Boeing Tanker Project Found ‘Generally Stable’ in Report

Boeing Co. (BA)’s development of the KC-46 tanker for the U.S. Air Force is “generally stable,” with the contractor “running very close to the planned budget and schedule,” according to a congressional audit.

The Government Accountability Office, in a report released today, also cited as a concern that the cost of development will eventually exceed the contract’s ceiling price of $4.9 billion. Chicago-based Boeing is responsible for any overruns under the contract terms.

Boeing is developing an initial four tankers as part of a $51 billion program for 179 aircraft designed to refuel warplanes and transports in mid-air. A decision on full-rate production is scheduled for June 2017.

“Entering its third year, the KC-46 development program is, for the most part, progressing as planned even though some concerns exist,” according to the GAO, the watchdog agency for Congress.

The agency cited Air Force estimates that Boeing may exceed the contract’s ceiling by $717 million, a projection reported by Bloomberg News on Feb. 8. The company estimates it will exceed the ceiling price by $265 million, according to data in the report.

Boeing is running through management reserves for the tanker “primarily for identified yet unresolved development risks,” the GAO said in the annual report mandated by Congress.

Trouble Sign

“Significant use of these funds early in a program may indicate problems,” the GAO said. The Air Force “has not yet evaluated how the significant use of these fund early” could effect future program milestones, it said.

Boeing had $72 million of $354 million in management reserves remaining as of December, according to the GAO.

Boeing spokesman Jerry Drelling said in an e-mail that the report “recognizes the progress the KC-46 tanker program has achieved over the past two years since contract award.”

“This includes a successful preliminary design review, the opening of the boom assembly center and the first of five system integration labs that will reduce risk during the design and development phase,” he said.

Boeing beat out European Aeronautic, Defence & Space Co. for the tanker contract in February 2011, ending an almost 10- year process. The next month, EADS decided not to protest the award. Ralph D. Crosby, who was chairman of EADS North America, said Boeing won the contract on “an extremely low-ball offer.”

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

To contact the editor responsible for this story: John Walcott at jwalcott9@bloomberg.net

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