Boeing ’Decided It Would Lose Money’ on Tanker

Boeing Co. (BA)’s cost overruns for the new U.S. Air Force tanker jets are “not our problem,” the Defense Department’s procurement chief, Ashton Carter, said today in Washington.

The company “decided it would lose money” developing the aerial refueling tanker, Carter said.

Boeing’s costs on the aerial tanker contract are projected to exceed its $3.9 billion target cost, triggering a “share line.” Up to a ceiling of $4.9 billion, Boeing would absorb $400 million in foregone profit. The Air Force pays $600 million. This is known as a 60/40 share line.

Boeing in April also told the Air Force it’s projected to exceed the ceiling by at least $300 million -- a loss absorbed only by the company.

Arizona Senator John McCain, the senior Republican on the Senate Armed Services Committee, yesterday called the situation “completely unacceptable.”

“I can assure you that Congress and taxpayers will find a $600 million subsidy of a low-ball bid by Boeing is something they feel they should not have to pay,” wrote McCain in a letter to Carter yesterday.

Still, the contract that includes development and production of the first four aircraft “was written with the protection for the taxpayer” in mind, Carter said.

Boeing Co.’s cost overruns for the new U.S. Air Force tanker jets are “not our problem,” the Defense Department’s procurement chief, Ashton Carter , said today in Washington. Photoggrapher: Suzanne M. Jenkins/U.S. Air Force via Getty Images Close

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Boeing Co.’s cost overruns for the new U.S. Air Force tanker jets are “not our problem,” the Defense Department’s procurement chief, Ashton Carter , said today in Washington. Photoggrapher: Suzanne M. Jenkins/U.S. Air Force via Getty Images

Pentagon officials evaluated proposals from Boeing and rival European Aeronautic, Defence & Space Co. for the Pentagon’s liability up to the ceiling price, and included funds to cover the military’s share in case of cost growth, Carter said.

Boeing’s Decision

“So the fact that Boeing decided that it would lose money in the development phase, presumably in the hopes of making money in the production phase, was a decision they made,” Carter said.

“That’s not a problem from the Department’s point of view and not particularly surprising,” Carter said.

“What’s good in this case is that somebody who underestimated the cost of development does not leave us open- ended liable” because the government does not pay any money to Boeing that exceeds the $4.9 billion ceiling, Carter said.

“If they come in” over $3.9 billion, the Air Force pays its share until the $4.9 billion ceiling is reached, Air Force KC-46 program manager Major General-select Christopher Bogdon said. “If they get to $4.9 billion, they get zero profit,” Bogdon said.

“We made an aggressive yet responsible bid to win the contract.” said Conrad Chun, a Boeing spokesman, in a previous statement. “This is a win for the Air Force and a win for the taxpayer in that they will receive the best tanker at the best price.”

To contact the reporter on this story: Tony Capaccio in Washington at acapaccio@bloomberg.net

To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net

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