Pontifications: Boeing takes another charge on tanker program; What’s next?

By Scott Hamiltn

By Scott Hamilton

July 20, 2015, © Leeham Co.: Boeing on Friday took another charges against its USAF aerial refueling tanker program, the KC-46A, this time $536m after taxes ($855m before taxes). This brings the charges to date to more than $800m after taxes ($1.3bn before taxes).

So much for my vacation and skipping Pontifications this week.

The new charge is split between Boeing Commercial Airplanes ($513m pre-tax) and

Boeing Defense, Space & Security ($322m pre-tax). This is because the KC-46A is based on the 767-

Japan’s KC-767. What about “lessons learned?” Photo via Google Images.

200ERF and BCA is principally in charge of the development.

Last week, the USAF–before the Boeing announcement–said it still expects the first production tankers to be delivered on time, in 2017, but Boeing Commercial’s recent track record of developing, producing and delivering airplanes on time and on budget leaves a lot to be desired.

Boeing has this to say in its press release Friday:

The after-tax charge of $536 million ($0.77 per share) reflects higher estimated engineering and manufacturing costs to complete development, certification and initial production of the tanker aircraft, while holding to the program schedule for initial production deliveries in 2017. The KC-46 tanker is being designed, developed and tested under a fixed-price Engineering, Manufacturing and Development (EMD) contract.   

“While we are disappointed with this charge, we are investing the necessary resources to keep this vitally important program on schedule for our customer, and meet our commitments for delivering the initial 18 tankers to the U.S. Air Force by August 2017 and building 179 tankers by 2027,” said Boeing President and Chief Executive Officer Dennis Muilenburg. “We have a clear understanding of the work to be done, and believe strongly that the long-term financial value of the KC-46 program will reward our additional investment.”

Increased company investment in the program primarily is being driven by required rework on the airplane’s integrated fuel system that was identified as Boeing prepared for and conducted test and verification of that system during the second quarter. The added investment will support the engineering redesign, manufacturing retrofit and qualification and certification of the fuel system changes, and the conclusion of ground and flight testing on the program.  

The KC-46 fuel system is a complex, integrated system that provides fuel to the aircraft’s engines and the capabilities to refuel other aircraft in flight. It is the final major system to be qualified in the KC-46 development program. Non-fuel system-related qualification testing is now more than 90 percent complete, and the overall ground and flight test program continues to progress, with initial airworthiness flight tests successfully completed in the second quarter.

I find the third paragraph a bit puzzling. Recall that Boeing produced eight KC-767 tankers for the Italian and Japanese air forces and that officials claimed to learn lessons from this program’s difficulties that led to write-offs, cost over-runs and delayed deliveries. What is different about this fuel system from the KC-767 International program to cause another set of delays and charges?

According to a report Friday by Dominic Gates of The Seattle Times, the fueling system is new to the KC-46A, different than on the KC-767.

One Wall Street analyst I talked to Friday said this latest event raises questions about  Boeing’s ability to execute. The 787, 747-8 and the 737-based Wedgetail military airplane for Turkey and Australia each had serious delays. The 737-based P-8 Poseidon had a few delays, “inconsequential,” this analyst said. Indeed, the success of the P-8 and the “one Boeing” (Commercial+Defense) approach was held up  by Boeing officials as a model to be followed the for KC-46A.

What has gone wrong?

During the very bitter competition for the KC-X contract, first against Northrop Grumman and then EADS between the 767-based offering and the KC-330 MRTT Airbus-based airplane, Boeing and its supporters constantly touted Boeing’s experience in building tankers (even though that last Boeing-designed and built tanker, the KC-135, was delivered in 1966), fueling systems and booms.

The winning bid was what’s called the Technically Acceptable, Lowest Price contract. Boeing was the lowest bidder,  by 10% under EADS.

Yet the USA and USAF so far are the only customers for the KC-46A. Every other customer has gone Airbus.

One can’t help but wonder, what’s next?

