Winning the U.S. Air Force contract for a new aerial refueling tanker was hard, but meeting the program’s requirements may be even harder for Boeing Co. (NYSE: BA). The good news is that U.S. taxpayers are saving about $3.5 billion. Then there is the not-so-good news.
The Government Accountability Office (GAO) released last Friday its congressionally mandated annual review of the program for 2015. The cost to the Air Force has come down 6.7% to $48.2 billion, which the GAO attributes to stable program requirements with fewer engineering change orders. The contract, awarded in 2011, called for 179 KC-46A tankers at a total program cost to the Air Force of $51.7 billion.
While the federal government has saved money, Boeing has not. The company has taken pretax charges on the tanker program totaling $1.2 billion because development costs are fixed by the contract at $4.9 billion and Boeing has to swallow any additional spending.
The first 18 planes of the order are due for delivery to the Air Force by August 2017, and the GAO said that Boeing still plans to make those deliveries by cutting the delivery schedule from 14 months to six. But the GAO is cautious:
Boeing has a challenging road ahead to complete testing and deliver aircraft. Test officials believe Boeing’s test schedule is optimistic and it may not have all aircraft available when needed to complete planned testing. Boeing also has not gotten several key aerial refueling parts qualified by the Federal Aviation Administration (FAA) and cannot get final FAA certification of KC-46 aircraft until this occurs. Program officials estimate there are 4 months of schedule risk to delivering 18 aircraft by August 2017 due to testing and parts qualification issues. Boeing is working on ways to mitigate the schedule risks.
Boeing is also contractually obligated to deliver four development aircraft by the end of May 2016. That may be a strain, given that last month’s test refueling of a C-17 cargo plane did not go well. The two planes were able to connect, but fuel could not be delivered, according to a report at Flightglobal. The plane has successfully demonstrated that it can refuel the F-16, the F/A-18 and the AV-8B Harrier II. Refueling tests remain for the A-10 Warthog and the C-17.
It took 11 years, a bribery scandal that sent a Boeing official to jail and cost one former CEO his job, and a third round of bidding before the company won the tanker contract. Whether Boeing can deliver remains to be seen.
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