Boeing Under Mounting Pressure To Deliver New Tanker

By Valerie Insinna
After a decade-long battle against Airbus that included protests and allegations of corruption, Boeing in 2011 won the highly-coveted contract to build a new aerial refueling aircraft for the Air Force. The fixed-price contract award came with strings attached: Boeing would be responsible for any development costs over a $4.9 billion cap.

Because of a 2014 wiring issue that delayed flight testing and added unforeseen expenses to the program, the pressure is mounting on Boeing. Failure to deliver an initial 18 combat-ready KC-46A tankers by August 2017 could cut into the company’s profits.

“What’s happened is we’ve now used up all the slack that we had built into the schedule,” Air Force Gen. Paul Selva, head of U.S. Transportation Command, said in December. “It was aggressive to start with ... but with the delay in actually bringing the first airplane out and agreeing on this new testing profile, we’ve consumed the slack that existed.”

As of January, Boeing and the Air Force were still engaged in discussions about a new development schedule for the aircraft that will shift testing but allow the company to deliver the planes on time, Boeing spokesman Chick Ramey said in an email. The changes have not been announced at press time, but the company is adamant that it will be able to meet its deadline.
“Any adjustments made to the internal work schedule keep us on track to meet our commitments to the Air Force,” he said.

The KC-46A is slated to replace some of the Air Force’s KC-135 aerial refueling aircraft fleet. The service plans to acquire 179 planes, which are derived from Boeing’s 767-200ER. The tankers will be able to employ both boom and probe-and-drogue refueling methods.

Wayne Plucker, an aerospace and defense analyst with Frost & Sullivan, said Boeing could feasibly deliver its first 18 aircraft on time. 

“They’ll be tight. They could certainly fall short of that, but given the fact that they’re coming off of a commercial variant, there shouldn’t be a lot of surprise,” he said. “They just need to mind their Ps and Qs and keep a close eye on the program because otherwise it’s going to hurt them financially.”

Last July, Boeing announced that it would have to pick up a $272 million after-tax charge for having to rewire test planes after problems were found.

An internal audit found that about five percent of the plane’s 98,000 wire segments were located too close to their redundant counterparts to be considered safe under military and Federal Aviation Administration standards, Maj. Gen. John F. Thompson, then the Air Force’s program executive officer for tankers, said in September.

The Air Force has projected that Boeing will have to pay $1 billion out of pocket for exceeding cost caps.

There have been no significant charges to Boeing since the wiring problem was disclosed, Ramey said. “That said, we continue to aggressively work plans to drive productivity, mitigate risks and lower our costs.”

However, further delays could be on the way. Schedule slippages may cause the Air Force and Boeing to miss the May 2016 target to begin initial operational test and evaluation, according to the fiscal year 2014 annual report by the office of the director for operational test and evaluation.

“Readiness for the scheduled start of IOT&E continues to be high risk, with a 12-month delay expected,” stated the report, which was released in January. “It is unlikely that Boeing and the Air Force will develop a schedule that delivers 18 different certified receiving aircraft, as described in the milestone B [test-and-evaluation master plan], prior to the start of familiarization training for the IOT&E.”
Changes to the schedule could have a domino effect on other milestones. For instance, the first KC-46A flight is scheduled for April instead of January as originally planned. This could result in a delayed decision on low-rate initial production slated for August, it said.

That could cause Boeing to incur extra expenses, said Richard Aboulafia, vice president of analysis at the Teal Group.

“I’m just worried for the cost for them, either from having to spend more to catch up or having to pay any penalty payments [for being late],” he said. “Either way, they pay.”

Of the DOT&E report, Ramey said, “We are working with the Air Force to ensure we have a realistic schedule that allows us to complete the necessary test requirements moving forward.”
The DOT&E report is far from a given conclusion, Plucker said. The company is not yet in a “worst case scenario,” in part because it’s making an airplane based on a proven design.

Despite setbacks, the company is making strides in its testing and development plan and met a major milestone at the end of last year. A Boeing 767-2C — a commercial test version of the tanker that is not outfitted with refueling equipment — completed its first flight on Dec. 28. The plane took off from Paine Field, Washington, and landed three hours later at Boeing Field in Seattle.

“The 767-2C performed flawlessly on its initial flight today — no surprises,” Ron Johnston, a Boeing KC-46 program test pilot, said in a company statement. “We took it to 28,000 feet and near max speed, verified aircraft handling characteristics and most of the systems.”