The 737 MAX and 777X derivatives are in development. While Leeham News hasn’t heard anything to suggest current issues aren’t manageable, BCA’s history of developing new and derivative airplanes in what is almost the last decade (!) is hardly reassuring.

You just have to wonder.

 

 

30 Comments on “Pontifications: Boeing takes another charge on tanker program; What’s next?

  1. Boeings words ..”engineering redesign, manufacturing retrofit and qualification and certification”… could almost be pulled from the 787 program
    .
    What they design isnt adequate, what they make doesnt fit and what they test has to be repeated.
    Not really sure the USAF is looking forward so sanguinely towards Boeings words-” long-term financial value of the KC-46 program will reward our additional investment.”

  2. They should have stuck with the KC-45.
    What has happened to the Boeing of Messrs Allen, Wilson and Shrontz?
    Let’s hope they can get it right with the 777X.

    • What happened to the Boeing of yesteryear? Simple Harry
      Stonecipher ( ” this is NOT a family ” ) and ” Shareholder value ”

      Followed by Mr Post-it, way too many ex GE types on the Bored, and of course the great sale of Boeing to MDC.

      Add in the ‘ love fest ‘ between BA and the Unions, mix in the greatest handout re taxes in History without Job guarantees, the fantastic rollout of a Potomptkin (sp) 7 late 7, and a slIght overrun of 20 to 30 Billion ( we’ll make it up in volume ) and you have the ” new ” Boeing.

        • Things started going south when McNerney ran Mulally off. Boeing hasn’t had a successful development program since then.

  3. It certainly leaves one suspicious of Boeing’s “we’ll bring the EIS forward” pronouncements for both the 737 MAX and the 777X.

    • What’s up with the photo?

      Is this an aviation blog site or Tinder? LOL.

  4. If they did the Italian and Japanese tankers in metric, perhaps they have an excuse, but wow!
    I wonder if there is a peg on spare parts escalation pricing for the program?

  5. I think every one deep down expected/ accepted this from the moment Boeing “won” the third round in the famous tanker battle. I think few will doubt who will, left or right, pay the bill for those tankers. Any surprised reactions are drama in my opinion.

    What’s next?

    Getting the new boom, it’s software, stability right and qualifying it for all applications will take 2+ years from first flight.

  6. When speaking of 737 MAX, it all comes down to the engines really. While there are some new manufacturing techniques being applied, they do not seem radical, and the production system remains fairly similar and stable on the face of things.

    777X will be another case altogether, with a new composite wing, and automated fuselage build, and an even leaner production system, woven into the current 777 line. Combine it all together and that spells trouble. Push the program forward a year and make that BIG trouble.

    It’s much safer to bet that it will be late, and over budget than otherwise.

    Having crushed the IAM, SPEEA is up next for flogging, even as Boeing’s engineering acumen seems under strain. The timing is exquisite.

  7. “When speaking of 737 MAX, it all comes down to the engines really.”

    – Entirely new engine
    – Pushed to its EGT/ OPR limits to match the GTF’s / NEO’s BPR’s.
    – SFC miss rumors not been put to rest
    – MAX struggling to keep 40% marketshare

    http://airwaysnews.com/blog/2015/04/07/cfm-missing-the-leap-1b-would-be-a-major-blow-to-boeing-737-max/

    Boeing has a very competitive product line in terms of the mid-market where the majority of the orders are in the -8 category. The 165-seater sector represents “70% of the demand” and Airbus is still catching up to the 737NG.

    Move on nothing to here. (while we scramble to stop A321NEO..)

  8. I don’t think it is coincidence that the onset of Boeing’s program execution troubles coincides with the onset of the McBoeing era.

    McDonnel Douglass management drove that company into the ground, convinced Boeing to let themselves be bought out with their own money and now we are seeing that toxic corporate culture drive Boeing into the ground.

    when the only thing Management cares about is short term “shareholder value” that company is not long for this earth.

