Boeing Defense to Surpass Commercial Side For First Time In More Than a Decade

But that's no cakewalk as new Air Force One and KC-46 tanker eat into the company's cash.

Updated, April 30, 2020, with a U.S. Air Force statement.

For the first time in 12 years, Boeing executives expect the company's defense and space unit to outperform its commercial airplane business, which is reeling from coronavirus and 737 Max losses.

Boeing's defense business has not outperformed its commercial side since 2008, when the commercial market was still recovering from post-9/11 declines and U.S. defense spending spiked during the wars in Iraq and Afghanistan.

The prediction comes on the back of pre-existing problems in the Boeing Defense, Space & Security division. The company's defense unit took a $1 billion hit in the first quarter of 2020, adding to the growing list of financial woes for the company trying to dig itself out of a massive hole.

“This year ... the defense business will probably be bigger than the commercial business,” Boeing CEO David Calhoun said during a call with Wall Street analysts. “That will probably hold for a while.”

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Additionally, executives said Wednesday that Boeing would lose $827 million on its work building KC-46 aerial refueling tankers and $168 million on the new Air Force One 747s that will fly the president, according to executives and regulatory filings. It's the latest black eye for the tanker project, which has cost the planemaker more than $4 billion over the past nine years. However, it is the first cost increase on the high-profile Air Force One project, which President Donald Trump personally negotiated with former Boeing CEO Dennis Muilenburg. Boeing began work converting two 747 jetliners into the unique Air Force One configuration in January before the coronavirus pandemic forced many workers out of the office.

“As we've had folks working virtually, and particularly on the engineering side — as well as that's gone — it's certainly experienced some inefficiencies that has caused us to reevaluate our estimate to complete those efforts,” Boeing CFO Greg Smith, said of the Air Force One project during a Wednesday afternoon call with reporters.

“The team has been doing a great job managing the program and executing very well on many fronts, but this we could not offset in the quarter as a result of COVID,” he said. “The program remains on schedule and ... continuing to execute, but we're looking for opportunities obviously to mitigate any further risk that we may have as a result of COVID.”

The terms of the Air Force One contract require Boeing, not taxpayers, to pay for any cost increases during the development of the plane, which the military calls a VC-25B. Despite the coronavirus-related issues, Ann Stefanek, an Air Force spokeswoman, said the project remains on track.

“As planned in the baseline schedule, the next phase of modification is on course to begin in June 2020,” Stefanek said in an emailed statement. “To maintain current schedule, Boeing and the VC-25B program office adopted maximum use of virtual tools, most notably to close Critical Design Review in March 2020 and conduct a modification readiness review in April 2020.”

As for the tanker, $551 million in cost increases stem from a deal reached between the Air Force and Boeing requiring the company to fix the complicated camera system used when refueling other aircraft. Most of the remaining $276 million is the result of coronavirus-related factory closures in Washington state where the tanker is built, and a “cost shift” resulting from slowing production of other commercial manufacturing.

“I do believe that that program now is exactly where it needs to be,” Calhoun said of the KC-46. “We're going to finish well. Importantly our customer is going to feel like we have finished well and we've delivered a product that is second to none. I do believe that even the tanker future is significantly brighter than the one we've experienced up until now.”

Calhoun also touted the company's development work. Although he did not mention any projects by name, Boeing is in the early stages of testing two new aircraft — the T-7A pilot training jet and MQ-25 refueling drone.

“Our development programs at the early stages are all looking quite good. We're really not off plan on anything and usually by now we have a snip that we might be. I feel pretty good about the risk profile of our defense business despite the difficulties that we've attempted to overcome in just the last couple of years.”

The same can't be said of the company's commercial airliner and aircraft repair businesses. Boeing is planning to cut 10 percent of its 160,000 employees through voluntary layoffs, attrition and involuntary layoffs.

The coronavirus has driven a substantial blow to the storied 104-year-old aerospace and defense company, which had already been reeling from the fallout of deadly 737 Max crashes in October 2018 and March 2019. Passenger air travel has fallen to record lows prompting airlines to cancel flights, ground aircraft, and defer buying new planes.

Boeing in late March temporarily stopped making commercial and military aircraft — including the tanker and the Navy's P-8 submarine hunter — in the Seattle-area, a COVID-19 hotbed. It also shut down its military assembly lines in Philadelphia for the Chinook and MH-139 Grey Wolf helicopters, and the tilt-rotor Osprey. Those factories have since reopened. A shuttered 787 Dreamliner factory in Charleston, South Carolina, is expected to reopen next week.

Now all eyes — including at the Pentagon — are watching to see how Boeing manages tens of thousands of employees on its complex assembly lines with new social distancing procedures in place. If successful, the model could become a blueprint for other U.S. manufacturers.

“They have allowed me to share their practices more broadly with industry to make sure that anything that is working for them to either be safer or get back to work, that that's something that can be shared with all,” Will Roper, head of Air Force acquisition, said Wednesday.

Boeing began the year with hopes of fixing its troubled 737 Max and restoring public confidence in the world's largest planemaker. Unable to deliver the unflyable Max to the airlines, it stopped building them in early January as it began running out of places to park them. Photos showed planes carefully aligned next to one another on tarmacs and even in employee parking lots.

There's still no formal timetable for getting the Max flying again, although executives are hopeful regulators will approve a number of fixes in the coming months and that it can begin delivering 737 Max aircraft to airlines in the third quarter.

https://www.defenseone.com/business/2020/04/boeing-defense-surpass-commercial-side-first-time-more-decade/165020/