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Report: Boeing may wind up with no profit on KC-46A

By Philip Ewing Monday, November 28th, 2011 8:51 am
Posted in Air

Bloomberg’s Tony Capaccio delivers good news and bad news for Boeing’s new KC-46A tanker program.

First, the good news: According to the latest information from DoD and Big B, development is “progressing well with no significant technical issues,” as of Sunday, with everything more or less on track.

Now, the bad news: Boeing’s cost estimates for this program have gone up again, and there’s a chance, Capaccio writes, that Boeing could hit its head on the cost ceiling it negotiated with the feds as part of its fixed-price deal. Here’s how it broke down:

The program manager’s most likely estimated price at completion is $5.3 billion and the contractor’s most likely is $5.1 billion,’’ according to the document obtained by Bloomberg News. “The government’s estimate is higher than the contractor’s due to the inclusion of schedule risk associated with the remainder of development,’’ it said. “The government’s liability is limited to $4.8 billion.’’
Program manager Brig. Gen. Christopher Bogdan said of Boeing in July that “if they get to $4.9 billion, they get zero profit.’’

Pentagon officials have insisted there’s no way for Boeing to wriggle out of this arrangement and bill the taxpayers for one dime above the cost ceiling, but stranger things have happened. Just the history of the tanker saga itself — so tawdry and convoluted it would embarrass the screenwriter of a Lifetime Original Movie — suggests that there are many more twists and turns in the road ahead.

