Boeing and Lockheed Face Crisis of Confidence: Cost Growth Questioned by Congress
As the debt limit discussion plays out in the background two major U.S. defense aircraft programs being led by two of the biggest defense contractors faced scrutiny these past few weeks as the extent of their cost growth becomes clear. In the past depending where the program was in its cycle the Government would absorb most of these costs protecting the contractor’s earnings and profits. In today’s budget environment that may not be the case which will have an affect on Boeing (BA) and Lockheed Martin (LMT) near term performance.
First was the new aerial tanker, the KC-46A, being developed and then produced by Boeing. The company won a hard fought contest with European rival EADS (EADS:P) last year for the first 179 new tankers to replace the aging KC-135 fleet. This was the third attempt by the U.S. Air Force to award this contract since 2001. First Boeing received a sole source lease that was overturned after investigations showed issues between the company and high ranking Air Force officials. Then in 2008 Northrop Grumman (NOC) and EADS won the contract but this was overturned by Boeing’s protest. Finally the third contest was won as Boeing bid a modified 767 airliner at rock bottom prices.
Now it looks like those prices were too good to be true. Boeing actually bid $300 million below the Air Force’s estimated cost for the initial development contract that includes the first 18 aircraft. In the last month the company and Defense Department have begun to inform Congress that not only will Boeing need the $300 million but that they may go over that to at least $4.3 billion. The first billion dollar increase over the $3.9 billion figure will be shared by the Government and the contractor and then Boeing will have to eat everything beyond that. While right now there is no guarantee that the costs will go up that much it does mean the U.S. could be on the hook for another $600 million in costs beyond what was budgeted. Needless to say Congress, especially Ranking Member of the Senate Armed Services Committee and budget “hawk”, John McCain (R-AZ), did not react positively to the announcement.
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