    • Shareholder value is really code for executive bonuses based on share options

  9. Its …its deja vue all over again !
    Its my understanding that Boeing defense was pretty much kept out of the P-8 ( Poseidon ) program which seems to have worked well. Even with the Cowering employees.
    http://www.speea.org/Communications/Temp/Must_be_cowering.pdf

    And guess who was honcho on the “ winning” contract for the tanker?
    Peter Principle reigns

    So once again, the impact of BA sale to McDouglas rears its ugly head.
    A bit of History follows for the youngsters.

    The following is an extract from a long ago meeting involving several things, but mainly how the tanker lease cluster came about. And yes, I wuz there.

    BTW- Rudy was asked if the meeting was open and on the record- his answer was YES

    Meeting re Tankers and CVD – extracts from original minutes
    Monday, February 25th, 2002
    And I was there – but have deleted all other employee names at meeting
    COMPANY REPRESENTATIVES: Rudy de Leon, Bill Baragar, and Bob Watt
    XXXXX provided overview and history of how we got where we are today. What the subcommittee has accomplished to date, his support for the project, and what he and Mr. de Leon had discussed in a prior meeting.

    Mr. de Leon started with his resume, which included the important fact that he had only been with the Boeing Company for the past six months. He continued with the fact that he was here today to discuss three issues: 1) Air Force 767 tanker program; 2) FSC tax, and 3) the plusses and minuses of a trade filing at this point in time.

    Mr. de Leon has a team of 12 looking at the Airbus issue, which was commissioned by Phil Condit.
    1) Tankers – the KC135’s are approximately 40 years old. The Air Force wanted leases to make it easier to get a new fleet of tankers, due to budget constraints over the next several years. Leasing the tankers allows the money to come from another pocket where money is available. The Air Force wanted 767s because Boeing built almost all the tankers the Air Force ever had. They were also getting lots of support from Congress, and on 12/21/01 Congress passed the defense budget bill containing provisions to lease up to 100 converted 767 tankers. However, The Washington Post ran an Airbus story the day before Christmas saying Airbus could build the tankers and for 40% less money. Boeing needs to prevail on this issue for the good of Congress, the public, and the Air Force with a contract. Airbus has retained DC law firms to help them make this a competitive bidding process. Airbus is making this a subsidy issue by saying this is nothing more than a handout to Boeing. The Air Force has to decide tankers configuration before the design phase may begin.
    Don asked when do we make the 1st airplane and the answer was we would start right away once we had a contract in hand. The present schedule is for a 2004 rollout and 2005 delivery of the first airplane. 25% of the KC135’s are in the depot at any one time so the Air Force is flying wings off these aging planes. We also need new planes to support the War on Terrorism. This is a limiting factor for other flights (fighters, bombers, transports, etc.).
    2) FSC – impacts us all because it is a tax deal. European industries can get VAT tax back on goods they sell outside the EU. This provision for VAT was grand-fathered into WTO agreements in the 1980’s. However, FSC taxes were not grandfathered into the WTO agreements for some reason. Our government needs to fix the FSC tax problem in the WTO agreements if possible. XXX questioned, how does our CVD petition cause a problem? Answer: A trade case opens up a third front to attack Boeing. Airbus would say Boeing wants a trade case because we can’t compete in the market place. The fact that SPEEA filed the CVD Petition makes no difference as it would be said that Boeing put us up to it.

    Rudy said his staff’s focus will be on 767 tankers and FSC tax issues, so he hopes he does not have to deal with the CVD petition at the same time since his political and legal resources are already tied up. Discussion on what this means and how we might be of more help then began. Mr. de Leon presented two ideas on how people might help:
    1. SPEEA could work the hill (Congress) on 767 tankers and FSC taxes.
    2. Help find some mechanism to level the trade “playing field” between America and EU.

    xxxxxx made a couple of comments:
    1. IF Boeing has plan to maintain jobs – we don’t see it? No answer provided.
    2. SPEEA wants to help Boeing preserve jobs.

    xxxx made a couple of comments (some of what was said):
    1. Need to sell airplanes to airlines.
    2. Need to build up U.S. military’s resources from downturn during last 10 years.
    3. Need insurance to fly airplanes and maybe government needs to help with it.

