The U.S. Air Force on Thursday finally accepted and took ownership from Boeing of its first KC-46A air-to-air refueling tanker, though it pointed to flaws in the aircraft’s refueling systems that must be fixed.
Rather than celebrate the tanker milestone — at the end of an 18-year wait that began with a procurement scandal and continued through a bitterly fought political battle to wrest the contract away from Airbus — the Air Force issued a short statement critical of the remaining shortfalls in the tanker’s capability. And actual delivery of the jet to McConnell Air Force Base in Wichita, Kan., now three years late, is still weeks away.
That was from a nice article at the Seattle Times. I thought that the aircraft was relatively low risk, with the 3D heads up display (or “remote vision system” as part of the night re-fueling mission) being some of the only new development pieces. I once did a record of analysis for the GAO on the KC-46 back in 2012/13, and I remember four major new development items, including that display, the boom, medical bay modules, and one other item that slips my mind. But it turns out that even after more than 3 years of delays, those features are still not properly working. Here’s more:
The government estimates it will spend $41 billion on development of the KC-46 and the purchase of a total of 179 tankers. Of that, approximately $30 billion will go to Boeing, according to the company’s annual report.
However, the contract has a fixed price, with costs for this development stage capped at $4.9 billion, a figure long surpassed. All further development costs beyond that have been coming out of Boeing’s pocket.
Boeing is scrambling to fix the remaining issues and keep the cost overruns from climbing toward $4 billion.
So that’s nearly 2x cost and schedule growth on the fixed-price development contract, meaning Boeing took a heavy hit there to buy into production and sustainment. I guess if you have the size to take that kind of hit, then its worth it. If acquisition cost is $30 billion, and ~$5 billion was spent on the development contract, then Boeing can expect to make about 15% of $25 billion in production. So they’ll roughly break even with about $3.5 billion in production profits and approximately that in losses on the development.
That is, if production costs don’t incrementally grow as they go along, which, in the DOD, is unclear whether that will mean more losses or higher profits.
And usually R&D + production is about 30% of total system costs, meaning there is about $96 billion in sustainment. If Boeing takes just 50% of that as revenue and earns a nice 15% profit, then we see where the investment pays off. That’s $7.2 billion in profits, and that might be conservative.
Now, of course, we’re talking about program costs being incurred and recouped over decades. But if a large company has a big portfolio of such programs, then their risk is smoothed out.
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