Boeing digging deep for tanker overruns

EVERETT — The Boeing Co. is digging deeper into its wallet to cover cost overruns for designing and developing the U.S. Air Force’s new aerial refueling tanker, the KC-46 Pegasus.

The aerospace giant said Friday it is spending $536 million to help keep the program on track to deliver 18 combat-ready airplanes to the military by August 2017, as required by its fixed-price contract with the Pentagon.

The Air Force on Friday expressed confidence in Boeing’s ability to meet the deadline and expects the tanker to fly by September, nine months behind Boeing’s internal schedule.

The latest cost overruns are due to problems with the airplane’s integrated fuel system, which provides fuel to the tanker’s engines and aircraft refuelling in air. Components of the system must be redesigned, manufactured, installed, tested and certified.

The fuel system issues were identified during ground tests conducted on the first test airplane in recent months at Boeing’s Paine Field plant, where the tanker is being assembled. The KC-46 is based on the twin-aisle 767 jetliner.

That pushes the program’s total cost to about $1.26 billion more than the contract, which caps the federal government’s share at $4.9 billion. In July 2014, Boeing announced a $425 million pre-tax charge — $272 million after taxes — to resolve problems with wiring bundles and software.

Last November, the Air Force said it was expecting the final cost to be $6.4 billion. At the time, Boeing said the actual cost would be much lower.

Boeing’s new CEO, Dennis Muilenburg said in a statement Friday that the Chicago-based company is devoting “the necessary resources to keep this vitally important program on schedule.”

Muilenburg took over as head of the company earlier this month from outgoing CEO Jim McNerney. Prior to that, Muilenburg ran the company’s defense division.

“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” make up for the extra costs now, he said.

The company expects the program to become profitable in production.

The latest cost overruns are being split between Boeing Commercial Airplanes, which is picking up a $513 million charge before taxes, and Boeing Defense, Space &Security’s military aircraft section, which will report a pre-tax charge of $322 million.

The company says its cash flow for the year will not be affected.

That means that the company will come up with an extra $500 million in cash from other operations, said Sam Pearlstein, an aerospace industry analyst for Wells Fargo, in a research note to investors.

The Air Force plans to order a total of 179 tankers to be delivered by 2027, a contract worth an estimated $48.9 billion. The airplanes will replace the oldest KC-135 Stratotankers, which entered service in 1957.

The head of the U.S. Air Force’s tanker procurement program, Brig. Gen. Duke Richardson, in a statement Friday said “Boeing continues to make solid progress. While we have more heavy lifting coming up, we believe it is achievable and do not see any technical showstoppers.”

Nonetheless, as federal auditors and Air Force officials have said, the program has little room for new delays. The test flight program has already been shortened after falling several months behind Boeing’s internal schedule. Company and military officials say it still will meet all test requirements.

The program’s first test plane, known as EMD-1, is expected to resume flights in the coming weeks. It is a 767-2C, an interim model being used to speed up the certification process. It does not have some of the military hardware that will be on the final version, the KC-46A. It first flew this past December, six months later than Boeing initially planned. It resumed test flights in May, including some with a refueling boom attached.

EMD is an acronym for engineering and manufacturing design, the program’s current phase.

The second test plane, EMD-2, is being built as a KC-46A. Boeing originally planned to have it in the air by January 2015. It is currently in the fuel dock at Paine Field, according to the company.

Two other test planes are in production: EMD-3, which is a 767-2C, and EMD-4, a KC-46A. Boeing plans to deliver all four EMD planes to the Air Force as KC-46s as part of the first batch of tankers.

The military has said it plans to decide on whether Boeing can start low-rate production this fall.

Given the fuel system problems, that decision might be pushed back to the first half of 2016, Pearlstein said.

Dan Catchpole: 425-339-3454; dcatchpole@heraldnet.com; Twitter: @dcatchpole.

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