    Boeing is trying to fill trough in 767 line by building tankers, thus employing workers.

    The meeting went on for about 90 minutes. Mr. de Leon was unable to answer questions that dealt with either job security or the off loading of jobs. Both issues had come up during the debate in the media on 767 tankers. He was also unable to answer a question about what the company’s reaction would be to our filing the CVD Petition.

    After the Company representatives left, the remainder of us continued to discuss the question of filing the CVD Petition. The result was that we would not file the petition today. We would continue to make the petition better in preparation for filing. We would determine the answers to several questions in regards to filing a successful petition. We will leave no stone unturned in the effort to do what is best for our members.

    Meeting closed around 1:15 PM.

    +++++++++

    What happened ?

    A) CVD initially was to be filed earlier- the week of 911 !

    B) XXXXX stopped filing of CVD.
    C) later Boeing Filed with WTO
    D) later the Tanker lease was cancelled and later the SEARS DRYUN game came to light.
    E) Later- in March 2004- part of the story re Tanker suggestion after 911 came out when my friend died.

    …President Richard Nixon appointed Hartley to a position as citizen adviser to Secretary of Defense David Packard, a role he didn’t resign from until the Reagan administration.

    “When I first met Dan, I couldn’t believe he knew all these people,” xxxx said. “But he’d show me e-mails he sent and received from these guys and I realized `By golly, he really knows about these things.”’

    Indeed, Hartley may have planted the seeds of the idea that the Air Force might lease Boeing 767s for use as aerial refueling tankers if the service couldn’t buy them. xxxx said he thinks that subject came up when Alaska Senator Ted Stevens called Hartley after the Sept. 11, 2001, terrorist attacks….
    +++++

    • I do have one correction.

      The KC135s are not having ghe wings flown off them, they are just old

      I believe they fly less than 1000 hours a year.

      Not a bad thing, the US has tankers all over the world, they are there for when they are needed, not because they fly huge amounts.

      One reason the 767 looks to be better for that than the A330, you don’t need what the A330 brings, 767 is more than enough for most missions.

      I have also seen those KC135s up close, they are well take care of birds and in excellent condition.

      Non CFM engines KC135s are parked. Tanker force size is exaggerated as a result

      • ” The KC135s are not having ghe wings flown off them, they are just old

        That statement was made by Rudy deLeon in 2001- Rudy was prior to Boeing Deputy Sec Defense. During the meeting he handed out a two page summary of so called financial and tax rules and impacts and such. As I was reading the first page trying to comprehend what it was about – My bud Dan Hartley stood up and told Rudy the handout was a total bunch of garbage and iterated about 3 reasons. When he got to the third reason ( about tankers ) Dan said – I was delivering Tankers when you ( Rudy ) was in knee pants- followed by I’ll take you out to the dash 80 and show you the rivet holes where we installed the prototype test boom. WhenRudy said the paper had been prepared by his staff and inferred something about high level meetings.. Dan then explained he ( Dan ) had been in more high level meetings at the pentagon than Rudy . . . ( Which was true ). By the end of the meeting, Rudy said that he had learned to be better prepared the next time he had a meeting with a bunch of Engineers. Rudy was a BA vice president at the time. – He ( Rudy) was not used to mere grunts telling him he was full of it. Most of the rest at the meeting were stifling a big laugh- except the Executive Director- and Boeing had agreed to pay employees time for the meeting…
        Dan had retired from the Airforce as a lt Colonel- and was very highly regarded by Al Mullaly. My point in posting the old ORIGIONAL minutes was mainly to show how totally Fubar the Mickey D gang had screwed up the Tanker deal plus other issues.

        • Don:

          I don’t disagree with history but they have a robust program to keep the KC135s flying and from what I am seeing they do a hell of a job of it. Those birds look GOOD. New engines as well.

