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Boeing reports second internal KC-46 cost overrun

Boeing will absorb another after-tax charge related to the KC-46 programme, as overall costs approach $1.5 billion over the US Air Force’s original contract award.

The after-tax charge of $536 million will be reported in the second quarter results to be announced on 22 July. That charge comes only a year after Boeing reported a $272 million after-tax charge on the KC-46 programme.

Boeing blames the latest charge on “higher estimated engineering and manufacturing costs to complete development, certification and initial production of the tanker aircraft”.

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Boeing has flown the first 767-2C, a commercial freighter that will be modified to become a KC-46 tanker. But the first flight of the military version has been delayed several months

Boeing

But the company still plans to deliver 18 tankers to the US Air Force within the next two years, as the USAF schedule requires.

The USAF awarded Boeing a KC-X development contract with a fixed-price structure in February 2011 worth $4.4 billion.

The deal included a $500 million escalation clause to cover any costs over the $4.4 billion award.

But Boeing burned through that sum within three years of the 6.5-year development phase. The company also has reported two pre-tax cost overruns totaling more than $1.02 billion.

Last year, the Government Accountability Office (GAO) assessed the programme and predicted that Boeing’s costs would overrun the escalation amount by $786 million.

Even as Boeing acknowledged a $272 million after-tax charge on the programme last year, however, then-Boeing chairman and chief executive Jim McNerney dismissed the GAO’s higher cost overrun estimate, saying the body was using military-based metrics and Boeing was running the development programme on a more efficient, commercial basis.

As it turned out, Boeing’s costs exceeded the GAO’s estimate by more than $200 million.

“While we are disappointed with this charge, we are investing the necessary resources to keep this vitally important programme on schedule for our customer,” says Boeing president and chief executive Dennis Muilenburg, who succeeded McNerney as CEO on 1 July.

Boeing’s latest disclosure comes only three weeks after South Korea rejected the KC-46 in favour of the Airbus KC-30 multi-role tanker-transport for a contract award of four aircraft.

Both companies are continuing to compete for a similar tanker contract expected to be awarded by Japan later this year.

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