By Doug Cameron
Boeing Co. said it uncovered more issues with its new military
tanker aircraft, tripling the total pretax charges from the
troubled program to more than $1.2 billion so far as it works to
meet its delivery target for the U.S. Air Force.
The company on Friday said ground tests of the KC-46A Pegasus
tanker's fuel systems during the second quarter revealed parts that
didn't meet Air Force specifications, forcing new design and
manufacturing work and triggering an $835 million pretax
charge.
The Pegasus--a heavily modified version of Boeing's 767
commercial jetliner--is designed to be the U.S. Air Force's main
aircraft for refueling other planes in midflight, replacing planes
with an average age of 50 years. Boeing in 2011 won a contract to
produce 179 Pegasus jets, following a decadelong contest with
Airbus Group SE.
The $41 billion tanker program is one of Boeing's largest
defense contracts, and a driver of sales as it pursues a deal to
build a new long-range bomber for the Air Force--a program expected
to cost at least $80 billion--ends production of older transport
planes and faces an uncertain future for combat jets. However,
Boeing's aggressive bid for the Pegasus deal left it on the hook
for any cost overruns, and nursing a loss on the first batch of 18
aircraft.
Boeing executives had recently indicated the Pegasus was back on
track after wiring and software problems last year delayed test
flights and forced it to take a $425 million pretax charge on the
program.
The latest charge equates to $536 million after taxes, which
Boeing said will wipe 77 cents from per-share earnings when it
reports on July 22. The company said its 2015 revenue and cash flow
guidance remained unchanged.
The coming quarterly earnings report also will be the first for
Dennis Muilenburg since he took over as Boeing's chief executive on
July 1 after serving as president and chief operating officer, as
well as head of its defense business when it was awarded the
Pegasus contract.
Boeing shares were down about 1% in midafternoon trading
Friday.
Boeing said it remained confident of meeting its commitment to
deliver 18 planes to the Air Force by its contracted August 2017
target.
The Air Force said it also was optimistic Boeing would meet that
deadline. "While we have more heavy lifting coming up, we believe
it is achievable and do not see any technical showstoppers," Gen.
Duke Richardson, the military head of the tanker program, said.
Boeing Defense and Space President Chris Chadwick in February
centralized oversight of its large programs, including the Pegasus
and the replacement for Air Force One. The move was designed to cut
costs, keep projects on schedule and avoid a repeat of the tanker
problems, though executives said it was also meant to help its
pitch for the bomber.
Boeing is teamed with Lockheed Martin Corp. and faces
competition from Northrop Grumman Corp. for the bomber, with an
award expected in September.
The initial bomber deal will be a cost-plus contract that sets a
cap on contractor's expenses and keeps most of the risk with the
Pentagon, but the Defense Department is increasingly pushing for
more fixed-price deals such as the tanker to motivate defense
contractors. Such arrangements are similar to contracts in the
commercial jet business, where airlines often order aircraft not
yet designed but aren't required to cover any additional
development costs.
The latest Boeing charge "is another reminder of how financially
perilous it is for defense [companies] to take on fixed-price
development contracts," said RBC Capital analyst Robert Stallard of
the latest Boeing charge.
A Pegasus test aircraft made its first flight last December,
some five months behind schedule. The full version, complete with
fueling boom and military systems, is expected to fly for the first
time in September.
Boeing also is pushing the Pegasus with international customers,
though Airbus has enjoyed more success securing deals with a tanker
version of its A330 jet.
Write to Doug Cameron at doug.cameron@wsj.com
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