Boeing will revise its full-year profit forecast because of an $835 million charge due to higher costs to develop a new U.S. Air Force refueling tanker.
Boeing said Friday it will take an $835 million charge on the Air Force’s KC-46 tanker program.
After taking lower taxes into account, the accounting charge is reduced to $536 million, or $0.77 per share, and Boeing will correspondingly lower its full-year profit forecast when it releases its second-quarter financial results on Wednesday.
Boeing said the expense is “driven by required rework on the airplane’s integrated fuel system.”
Problems with the fuel system were identified in the past three months as engineers conducted tests to validate its performance, Boeing said.
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The KC-46’s fuel system controls all the fuel it carries, both inside the jet’s wings and in four extra fuel tanks inside the fuselage.
The complex system directs the fuel flow both to the aircraft’s own engines and to the refueling boom, hose and drogue, and wing pods used to refuel other aircraft in flight.
The fuel system is new on the KC-46, capable of carrying and offloading much more fuel than previous 767 tankers built for the Italian and Japanese Air Forces.
Boeing said it’s the final major system to be qualified in the tanker development program and other non-fuel-system-related qualification testing is more than 90 percent complete.
New Boeing chief executive Dennis Muilenburg said the engineers “have a clear understanding of the work to be done” to fix the fuel system.
He insisted Boeing is “investing the necessary resources to … meet our commitments for delivering the initial 18 tankers to the U.S. Air Force by August 2017 and building 179 tankers by 2027.”
However, this reassurance is only the latest in a series of such statements following a litany of problems on the tanker program.
Though Boeing has conducted five test flights of a prototype 767 tanker airframe, that jet does not have any of the refueling systems, and the first flight of an actual KC-46 has been repeatedly delayed.
The first flight is now set for sometime this summer but could be as late as September.
That’s just one month ahead of when the Pentagon has to decide whether to start building the first production models.
In July 2014, Boeing took a $425 million charge, or $272 million after taxes, for cost overruns related to major wiring problems that required the complete rewiring of the first four airplanes.
“Here we are a year later,” Robert Stallard, an RBC Capital Markets analyst, said in a note to clients. “This is yet another reminder of how financially perilous it is” for contractors to take on the development of defense projects at a fixed price.
The Air Force contract is worth roughly $50 billion to Boeing eventually, but the initial development phase has a contract-budget ceiling of $4.9 billion, above which any extra costs must be borne by Boeing.
In January, the U.S. government’s General Accountability Office (GAO) reported that suppliers of parts for the tanker’s aerial refueling boom and its wing refueling pods were running substantially behind schedule, in part due to design changes by Boeing.
An April GAO report estimated that Boeing’s early development costs would exceed the ceiling price by about $1.4 billion.
At that time, Boeing’s estimate of the overrun was just $380 million, the GAO report said.
In his column for Forbes on Friday, defense analyst Loren Thompson of the Lexington Institute, which receives funding from Boeing, dismissed the latest tanker issues as “glitches (that) are common in military development programs.”
Noting that Boeing continues to forecast a total $80 billion market for refueling tankers worldwide, Thompson wrote that the tanker program is “a franchise worth losing some money on in the near term to secure for the next 50 years.”
The KC-46 is based on Boeing’s 767 commercial jetliner, built in Everett.
With development work divided between Boeing’s commercial airplane and defense units, on a pretax basis the commercial division will report a charge of $513 million and the defense division a charge of $322 million.
Boeing won the contract in 2011 in a bitterly fought competition with European plane maker Airbus Group. Boeing won in a second round of bidding only after the Pentagon threw out its initial decision that awarded the contract to Airbus.
Airbus’ rival tanker, based on its A330 commercial jet, has won orders from the Air Forces of Australia, France, the U.K., the United Arab Emirates, Saudi Arabia and Singapore.
And last month, Boeing lost out to Airbus’ tanker in a contract to supply South Korea’s Air Force.
Boeing stock fell just over 1 percent Friday, closing down $1.65 at $146.84.