns to $1.5 billion.
Boeing Military Aircraft was awarded a $4.4 billion fixed-priced KC-X development contract in February 2011, and the Air Force had factored in a $500 million safety net in case the engineering and manufacturing development phase went over budget. But Boeing quickly ate through that war chest and has had to stump up the cash for any KC-46A development costs above $4.9 billion.
Boeing Defense, Space & Security
In July 2014, Boeing announced its first $425 million pre-tax charge ($272 million after tax) because electrical wiring had been improperly installed in the first four development aircraft. In July 2015, the company announced a second pre-tax charge of $835 million ($513 million after tax). This third charge of $243 million allows Boeing to “maintain schedule with concurrency between late-stage development testing and the transition to initial production”, it says.
Boeing Commercial Airplanes will accept the lion’s share of the cost overrun, recording a $162 million pre-tax charge. Boeing Military Aircraft will record an $81 million charge on its books. The total cost to Boeing is $156 million after taxes.
In sum, $6.4 billion has been spent on the KC-46A tanker programme. The next financial instalment from the US government is expected later this year if the tanker if approved for low-rate initial production (LRIP).
Boeing is chasing two contracts for seven and 12 operational aircraft, respectively, but late delivery of the full complement of test aircraft and difficulties boom refuelling the C-17 strategic transport aircraft has seen that “milestone C” decision and the expected start of an operational assessment push farther out. That Milestone C acquisition decision had been expected this month, but will now wait until June, according to the air force. Boeing is still obligated to deliver the first 18 operational aircraft by August 2017.
Boeing president and chief executive Dennis Muilenburg told investors during a 27 April earnings call to expect the first LRIP contract in late June. He remains confident about meeting the August 2017 delivery deadline, with 15 total aircraft now in the supply chain and seven 767-2Cs now coming down the assembly line in Everett, Washington.
Muilenburg says the KC-46 team has completed 80% of the test points required for a positive Milestone C decision. He expects the global tanker market to be as high as 400 aircraft in the long term. “Without question, this is an investment worth making," he says.
Boeing Defense, Space and Security
Boeing’s defence business generated $8 billion in revenue in the first quarter of 2016, up 19% compared to the $6.7 billion recorded last year. Boeing delivered 49 military aircraft from January to March including four F-15s and three C-17s, which is up from 41 in the first quarter last year. Profit, however, dipped 0.8% from 11.1% last year to 10.3% in Q1 2016.
In the quarter, the company captured an order from the US Navy for 20 P-8A Poseidon armed maritime patrol aircraft and signed another deal with the Army for 117 more AH-64 Apache gunships. Boeing also received a sizable order for 15,000 Joint Direct Attack Munition tail kits.