“Boeing on Wednesday announced a $201 million post-tax charge on the KC-46 tanker program, bringing cost overruns on the program up to more than $2 billion dollars.
Boeing is locked into a fixed-price contract with the Air Force that makes the company liable for any cost growth exceeding the $4.9 billion contract value.
The company had previously paid more than $1.9 billion for cost growth induced by various technical issues during the tanker’s development. However, the $201 million charge incurred in the fourth quarter of 2016 stemmed from implementing changes to initial production aircraft, not a newly discovered problem, Boeing CEO Dennis Muilenburg said in a Jan. 25 earnings call.
“The charge we took in the fourth quarter is [centered] around the previously defined configuration changes, the wiring changes,” he said. “Now we are implementing those at the detailed level in the initial production aircraft.”
Although that work is well defined, “We have some job categories that are taking longer than planned in terms of hours per job, and that’s what you see in the charge,” he said.
The wiring issue dates back to 2014, when a Federal Aviation Administration review discovered that some wiring bundles within the tanker met commercial, but not military requirements. The issue forced Boeing to redesign some KC-46 wire bundles so that redundant wiring was not grouped together.
Today’s charge comes in at $312 million before tax, which is split between Boeing’s commercial and defense business segments.
Although the company was “disappointed” with yet another charge on the KC-46A, Muilenburg told investors that he believes the program has turned a corner as it moves from development into production.
“Last year we were talking about key development risks, flight test risks, and if you recall we had to work through some challenges on the refueling boom,” he said, referring to the problems discovered in 2016 that compelled Boeing to make hardware and software modifications to the boom.
“While we still have flight testing to go, it’s very clear now that we’re not discovering new testing risks,” he said. “It’s now about getting the first 18 aircraft delivered.”
Boeing plans to deliver the first KC-46 to the Air Force this year. Technical issues will force the company to miss its first contractual deadline to deliver 18 aircraft by August 2017. It now hopes meet that milestone by January 2018.
Last year, the Air Force awarded Boeing a $2.8 billion contract for the first 19 KC-46As. The service expects to purchase 179 tankers throughout the course of the KC-46 program.
Although President Donald Trump has indicated a desire to purchase more Super Hornets and reduce the price of Air Force One — two aircraft that could impact Boeing’s bottom line — little was said about potential changes to the programs. Asked about Trump, Muilenburg stated that he had had productive discussions with the president and is encouraged by his engagement with the defense industry.”