          I believe average hours are 600 a year but don’t have the attribution on for that.

          A significant percentage are in maint but its working. As they do not have new tankers yet that’s all good. Maybe even less costly than the new tankers!

          And the oldest ones are retired, but that congress thing that they can’t crush em, parked in long term never to be used again storage.

          There seems to be 415 KC135s in US Service (Wicki). You start scattering those out all over the world and maint and its not a lot.

  10. The Brits have gone for leasing tankers, but they didnt have to pay for the A330 tanker development.
    Another reason why leasing works for UK, is their defence budget includes a capital charge paid back to the Treasury, so if you can keep the capex off the books you dont have to pay the charge. When it was introduced the capital charge was additional money but since then the cost of new equipment has skyrocketed so nowadays they have to find the money out new equipment spending. Explains also their zeal for selling off or scrapping equipment, once that happens they dont have to pay capital charge on that item

    • And the US could have gotten those 767 tankers for how much?

      Maybe a far better deal than all the hulla balloo by John M caused.

  11. While I do share the feelings, also keep in mind that the Aussie A330MRT just got approved to do fueling.

    I think they had it 3 years or so before it was qualified.

    You can include one incident where the boom fell off an A330MRT as well as a second one that was knocked off?

    They all have their issues, but Boeing truly has monumental egg on its face as they are barely off the ground.

    And yes all their vaunted expertise was in a universe far far away.

    All that mucking with the company structure is paying dividend (well to some people anyway)

  12. I do think the South Korea deal was a natural fit for the 767, lot of possibilities. Near area, don’t need range or the massive fuel load the A330 can carry for that area.

    1. Too far out (and others may be willing to give up slot(s) to defer their purchase cost these days
    2. Not enough offsets
    3. Didn’t like the delays as nothing is fixed
    4. A330 is now a known entity

    combo of above

    • In case of a conflict South Korea needs US reinforcement as soon as possible. The KC-46 can carry 115 troops while the A330 (KC-30A) 295 troops. The bigger tanker is also better suited to trail fighter jets over the Pacific than the smaller tanker.

      KC-46’s lower cargo compartment is occupied by fuel tanks. The only option to move cargo around is to have a main deck cargo floor. The A330MRTT moves the fuel in its A340 wings and the belly is free for cargo. According to my knowledge no air force has ordered the A330MRTT with main deck cargo capability so far. Standard airline seating (except the Australian VIP MRTT) seems cheaper than additional palletized seating.

      The US Air Force calculated the KC-46 cheaper than the A330MRTT on the long run due to strange flight profiles (7 touch-&-go maneuver on every mission over the whole period of usage).

      Korean Airlines operates a fleet of A330 but no 767 (spare parts!). I’m not aware where ROKS Air Force will get its tanker pilots from.

      We can estimate that the 767 was offered for about the same price as the A330. The A330 just offers more. Why should South Korea buy less?

      As some US Air Force general said why the A330MRTT: “One word: more!”

      • I disagree for the most part on the above and I think you are simply wrong.

        The US operates differently than the rest of the world.

        In your first scenario the US fighter squadrons would fill the aircraft with their own personal and equipment, not troops. You can’t operate an aircraft without the personal. So the so called drag out is with squadron assets.

        Troops would move as always on C-17, C-5 (though more likely equipment) and the various hired, leased and in an emergency the CRAC fleet would be activated.

      • They live in detached world where they just reinforce their own view and nothing to do with reality.

        Reality is 27 billion and climbing on 787, 747 did not deliver, KC46 in money spewing mode.

        What’s not to like?

  13. Is there a penalty for late delivery to Boeing like any airline would have in its contract?

  14. Nope, but they understand they pick up the cost overun above $500m or so ( please correct if wrong)

  15. Fixed price contract, once it ex ceded the 500 million its all on Boeing (well us as they write it off on their taxes and we pay for it anyway)

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