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	Aurora November 28th, 2011 at 8:49 am This only addresses the initial stage of the program. As I recall, the entire procurement will total 169 aircraft. To say “Boeing will wind up with no profit on KC-46A” is a little premature, isn’t it? Maybe you should modify the title of this article to “Boeing will have no profit on initial stage of KC-46A contract”?
	chockblock November 28th, 2011 at 9:07 am Remember Boeing’s epic plan was to lease these tankers. They’ll probably get depot level work as sugar over the bitter pill of the initial stages of the contract. The DoD is moving away from having service members at the depot level anyways. Expect to see this pimped for FMS to help out Boeing as well.
	Thinking_ExUSAF November 28th, 2011 at 10:46 am LOL! Lets just try to look at a glass half full, gents. If the KC-46 is successfully “pimped”, does not that imply at least some foreign capital coming into town supporting Boeing jobs? And for the company, the O&M budget for any complex system (like an aircraft) is normally close to an order of magnitude greater over the life cycle than the initial acquisition. There is nothing unusual about that in government and civil use aircraft. Let Boeing try to get its cut there against all of the other eager competitors. Someone will get those dollars, and last time I checked we do live and work in a capitalist society. Companies generally exist to make money, and in the case of Boeing, distribute that money to their shareholders; and in the process, keep a lot of US citizens employed and drawing paychecks. IOW, lets complain about the things that deserve the complaints. Bashing Boeing and the USAF for the sake of bashing hardly deserves the effort, and making a legitimate profit is NOT a crime.
	bingo81 November 28th, 2011 at 10:48 am Some “Analysts” always try to paint a sensational picture by ommiting some facts, so they can get some attention to themselves and portray themselves as “experts” in the field.
	David November 28th, 2011 at 1:16 pm I mostly agree, T_Ex, but I do worry about one thing. With Boeing taking a bath on the initial development and production contract, and hoping to make it back on later lots and O&S, just how reliable/maintainable/suitable would you expect those early production aircraft to be? The worse they are, the less money Boeing loses right now (and the more they make down the road), right up until they become so bad the government won’t accept delivery.
	Thinking_ExUSAF November 28th, 2011 at 1:49 pm OR. .. if the aircraft are so unsuitable going through OT&E that they are hammered and the follow on contracts are thrown up for a re-compete.. .. After all of the hoopla, hate and discontent leading up to the contract award, they cant afford to roll out a shell of an aircraft hoping to fund and fix the problems later, certainly not with the scruitiny that this acquisition is going to get. The tanker MIGHT not do all of the things that it could do, but it had danged well better do what the AF put on contract. There really wont be much “wiggle room” to get out from under an “operationally unsuitable” finding. At least in my humble opinion, Boeing would do well to invest whatever is needed to deliver a primo-a-#1 aircraft even if it did cloud up the current quarterly profit report.
	Taxpayer November 28th, 2011 at 7:24 pm Next, Boeing will use this to confirm that development programs should be cost-plus contracts, with the government (taxpayer) footing the final bill. Privatize profits, socialize losses.
	POLkeytothefight November 28th, 2011 at 9:32 pm Lets not forget about the storm Boeing whip up after losing to Northrop Grumman/EADS team KC-45 team. Would this have happened it the GAO had sided with EADS????????
	pfcem November 29th, 2011 at 1:10 am The program is for 175 aircraft. 169 production/service aircraft + 4 SDD aircraft. You are asking far to much of Mr. Ewing.
	pfcem November 29th, 2011 at 1:17 am It wasn’t Boeing’s plan, it was the US DOD’s plan. A plan which could/would have gotten new tankers 6 years earlier (2006 vs 2012) than the previous roadmap, while costing LESS on a year-to-year basis AND NOT REQUIRE ANY PROCUREMENT FUNDS for the lease. KC-X was ALWAYS going to be “pimped for FMS”. FMS adds to total production numbers which reduces unit costs.
	pfcem November 29th, 2011 at 1:23 am Boeing is going to do no such thing. It knew full well what it was getting itself into when it underbid the 1st part of the contract — accepting no profit (or even some losses) on the 1st ~$5 billion in order to ensure the MUCH GREATER profits on >10 times that during production & sustainment.
	DensityDuck November 29th, 2011 at 12:35 pm And if only John McCain could have kept his fool mouth shut, nobody would have said “boo” to the lease deal. But no, he had to go and be all hard-guy about someone’s dead son, and fifteen years later we’re still feeling the fallout.
	JSFMIKE November 29th, 2011 at 3:21 pm Short memory, Duck. The Lease was for the airframes. The gov’t would pay Boeing to mod the jets into tankers. Then at the end of the lease (10 years) would have to pay Boeing to mod them back into bare airframes. Or at that point, could buy them as tankers from Boeing for a different price. That was a Win — Win for Boeing and a Screw Job for the USAF. That’s why McCain yelled so loud for such a long time. And it was also part of the reason that Under Secetary Darleen Druyin went to jail.
	JSFMIKE November 29th, 2011 at 3:26 pm The first contract may not let Boeing break even. BUT .. the real profit is in the follow on contracts and the sustainment contracts (spare parts, training, support equipment, tech manuals, etc.) No company the size of Boeing goes into any long term project without calculating the long term profit. That’s a lot of bonuses for the executives each year. They protect those like vultures!
	dopydem November 29th, 2011 at 5:59 pm It might not have but the taxpayer would have paid more for the development and production contract as well as the follow on production. Then comes the infrastructure costs the KC-45 would have caused. There were new hangers to build. KC-45’s don’t fit in the existing hangers. New runways to build on many airfields. KC-45 is heavier and requires more runway than the KC-46A. Then we can go to the cost of additional fuel. The KC-45 burns more fuel for the same distance. It also will have to fly further because it cannot land at many foreign bases the KC-46A can. All in all the TOTAL cost of the EADS entry would have cost the U.S. taxpayer MUCH more.
	TMB November 29th, 2011 at 6:59 pm Duck, would that be the same lease deal that had people in Air Force acquisitions going to jail for corruption?
	itfunk November 29th, 2011 at 10:15 pm Boeing deal was always going to be a bait and switch that was obvious all the way from the start. In the end we will pay more for less, like we always do.
	pfcem November 30th, 2011 at 12:48 am On the contrary, PLENTY of people voiced concerns about the lease deal but unlike McCain most of them eventually recognized that it was in fact a VERY GOOD deal for the USAF.
