Boeing’s New Air Force Tanker Still Faces Problems

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When Boeing Co. (NYSE: BA) reported fourth-quarter 2016 earnings in January, the company announced a $201 million charge to the KC-46A tanker program. That brought the total cost overruns on the U.S. Air Force’s new tanker to over $2 billion. Things could get worse.

Under the terms of the revised contract with the Air Force, Boeing needs to deliver 18 planes by January of 2018 and 18 refueling pods by October 2018. The U.S. Government Accountability Office (GAO) issued an updated report on the KC-46A program in March, confirming that the costs and performance targets were being met while the schedule remains a problem.

Leanne Caret, CEO of Boeing’s defense, space, and security division, told Aviation Week on Tuesday that she was “not thrilled with where we are today:”

[I]t has not been easy or graceful—we are within line of sight to delivering aircraft this year. I am very pleased with the progress the team has made and the fact that we are going to be delivering an amazing, combat-ready tanker to the U.S. Air Force.

The GAO is not so sure:

GAO’s analysis shows there is risk to the current delivery schedule due to potential delays in Federal Aviation Administration certifications and key test events. Boeing must also complete over 1,700 test points on average for each month from February to September 2017, a level that is more than double what it completed in the last 11 months. Program officials agree that there is risk to Boeing’s test completion rate until it obtains Federal Aviation Administration approval for the design of all parts, including the pods, but test mitigation strategies are underway.

Source: U.S. Government Accountability Office

Boeing announced on Wednesday that a sixth KC-46A had entered its test program. The latest addition is the second of a low-rate production lot of seven planes. The Air Force and Boeing have agreed on price and schedule for the first three low-rate production lots totaling 34 aircraft.

The total number of new tankers on order is 179 to replace less than half the existing fleet of 59 KC-10 and nearly 400 KC-135 tankers. The KC-135s  average 55 years old and the newer KC-10s average 30 years old. The total value of the contract could exceed $100 billion, including spare parts and other services.

Boeing is the third-highest performing stock on the DJIA, up 17.8% year to date, trailing only Apple (up nearly 27.0%) and Visa (up nearly 18.5%). Shares closed nearly flat on Wednesday at $183.39, in a 52-week range of $122.35 to $185.71. The 12-month consensus price target is $188.05.