Boeing’s Golden Opportunity

Boeing has a golden opportunity as it ponders whether to protest the KC-45A tanker award to Northrop Grumman.

By forgoing a protest, Boeing can adopt a statesman-like posture for the war fighter and relieve the engineering pressure that has been and would be associated with moving forward on the KC-767.

Boeing previously acknowledged that the company diverted engineers from the 747-8, 737 and various defense programs to resolving the 787 issues. With a new delay looming, these resources and any production resources that would have been assigned to the KC-767 are better served going toward the 787 and 747 programs.

In fact, consider what’s on the plate of Boeing Commercial Aircraft, which also would have prime responsibility for the KC-767 (which is based on the commercial 767):

787-3 (some work already suspended)

787-8

787-9

787-10 (status unclear)

777F

747-8F

747-8I

[737RS] and [777RS]

Despite the stated value of the tanker program, $35 billion, over 10-15 years, the loss of the contract to Boeing truly doesn’t amount to all that much. As we pointed out in an analysis after the award was announced, the net retained revenue by the winning airframer is far less than the stated value of the total contract because of the money skimmed right off the top to pay suppliers. In the case of Airbus, a European analyst estimates Airbus will only see 40% of the revenue after all suppliers are paid. (We were somewhat higher in our estimate. Boeing, with a slightly higher US content for the KC-767 than that of the Northrop/Airbus-based KC-30, would be expected to have a higher percentage retained revenue.)

But over the next five years, during the ramp-up, Boeing’s defense unit president James Albaugh told an analyst conference Boeing would have seen only a 1% increase in revenues. On $66 billion recorded last year, this is $660 million—over five years—or $132 million a year, depending on whether Albaugh was referring to an aggregate of five years (of $132 million annually) or 1% annually in each of the five years ($660 million a year). Either way, this isn’t much. The $132 million is almost a rounding error on revenues of $66 billion and while $660 million isn’t quite a rounding error, it’s pretty close.

Boeing has also said no jobs will be lost as a result of losing the contract. Demand is so great that suppliers can’t keep up with the commercial aviation production and Boeing is considering ramping up 737 production well beyond the 30 per month currently.

Boeing needs to get the 787 sorted out. This is the flagship. The tanker, at 12, 15 or 18 airplanes a year, is an after-thought.

Boeing should go for the gold with the 787, and its other programs as the bread-and-butter. Once these are sorted out, there are the issues of replacing the 777 and 737. By the time these programs are decided, then Boeing can compete for the KC-Y program.

Boeing shouldn’t miss these opportunities to pursue a protest.

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