Leeham News and Analysis
There's more to real news than a news release.
Leeham News and Analysis
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Pontifications: Boeing takes another charge on tanker program; What’s next?
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.
KC-46A contract “restructure,” Blue Angels grounded in Sequestration (very local to Seattle)
The US Air Force will have to “restructure” the USAF KC-46A tanker contract with Boeing if Sequestration hits on March 1, according to a new document issued today. The document doesn’t indicate what “restructure” means, but we’d guess the fixed price deal that won Boeing the contract will eventually become a lot more expensive to taxpayers.
Very localized to Seattle, Sequestration also means the Blue Angels will likely be grounded by the Navy as well. This aerobatic group has been a staple of the local Sea Fair for decades, and has been a key in public relations for the Air ForceNavy. While we acknowledge the Blue Angels have nothing to do with readiness, since we live in Seattle, and this is our blog, we get to be highly provincial once in a while.
News on the tanker, 787, Boeing earnings
The last 24 hours have been busy news days on the tanker and the 787.
Reuters published a story yesterday about the Air Force calling the CEOs of Boeing and Northrop Grumman on the carpet for the vitriolic nature of the protest. Boeing has been engaged in a high profile advertising campaign that many view as a scorched earth approach toward the Air Force. This was the subject of an in-depth column we did last week on our Corporate Website.
Although Boeing kicked off the latest round with its post-protest ad campaign, Northrop hasn’t distinguished itself, either. In e-blasts, Northrop’s language is as over-the-top as is Boeing’s rhetoric. Both companies, which by their nature fall into the “world class” category, ought to be embarrassed by their respective efforts.
Other tanker news in the last 24 hours: US Sen. John McCain, the GOP presidential candidate who killed the Boeing KC-767 tanker lease deal in 2004 and who has been blamed (unfairly, in our view) by Democrats for killing Boeing’s chances this time around, told the parties to “get on with it,” as outlined in this report by The Moble Press-Register.
The Citizens Against Government Waste awarded US Reps. Norm Dicks (D-WA) and Todd Tiahrt (R-KS) the “Porker of the Month” award (named for pork-barrel projects, a US term for wasteful government spending) for their efforts to kill the USAF tanker contract with Northrop Grumman. This makes a good sound bite, but The Washington Post previously reported that Northrop helps fund CAGW. Northrop did not confirm or deny the funding story when The Post inquired. So take this one with a grain of salt.
On the 787 front, Jon Ostrower last night obtained a memo to employees from Boeing CEO James McNerney, discussing the 787 program and the production model. Ostrower’s Flightblogger has the write-up and the memo. Dominic Gates at The Seattle Times followed with his story and copy of the memo in today’s paper.
Boeing’s first quarter earnings call is tomorrow at 10:30 EDT. The webcast may be found here. Boeing is expected to reaffirm its 2008 earnings guidance (as it did on the program update), but maybe there will be some information about penalties and lost/deferred revenue. We provided an analyst estimate recap in our own estimate on revenue lost through 2013 in our column last week on our Corporate website. The analyst estimates of penalties range from $800 million to $5 billion. Our guesstimate on revenue loss through 2013 is about $30 billion. Extra production costs are on top of these numbers.
It’s Northrop Grumman!
Just got word from three sources-Northrop Grumman!
USAF changes specs, may taint process
Incredibly, Reuters reported yesterday that the Air Force changed its criteria at the last minute in the KC-X program that lowered the score of the Northrop Grumman KC-30 proposal. The Mobile Press-Register reports that Boeing’s KC-767 score was also lowered but that the effect was to reduce the cargo-troop carrying capability important of the tankers, which was a major KC-30’s selling point.
This is an astounding development. The USAF has made every effort to provide the appearance of fairness in what is perhaps the most controversial procurement program in decades. By making this last-minute change that undercuts a major attribute of the KC-30 only taints the process and is sure to be a basis of a Northrop protest if it loses. This is also likely to attract the attention of Sen. John McCain, who campaigns on his oversight of the previous scandal of the KC-767 award in 2002.
Furthermore, recall that Northrop nearly withdrew from the competition because the Air Force initially wasn’t going to place a lot of importance to the cargo-troop capability of the evaluation process. For the Air Force to change the criteria at this late date invites a protest–even Boeing might cite this if it loses, on procedural grounds.
This is a dumb, dumb move on the part of the Air Force, no matter how they explain it.
Dodging a bullet
Boeing dodged a bullet when a court refused to let a discrimination lawsuit go forward, but the bullet missed two targets: the discrimination itself but also perhaps the tanker contract.
We’re told that under federal rules, Boeing could be ruled ineligible for federal contracts if found guilt of discrimination. In received a phone call just this week from someone taking issue with our view that the KC-X contract was Boeing’s to lose. This person believed that Boeing could lose it because of alleged discrimination.
If this caller was correct–and we simply didn’t have time to check out the facts–then maybe Boeing dodged this bullet, too.