Air Force Awards Boeing $2.8 Billion Contract for New Tanker

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The U.S. Air Force has awarded a contract valued at $2.8 billion to Boeing Co. (NYSE: BA) to produce the first 19 new KC-46A tankers. The contract comes about a month after the company passed a major milestone in the project and after nearly $2 billion in pretax charges that Boeing had to swallow on the program.

The contract award calls for the Air Force to acquire seven¬†tankers from low-rate initial production (LRIP) lot 1 and 12 tankers from LRIP lot 2, along with spare engines and wing refueling pod kits. Deliveries are “expected to be complete by August 24, 2018,” according to the Air Force announcement.

In mid-July the new tanker passed the last of six flight refueling tests required for the contract award. In order to clear the Air Force’s “Milestone C,” the KC-46A had to pass fuel to Air Force F-16 fighter jets, Navy F/A-18 Hornets, the Marine Corp AV-8B Harrier II, the C-17 cargo plane, the A-10 Thunderbolt II (aka the Warthog) and another KC-46 as the receiving aircraft.

Boeing plans to build a total of 179 KC-46A tankers to replace the current Air Force fleet of KC-135 tankers. The last KC-135 entered service in the mid-1960s.

The new tanker is based on the company’s 767 jet. Boeing built two 767-2Cs and two KC-46As as part of its engineering and manufacturing development contract with the Air Force. The fixed price for those planes was $4.9 billion. As already noted, Boeing has had to swallow nearly $2 billion in costs above that figure, but it may be worth it. The total value of the contract could exceed $100 billion, including spare parts and other services.

Boeing’s stock closed up about 0.2% on Thursday at $135.00 and was inactive in Friday’s premarket. The stock’s 52-week range is $102.10 to $150.59 and the 12-month price target is $149.27.