Boeing's defense unit has logged $222 million in losses since January on two major firm fixed-price contracts with the Air Force, the KC-46A and T-7A, Chief Financial Officer Brian West told investors today during a first-quarter earnings call.
The KC-46 Pegasus tanker program bled another $128 million while the new T-7 Red Hawk trainer shed $94 million, West said. These firm fixed-price contracts require Boeing to absorb any additional costs when technology development goes over budget and can often cause significant delays. Boeing has so far taken on more than $7 billion in cost overruns on the KC-46 tanker alone.
Meanwhile, the Air Force has said it does not favor fixed-price contracts because companies may undersell the price of high performance just to win the contract.
“Our game plan to get [Boeing Defense, Space and Security] back to high, single-digit margins by the [20]25, [20]26 timeframe remains intact,” West said. “We still expect to return to the strong historical performance levels as we roll into new contracts with tighter underwriting disciplines” in the next two years.
The major aerospace company has also been dealing with significant quality issues since a commercial 737 Max 9 aircraft suffered a midair door plug blowout in January that forced an early landing and prompted an investigation by the Federal Aviation Administration. Boeing Chief Executive Officer David Calhoun in March announced he would be stepping down at the end of the year as part of a broad managerial shakeup to address a lack of confidence in the company’s safety protocols.
The company has an internal unnamed candidate to fill Calhoun’s position “that I think the world of,” he said. “My view is that next leader has to be prepared to make smart, long-term decisions and get the development programs right.”
Still, Boeing pointed to some successes in its core defense portfolio, having delivered 14 aircraft in the first quarter of the year and receiving a 6% boost in revenue on improved volume.
On reducing risk, West said the company will deliver the two VC-25B presidential aircraft -- effectively ending the program -- despite racking up more than $2 billion in charges over the course of that jet's development.
The T-7 is also proceeding well, he said, with the jet expected to exit flight testing by the end of this year. But that program has also claimed losses, causing the Air Force last spring to rebaseline it to accommodate the company. An original contract penned in 2018 called for initial operational capability in 2024 and low-rate initial production deliveries to start in 2023.
The rebaselined schedule, however, predicted entering LRIP in February 2025 and for deliveries to begin in December the same year.
Now, new dates determined in the fiscal year 2025 budget would push the LRIP schedule an additional four-months to the right, and IOC back one more year from 2027 to 2028.
Boeing’s five firm fixed-price development programs represent about 15% of its defense revenue.
“Despite the relatively modest updates in the quarter, we continue to retire risks. We remain focused on maturing these programs quarter in and quarter out,” West added.