Despite strong Q3 earnings, Boeing hit with $349M loss over Pegasus

Despite Boeing publishing strong third quarter earnings on Wednesday, the defense contractor will take a loss of $349 million due to cost overruns on the Boeing KC-46 Pegasus program as a result of its fixed-price contract with the U.S. Air Force.

The KC-46 Pegasus is a wide-bodied aerial refueling tanker jet being developed for the U.S. Air Force. It is capable of refueling all U.S. and allied military aircraft capable of mid-air refueling.

The aircraft has met performance and cost requirements since work on the KC-46 program first began in 2011, and more recent problems with development and the necessary fixes have led to delays in the KC-46's delivery to the Air Force.

Under the terms of the deal between Boeing and the Air Force, the risk of cost overruns during production falls on Boeing. Historically, the burden of the fixed-price contract weighs heavy, especially for innovative projects involving military transports that are untested or have undeveloped technologies.

The $329 million of overrun costs are split between Boeing's defense business unit and its commercial sector, the company said in its third quarter earnings report. The business unit will pay out $73 million, with commercial taking on the remainder.

To date, Boeing has had to pay out roughly $2.9 billion in pre-tax fees, equating to about $1.9 billion after taxes.

Wednesday's cost overrun disclosure is attributed to "incorporating changes into initial production aircraft as we progress through late-stage testing and the certification process," the company said in its third quarter 2017 conference call with reporters.

While Boeing CEO Dennis Muilenburg gave little insight during a conference call into the cost overruns and penalties acquired by the company, he remained optimistic about Boeing's approach to developing the KC-46 and the company's ability to meet its delivery deadline.

"We remain very confident," Muilenburg said. "The opportunity is measured in hundreds of aircraft. We expect this to be a long-term production and support franchise, one that will add tremendous value for our customers, and the need for the new tankers is very clear. So the fundamentals for the program are strong, the long-term value proposition is very strong."

Boeing said that they have completed more than 2,000 hours of flight testing with six tankers, and about 80 percent of flight test requirements have been completed.

"While we've had some issues that have occurred during flight tests that are normal to tanker testing," he said. "I can tell you the feedback we've heard from the customers flying the airplanes is that the airplanes are flying well and the controllability of the boom is excellent."

"The challenges we're having right now are related to just implementing just final detailed changes on the aircraft to get them to a final certification standard."

The first 18 planes are expected to be delivered by next February and their wingtip aerial refueling pods by October 2018, 14 months later than originally planned.

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