A Silver Lining For Boeing

The loss of a big contract could help its blended-wing tanker get off the ground

It was a deal that sparked controversy from the moment it was announced in November, 2001. The U.S. Air Force's proposal to spend $23 billion leasing 100 Boeing Co. (BA ) 767 jetliners as refueling tankers was immediately derided as a bailout for the aerospace giant in the wake of September 11. Since then, several criminal probes have been launched into Boeing's procurement, two top Boeing execs have been forced out while a third pleaded guilty to criminal conspiracy, and the government has released several reports questioning the leasing costs and the need to replace the tanker fleet immediately. Now, say people close to the deal, it is essentially dead, despite denials by Boeing and the Pentagon.

Clearly, losing the tanker contract would represent a serious financial blow to Boeing. But there is a silver lining. For the past decade, Boeing has been developing an alternative plane known as the Blended Wing Body -- an aircraft that looks like a flying wing. Not only would the plane make a more efficient tanker than the old-line 767, say experts, it could also be used as a bomber or troop transport. What's more, developing the plane could have a galvanizing effect on Boeing, which in recent years has lagged Airbus in innovation. "The blended wing offers exceedingly strong performance improvements," says Richard L. Aboulafia, aerospace analyst for Teal Group Corp. "And it would further Boeing's objective of seizing the technological initiative."

But getting to the long-term gain means living through considerable short-term pain. Analysts estimate the leasing deal would have added up to about $300 million in annual profit over a decade. In recent Securities & Exchange Commission filings, Boeing said that if the deal collapses it would take a one-time writedown of $300 million to cover the tanker's development costs. It also would have to shut the 767 assembly line, meaning an additional $200 million-plus writedown, analysts say.

GAME CHANGER?

So if the blended-wing plane is such a great idea, why didn't Boeing push it in the first place? For starters, many of its engineers and commercial execs have resisted the concept. Moreover, Boeing execs know the Pentagon has little appetite to spend billions on a new tanker program. That's why Boeing floated the 767 leasing arrangement in the first place: It skirted the usual budgetary process. Developing the blended-wing tanker would require funding of $10 billion while building 100 models would cost more than double the cost of leasing 767s.

Even so, military procurement and research execs have shown plenty of enthusiasm for the blended wing. The aircraft can refuel two planes at once, rather than one. It can fly 25% to 50% more efficiently than current aircraft, according to the Defense Advanced Research Projects Agency. Statistics like those have prompted DARPA to team up with NASA and the Air Force to build a blended-wing demo for $450 million.

There are blended-wing advocates at Boeing, too, starting with CEO Harry Stonecipher. He has told insiders he's waiting for the Air Force to agree to back it. Some execs say taking on a project of this complexity is exactly what the company needs to force it to take risks. George K. Muellner, Boeing's vice-president for Air Force programs, goes even further. He believes the blended wing, which could one day also become a commercial jet, is a potential game changer that could revitalize the entire U.S. aerospace industry.

Of course, Washington politics could mean the blended wing never gets off the ground. There are cheaper options: reopen the competition for conventional tankers between Boeing and Airbus, or buy used planes. But neither fulfills the demands of future warfare, say experts. By 2007, when the Air Force will need to get serious about replacing the tanker fleet, there should be research money available, according to budget documents. It will be up to Boeing to convince the Pentagon that the blended wing is the way to go.

By Stanley Holmes in Seattle

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