WASHINGTON — Boeing’s defense unit recorded a $924 million loss in the third quarter of 2023, primarily dragged down by rising costs on its VC-25B Air Force One program.
More than half of Boeing Defense, Space and Security’s loss stemmed from a $482 million loss on the company’s work building two new VC-25B aircraft for the U.S. Air Force. The company attributed the higher costs to engineering changes and labor instability as well as the resolution of supplier negotiations last quarter.
With the $660 million charge Boeing previously recorded on the VC-25B program in the first quarter of 2022 and a $168 million charge in early 2020, the program’s losses have now topped $1.3 billion.
The division’s nearly $5.5 billion in quarterly sales was “essentially flat” year over year from the third quarter of 2022, Brian West, Boeing’s executive vice president and chief financial officer, said in a Wednesday earnings call.
The company’s chief executive, Dave Calhoun, expressed dissatisfaction with the pace at which the defense unit has improved, but said the sector is on track to see improvement in the next two or three years.
“We’re seeing some early signs of progress,” Calhoun said during the call. “But financial improvement at BDS’ lower volumes takes time. Recovery in BDS is slower than we’d like; slower than I’d like. But we’re confident in the future, and our path to normalizing BDS margin performance by that ’25 and ‘26 time frame is intact.”
West said Boeing wants to get its defense sector back to returning high single-digit profit margins by that time frame. He expects the defense unit’s cash flows to show improvement in 2024, but cautioned that lingering effects of repeated charges on the company’s programs would be “still likely a drag.”
As signs of strong demand for the defense business, executives pointed to Boeing’s delivery of the first T-7A Red Hawk trainer to the Air Force and its contract to build 21 Apache helicopters for the Army,
Boeing’s defense unit has been plagued in recent years with delays in important programs, rising costs, repeated losses, and concerns over the quality of its work on key aircraft such as the KC-46A Pegasus tanker and VC-25B, which is now years behind schedule.
In March 2022, the company moved one of its top executives, Ted Colbert, to take charge of the defense unit and reshape it. Eight months later, Colbert revamped the unit and consolidated its eight divisions into four in an effort to get the sector back on track.
Boeing originally expected it would lose about 9% in the quarter, West said, but the Air Force One costs drove that margin down to a 16.9% quarterly loss. Another $315 million loss on a satellite contract further sank Boeing defense’s profits.
“These are disappointing results in the quarter and year to date,” West said. “This performance is below our expectations, and we acknowledge that we aren’t as far along in this recovery as we expected to be at this stage.”
Calhoun said Boeing is working to stabilize its operations in its defense sector, including looking for ways to operate more efficiently, invest in engineering and approach contracting in a more disciplined way.
West said Boeing is also investing in new training programs to speed up factory workers and has sent resources to its suppliers to support their recoveries. He also told investors they can “rest assured” that Boeing has not signed any further fixed-price development contracts, nor does it plan to.
It’s not the first time Boeing has expressed regret for entering into such contracts. Previously, Calhoun in April 2022 said Boeing should not have accepted the Trump administration’s terms as it aggressively renegotiated the company’s Air Force One contract in 2018.
West and Calhoun said Boeing is working through the challenges of building new Air Force Ones and that the major steps of turning the new planes’ power on and flying them for the first time will be largely finished before the 2025/2026 time frame.
“In a fixed-price environment, any unplanned hurdles can introduce unrecoverable costs,” Calhoun said. “At the end of the day, we have two airplanes to build. We’re getting past these hurdles and are committed to delivering two exceptional airplanes for our customers.”
Author: Stephen Losey
Source: DefenseNews
