Aircraft manufacturing giant Boeing’s defence portfolio will continue posting financial losses in the short term.
Speaking at a BofA Securities conference on 22 March, chief financial officer Brian West said Boeing Defense, Space & Security (BDS) will post an operating loss in the first quarter of 2023.
“They will be negative, they won’t be positive,” West says of BDS’s first-quarter profit margin.
The disclosure is part of what West describes as an attempt by the leadership team at Boeing to be more transparent with investors, regulators, customers and the public.
“I have learned over the last 18 months how important that transparent culture is to our company and is to our industry,” West says. “Sometimes it’s painful.”
One of the most-troubled BDS programmes – the KC-46 Pegasus aerial refueller – remains at the centre of the divison’s ongoing financial woes. Already racking up more than $5 billion in punitive charges from the US Department of Defense, the KC-46 is now set to receive another penalty.
West says a “supplier quality issue” on its 767 commercial airframe production line – from which the KC-46 is derived – will require the company to fix both production and operational aircraft.
“Through Boeing’s standard process, a quality issue was identified on some 767/KC-46 tanker components,” the aircraft manufacturer said on 7 March. “We are continuing to work through our process with our supplier, regulator and customers to resolve the issue.”
West reveals that the problem involves 767 centre fuel tanks.
“We have the fix, we know how to fix this,” he says, without specifying how many aircraft are affected.
Despite the type’s numerous engineering issues, including with the internal cargo system and refuelling boom remote operating system, the US Air Force (USAF) has pushed the KC-46 into full operational service worldwide.
The service continues to place new orders for the tanker, including a January contract for 15 airframes worth $2.25 billion to Boeing. The airframer has also notched new KC-46 orders from Japan and Italy in recent months.
West does not reveal how much financial impact the 767 quality issue will have on BDS’s balance sheet, but says the figure will be less than $500 million. “It will impact BDS margins in the quarter,” he confirms.
Despite the latest strike against the beleaguered BDS, West says Boeing’s executive team remains optimistic about the KC-46 programme and the defence business broadly.
“The product is out, performing its mission,” West notes of the Pegasus tanker, adding that customer feedback has been positive.
In November, a USAF KC-46 crew completed a 36h endurance flight, which the service described as the Air Mobility Command’s (AMC’s) “longest mission to date”.
AMC commander General Mike Minihan has said the USAF is moving to accelerate the operational use of the KC-46, which he described as “incredibly capable” last September.
In a further boon to Boeing, top USAF officials now say they will likely cancel plans for a new “bridge tanker” – known as the KC-Y – and instead purchase additional KC-46s.
“The information that industry has previously provided… may lead us towards KC-46 [as] the answer,” Andrew Hunter, chief of acquisitions for the USAF, said at an Air and Space Forces Association conference in Colorado on 6 March.
The decision could ultimately result in an additional 75 KC-46 orders for Boeing.
The service ultimately plans to develop a new, stealthy tanker aircraft officially known as the Next Generation Air-refuelling System (NGAS) – or KC-Z – that will enter service sometime in the 2030s.
Those developments, plus recent Boeing wins – including deals to sell CH-47 heavy-lift helicopters to Germany, AH-64 attack helicopters to Poland and E-7 airborne warning and control jets to the USAF – signal BDS will soon reverse financial course, according to West.
He notes that money-losing fixed-price development contracts, such those for KC-46s and VC-25B presidential aircraft, which are responsible for Boeing’s defence losses, represent just 15% of BDS’s portfolio.
“We [have] to execute them,” West says, noting that Boeing’s executive team has moved to “de-risk” those programmes from more future losses.
While that comes at the cost of short-term profits, West says the moves will ultimately return BDS to positive margins. He also insists that senior Boeing officials will no longer pursue ultra-competitive, fixed-price bids to secure contracts.
“Lesson learned,” West says. “There is a different risk tolerance for underwriting in the company. Fixed-price development work is something that we have no appetite to take.”
Beyond projected losses in the current quarter, West says BDS should return to a more “familiar” state, with margins in the “high single digits”.
“We thought it was prudent to stabilise the business, execute on these fixed-rate, fixed-price development contracts and then get the underlying margins better,” West says of Boeing’s approach.