	pfcem November 30th, 2011 at 1:17 am And you either have no memory or simply drank the anti-Boeing/767 Kool-Aid & never bothered to learn the truth. The lease was for 6 years for each lot (6, 14, 20, 20, 20, 20: FY2006-2012 through FY2011-2017). The tankers were to have been bought from Boeing by a NON-PROFIT Special Purpose Entity (SPE) named the Wilmington Trust using funds FROM PRIVATE INVESTORS through the commercial bond market & the USAF would lease the tankers from THE SPE. At the end of the 6-year lease period for each lot, the USAF would have the option of either returning the 767s to the SPE or purchasing them. If the Air Force did not buy the aircraft, Wilmington Trust would sell the aircraft to pay off the bondholders. Whether the USAF bought the tankers from Boeing or leased & then bought them (or not) from the SPE made no no difference to Boeing — it either sold them to the USAF or the SPE.
	pfcem November 30th, 2011 at 1:27 am McCain “yelled so loud” because all that he could (&/or wanted to) see was that the TOTAL cost of the tanker lease (PLUS purchase from the SPE) was higher than if the USAF simply bought the tankers outright from Boeing. He could not/would not see (or simply did not care) that the year-to-year costs were LOWER &/or that the USAF did not have to come up with ANY PROCUREMENT FUNDS to pay for the lease &/or that if/when the USAF did buy the tankers from the SPE that it would be at ~1/3 the unit cost. Buy or lease made no difference to Boeing (it either sold the aircraft to the USAF or the SPE) but the lease was a GREAT DEAL for the USAF.
	pfcem November 30th, 2011 at 1:40 am Darleen Druyun (USAF) & Michael Sears (Boeing) went to jail for negotiating a job for Druyun at Boeing while they were working on the tanker lease. Three additional notes. 1. It was BOEING which discovered & disclosed the unethical Druyun/Sears actions AND helped authorities prosecute them both. 2. The entire lease deal was redone (due in no small part to McCain objections to the original deal) to leasing just 20 & buying 80 AFTER Druyun left the USAF. 3. Independent agencies found the costs of the lease deal to be “fair & reasonable”.
	pfcem November 30th, 2011 at 1:42 am Quite the opposite.
	pfcem November 30th, 2011 at 1:53 am A couple things. The KC-45 being closer to the KC-30 EADS is/was developing for other customers than the KC-46 is to existing KC-767s should/would have cost less to develope — but everything else about the KC-45/KC-30 costs more. The KC-30 does not require MORE runway but it does require stronger runways. For runways with a PCN >~50, the A330 can take-off with a greater payload BUT for runways with a PCN of <~50 the 767 can take-off with a greater payload.
	irtusk November 30th, 2011 at 3:35 am > the TOTAL cost of the tanker lease (PLUS purchase from the SPE) was higher than if the USAF simply bought the tankers outright > the lease was a GREAT DEAL for the USAF. all that needs to be said about pfcem’s ‘logic’
	Old 391 November 30th, 2011 at 12:44 pm I see the Boeing Blow Heart is v=back defending the KC-30. What you going to say when Boeing comes back and tells the Air Force they will be behind schedule and over cost. It will happen its in their nature like Lockheed
	RQuick November 30th, 2011 at 7:48 pm As of the Boeing Vs Airbus (EADS) contest for the refueling tanker.… Airbus lost out Big Time, due to mostly influential political maneuvers mainly from mr. obama, who’s home state is Illinois which happens to be Boeing’s chief headquarters. Airbus already has a viable flying aircraft which is in use in Europe, and Australia. These cost over runs are part of a bigger picture, as Boeing significantly under bid Airbus seeking to make up the profit of these under bidding tactics, as an over all profit scheme! They do not have a single flying prototype of the proposed tanker. Further more, “We The People” the American Tax Payer will be responsible for these cost over runs, not the American politicians! And that is another piece of wool that is being placed over the eyes of the American Public! When will the lies, and deceit stop?
	JohnB November 30th, 2011 at 10:12 pm Not to many contractors/companies, have ever gone broke by doing business with the Government. Remember this is a Bloomberg News, item not a Boeings.
	Follow the Money November 30th, 2011 at 11:11 pm think about how much overhead costs Boeing will bill in the 4.9B.….….
	pfcem November 30th, 2011 at 11:54 pm Quite the opposite. Try reading the rest of the statement… Your post is clear indication of your complete lack of BOTH logic & genuineness however.
	pfcem December 1st, 2011 at 12:00 am http://www.aviationweek.com/aw/generic/story_chan…
	pfcem December 1st, 2011 at 12:31 am No, EADS lost out due to Boeing offering a tanker which better fit the USAF’s needs/requirements (& at a lower cost). NO KC-30 is expected to reach IOC until late 2012 (Australia). By the end of 2011 (or early 2012) there will be EIGHT operational KC-767s (4 with Japan & 4 with Italy). In fact two of Italy’s KC-767s participated in operations against Libya… There have been NO cost overruns! What kind of profit scheme can there be in under bidding on a FIXED PRICE contract? BOEING (not the American tax payer) is resposible for any & all cost overruns. The lies won’t stop until people like YOU stop lying.
	irtusk December 1st, 2011 at 2:41 am > Quite the opposite. Try reading the rest of the statement… There’s nothing there makes PAYING MORE a GREAT DEAL. > There have been NO cost overruns! It’s still early > What kind of profit scheme can there be in under bidding on a FIXED PRICE contract? Keeping Airbus out of the US > BOEING (not the American tax payer) is resposible for any & all cost overruns. False. DOD shares partial responsiblity up to a certain limit. > The lies won’t stop until people like YOU stop lying. :rolleyes:
	pfcem December 1st, 2011 at 11:39 pm Getting 100 new tankers 6 years earlier. Able to retire 135 50+ year old tankers 6 years earlier (which can be used for spare parts for the remaining 410). LOWER cost year to year. NO procurement funds needed for lease. If/when procured after lease, it is at ~1/3 the cost vs new. Congress already agreed to the deal.
	pfcem December 1st, 2011 at 11:41 pm RQuick posted that there already were cost overruns.
	pfcem December 1st, 2011 at 11:42 pm Doesn’t keep Airbus out of the US. Airbus is STILL able to do so if that is truly what it indends to do.
	pfcem December 1st, 2011 at 11:43 pm The fixed price contract placed ALL resposibility for cost overruns on Boeing.
	irtusk December 2nd, 2011 at 12:03 pm > Getting 100 new tankers 6 years earlier. They could have gotten them at the same time if they were willing to pay for them. Nonissue. > LOWER cost year to year over more years = higher cost overall = BAD DEAL > NO procurement funds needed for lease. money still has to come from somewhere or is ‘non-procurement’ money suddenly free and without consequence? get real > The fixed price contract placed ALL resposibility for cost overruns on Boeing false, do some research before you spout your ignorance
	Robert A. Fritts February 3rd, 2012 at 11:18 pm Kinda Ironic that the Artists impression has an problematic Tanker refueling a B-1B Bone. The Tanker is a boondogle of a program, which still may work out well despite everyone from the USAF to the US Tax Payer getting a crummy deal from all the politicans involved. The other a plane that for all of its bad press and political morass did nothing but work( I know it was hard to maintain) amazingly well. Always felt very good when our Tac Controller said a Bone was availible. The Ironic part is that before the former can even show what it is capable of, the latter will only be around as static displays. LMAO!

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