As part of the development phase, Boeing plans to test four aircraft: two 767-2Cs and two fully-equipped KC-46As.

“The 767-2C will be used primarily to test and certify the structure prior to becoming the KC-46,” Ramey said. “The planes in the KC-46 configuration will be used to test and certify the mission systems and aerial refueling capability.”

The Pentagon is slated to make a decision on low-rate initial and full-rate production in August 2015 and June 2017, respectively.

“They’ve still got a bunch of code to write to missionize the software,” which will need to be done before the KC-46A’s first flight, Plucker said. “That has to be a concern to them, but they’re old hands at it, so that shouldn’t be an issue.”

Production of the aircraft is expected to reach a high of 15 aircraft per year and would end in 2027 unless there are additional orders. The Air Force may choose to buy more KC-46s in lieu of moving forward with the planned KC-Y program that would replace the rest of the KC-135 fleet, but the Air Force has not yet decided which direction it will go, said Air Force Lt. Gen. James Holmes, deputy chief of staff for strategic plans and requirements.

It “might be more KC-46s or it may be, by that time, a requirement that’s a little bit different,” he said. “It’s one [future year defense program] at a time.”

The aircraft is also a competitor in South Korea’s $1 billion tanker contest. A decision was expected to be announced as early as February. Airbus and Israel Aerospace Industries Ltd. are also competing for the contract. Airbus has offered the A330 Multi Role Tanker Transport, while IAI is proposing its own aerial refueling variant of the Boeing 767. The winner of the competition would deliver its first four aircraft between 2017 and 2019.

The competition pits Boeing against its rival from the U.S. Air Force’s competition, Airbus. The A330 is larger and more expensive than the KC-46, but can hold more fuel and cargo. However, taking off, landing and parking such a big airplane may be an issue in some of Korea’s smaller airfields, Plucker said.

It will be difficult for Boeing to profit from KC-46A international sales because so many countries have already bought the A330, Aboulafia said. Australia, the United Kingdom, Singapore, Saudi Arabia and the United Arab Emirates have ordered the A330. India, Qatar and Spain have stated their intention to purchase it. South Korea is one of the last remaining opportunities for Boeing, as “Airbus ran away with that market,” he said.

Plucker is more optimistic about the aircraft’s international potential. He believes there will be countries in the Middle East and Asia-Pacific interested in the KC-46, but the U.S. government will have to be proactive in brokering foreign military sales. Otherwise, countries will likely defer commercial purchases until they see how the tanker performs for the Air Force, he said.

Boeing’s missteps are surprising considering the experience the company has in turning its commercial designs into military variants, Aboulafia said.

“Boeing builds a great jetliner, and they have more experience than anybody in tankers.” The company has even converted the 767 into an aerial refueling aircraft before. The Italian government awarded it an $800 million contract in 2002 for four tankers based on 767-200ER variant and five years of logistics support, according to a 2014 report by Aboulafia. Deliveries were scheduled for 2006, but didn’t occur until 2008.

The company also suffered from delays in its Japanese tanker contract, which was awarded in 2003, the report said. It delivered the first of four KC-767J tankers to Japan in February 2008, one year behind schedule. Boeing incurred a financial penalty from Japan’s Ministry of Defense as a result.

“I don’t get it. …This is a company that did amazing work turning the 737 into a maritime patrol aircraft,” Aboulafia said, referencing the Navy’s P-8 Poseidon currently being procured to replace the P-3 Orion.

In a situation where Boeing has to pay if it’s late or over budget, the government wins. That means the military will likely push for more fixed-price contracts in the future, Plucker said. But there is also a benefit for vendors.

“On this particular program... the Air Force has not altered or added on to the contract in any way. In other words, no new requirements,” he said. While that used to be commonplace in past programs, requirements creep is almost a given in today’s procurement environment.

Even if Boeing incurs cost penalties, the program will be profitable, Aboulafia said. According to the Pentagon’s newest budget projections, the Air Force could spend up to $15.6 billion over the next five years for procurement and research and development of the KC-46A.

But perhaps more importantly, the contract allows Boeing to retain its legacy of building tankers for the Air Force, Aboulafia said. Boeing manufactured the KC-135, and McDonnell Douglas — which was bought by Boeing in the 1990s — developed the KC-10.

“Everyone went into this with their eyes open. DoD realized that Boeing needed to be aggressive to keep the tanker franchise. So they structured a contract that’s really very customer friendly,” he said.

Topics: Aviation

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