Boeing’s Defense Unit Faces Challenges Amid Growing Costs
Boeing’s defense division is facing headwinds due to high manufacturing costs, supplier errors, and fixed-price contracts that increase its risk to cost overruns on projects like the forthcoming Air Force One and NASA’s Starliner capsule. This comes at a time when other defense contractors are experiencing revenue growth, largely fueled by the conflict in Ukraine.
Year-to-date, Boeing’s defense arm has reported losses of $1.7 billion on its fixed-price development contracts, constituting 15% of its defense program revenue. These contracts were secured before challenges arose in Boeing’s commercial airplane sector, like the MAX crisis and the pandemic, and prior to the inflationary surge affecting material and labor costs.
Key programs that reported losses this year include:
- Air Force One: A $482-million charge in Q3, totaling losses to $2.4 billion out of a $3.9 billion contract, with the first plane scheduled for September 2027 delivery.
- Starliner: A $410-million charge in Q1 due to multiple delays in its uncrewed orbital flight test.
- KC-46: A $318-million charge in Q2 attributed to a supplier error in fuel tank coatings. Cumulative losses since 2014 surpass $5 billion.
- MQ-25: A $71-million charge in Q3 for the Navy’s unmanned aerial refueling tanker, with the first unit expected in 2024.
- T-7: A $69-million charge in Q1 for an advanced pilot training system, anticipated to yield positive margins eventually.
Boeing executives are optimistic, emphasizing initiatives like lean manufacturing and enhanced program management to improve the division’s margins by 2025-2026, aligning with the maturation of their most challenging programs.
Chief Financial Officer, Brian West, commented on these strategies during a recent earnings call, “We’re driving lean manufacturing, program management rigor, and cost productivity consistently across the division.”
Yet, industry analysts remain cautious. Byron Callan of Capital Alpha Partners mentioned, “Someone really dropped the ball on all of this,” and Seth Seifman of JP Morgan observed, “Even after excluding charges, BDS (Boeing Defense Space and Security) still did not generate a real profit.”
While Boeing remains cautious about entering new fixed-price contracts due to unpredictability in design and testing, the defense division is keenly focusing on securing contracts for innovative fighter jets and drones. As Richard Aboulafia of AeroDynamic Advisory puts it, “It’s a target-rich environment.”
reuters.com, boeing.com, airforcetimes.com