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During the last years, Boeing& # 39; s (NYSE: BA) military aeronautical affairs have executed a strategic pivot. While the company has long been designing fighters and bombers for the US military, it plans to focus its efforts on commercial derivatives. The goal is to reduce costs and accelerate development by adapting proven commercial aircraft designs to the demands of the military.
Today, the KC-46 Pegasus oil tanker is the largest commercial derivative of the Boeing military aircraft pipeline. The process of adapting the Boeing 767 as a military tanker has not been as easy as expected. But on the bright side, the KC-46 is finally ready to be delivered to the US Air Force.
Cost overruns have affected the KC-46 program
To overcome the stiff competition of a joint offer of Airbus and Northrop GrummanBoeing proposed a capped development budget for KC-46 Pegasus. The US Air Force has agreed to pay development costs of up to $ 4.9 billion, Boeing being responsible for any cost overruns beyond that level.
Unfortunately, development costs have far exceeded expectations. For example, while the KC-46 is derived from the 767, Boeing discovered that part of the wiring design did not meet military standards for redundancy, imposing a costly new design and recovery of aircraft already manufactured. In addition, the refueling arrow guidance system required adjustments to correct shadows and reflections when the sun is at certain angles to the aircraft.
The KC-46 development program suffered serious cost overruns. Source of image: Boeing.
Boeing has announced a series of significant operating expenses in recent years due to the cost of designing and implementing fixes for these issues. At the end of the second quarter, these expenses were $ 3.4 billion before taxes, according to Defense News.
Boeing takes a big step forward
On Tuesday, Boeing announced that it has reached an important milestone in the KC-46 program, completing the FAA certification process nearly three years after the first flight test.
At the end of last year, Boeing received a modified type certificate for the KC-46. This means that the FAA has certified "that the fundamental design of the KC-46 tanker is safe and reliable," according to the company. This week, Boeing completed the second stage of the FAA certification process, with the agency issuing an additional type certificate for the KC-46, "verifying that its mission refueling and avionics systems meet the requirements of the the FAA ".
Boeing noted that the KC-46 is not yet fully allowed to take off. He still needs to receive a military type certificate from the US Air Force. However, the flight tests for this certification were completed two months ago, so the company is waiting for the final approval in a few months. This would allow deliveries to begin before the end of 2018.
From the leak of money to the milk cow?
In recent years, the KC-46 program has been a source of losses for Boeing as development spending has exceeded the $ 4.9 billion ceiling negotiated by the Air Force. Nevertheless, Boeing's management has high hopes for the long-term program.
The Air Force plans to purchase at least 179 KC-46 tankers by 2027 at a total cost of more than $ 35 billion. There is a good chance that the Air Force will eventually decide to buy even more KC-46s. International sales are also an important opportunity for Boeing. As a result, the company estimated that sales of the program could be about 400 units. This large fleet will then drive a stream of multi-decision lucrative service contracts.
In short, the KC-46 program will no longer be a waste of years on Boeing's finances, but a long-term cash cow. This should contribute to the next step for cash flow to the American aerospace giant.
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