Boeing Liable For KC-46 Overage

Jun 29, 2011 By Amy Butler Aviationweek.com

The U.S. Air Force is expecting to pay the largest amount allowable under the KC-46A contract with Boeing to develop a KC-135 refueler replacement, with Boeing picking up the rest of the tab.

Two months after Boeing won the contract over rival EADS, which proposed an Airbus A330-based design, the Air Force got news that it would need to pay an additional $500 million to develop the 767-based tanker and deliver the first 18 aircraft.

The target cost agreed upon in February for the fixed-price, incentive-fee development was $4.4 billion, according to Air Force officials. However, “Boeing revealed, post-contract award on 25 April 2011, that during source selection it proposed a ceiling price for the [engineering and manufacturing development] contract that is less than its actual projected cost to execute the contract,” says Lt. Col. Jack Miller, an Air Force spokesman, in a statement. “Boeing is liable for all cost above the $4.9 billion contract ceiling.”

Bloomberg broke the news last week that Boeing may have to pay $300 million over the contract ceiling (totaling $5.2 billion) to develop the KC-46A. The company chose a strategy of submitting a low bid – risking a deficit in development — to make up for the loss in projected sales.

The Air Force intends to buy 179 KC-46A tankers, and there are international opportunities. “We expect to make money on the KC-46 tanker program,” says Bill Barksdale, a Boeing spokesman, in a statement. “The KC-46 contract opens additional opportunities, including potential U.S. and international tanker sales and related services for decades to come.” Boeing has not yet been awarded a KC-46 production contract.

Barksdale and Miller both decline to identify the projected amount of the KC-46A development estimate at completion for the development program. Barksdale also declines to say how many of the tankers must be produced for the company to break even. Barksdale says the Boeing KC-46 bid was “aggressive but responsible.” He declined to say when the company realized its actual development cost would exceed the contract ceiling.

Boeing’s next earnings call with investors is July 27, and this may be when the company discusses how it will take a charge or charges for the projected overrun. So far, Boeing’s stock price has not indicated concern from investors.

“It is one program. It is a bit of a surprise, clearly, but in the broader context of everything else going on with the company and the stock, it doesn’t have the weight or bearing” to influence its price, says Byron Callan of Capital Alpha Partners.

One Air Force official says that if Boeing’s out-of-pocket cost is $300 million, “it may be the best $300 million Boeing spends all year” because it maintained the company’s grip on a decades-old refueler business in the U.S. and kept Airbus from establishing a stateside facility to build A330s.

Barksdale notes that the company is on schedule with the KC-46A development work. Few details about the schedule have been released, though, except for the requirement to deliver the first 18 aircraft in the final production configuration by the fourth quarter of fiscal 2017.

Boeing’s low-ball strategy does not violate acquisition law or regulations, Miller says. “There is no legal barrier that prohibits an offer or from pursuing a below-cost proposal strategy,” he says.

Boeing’s bid price was 10% below that of EADS’s, according to company officials after their loss. If the $300 million projected cost to Boeing is tr