WASHINGTON — Boeing reported $1.3 billion in cost overrun charges among some of its major defense programs in its most recent quarter, lowering its defense unit’s sales in what its chief executive called a “messier quarter.”
Much of those charges — a little more than $1 billion — came from development of the new Air Force One and the Air Force’s T-7A Red Hawk trainer, the company said in its quarterly earnings statement Wednesday.
And in a call Wednesday, Boeing chief executive Dave Calhoun suggested the company should not have accepted the Trump administration’s terms in 2018 on the new Air Force One, as the former administration engaged in hardball negotiations to drive costs down.
Boeing’s defense, space and security division saw its sales in the first quarter of 2022 drop to $5.5 billion, down 24% from the same period last year. This decline was largely due to lower volumes and its charges on fixed-price development programs.
Calhoun said in an MSNBC interview Wednesday morning Boeing reported a “messier quarter than any of us would have liked.”
The VC-25B Air Force One program saw the largest charge, totaling $660 million. This stemmed from schedule delays, rising supply costs and higher costs to finalize technical requirements. The aircraft was originally due to be delivered in 2024, but the Wall Street Journal reported earlier this month it could be at least two years behind schedule.
Another $367 million in charges came from the T-7, the Air Force’s next jet training aircraft. Supply chain constraints, complications from the COVID-19 pandemic, and inflation complicated ongoing negotiations with suppliers, Boeing said.
Boeing’s Securities and Exchange Commission filings also showed a $165 million charge for the KC-46A Pegasus, driven mainly by higher supply chain costs, and a $78 million charge for the MQ-26 Stingray stemming from additional testing requirements from the Navy and supplier quality problems.
During the call, Calhoun said Boeing still has high confidence in the T-7′s future and said other programs have weathered similar pressures. He added that he expects the MQ-25 Stingray program, a Navy aerial refueling drone for which Boeing won the contract in 2018, will also turn out to be another good bet for the company. Despite both programs having higher-than-anticipated development costs, Calhoun said, the military will be flying them both for a long time.
But he expressed regret over the path Boeing took on the new Air Force One during the Trump administration.
In December 2016, then-President-elect Donald Trump tweeted “costs are out of control” for the more than $4 billion price tag for the new Air Force One and that he wanted to cancel the order. In July 2018, the Air Force awarded Boeing a $3.9 billion contract for two new Air Force Ones. The White House said that represented a dramatic price drop from the original proposal for the cost-plus contract, which it said was valued at $5.3 billion.
That contract represented “a very unique moment, a very unique negotiation, a very unique set of risks that Boeing probably shouldn’t have taken,” Calhoun said. “But we are where we are, and we’re going to deliver great airplanes.”
Calhoun said COVID-related inefficiencies were largely responsible for the cost overruns it experienced, and that they have been particularly acute for the Air Force One program.
“In the defense world, when a COVID line goes down, or a group of workers steps out, we don’t have a whole bunch of cleared people to step into their shoes,” Calhoun said. “It has always been a tougher implication, and for the VC-25B where the clearances are ultra high, it’s really tough. So we just got whacked in a number of different areas.”
Author: By Stephen Losey