Further problems at Boeing ...

Boeing’s tanker losses top $7 billion

— Boeing reported a $245 million charge on the KC-46A Pegasus tanker in the first quarter of 2023, due to a supplier’s quality issues.

The penalty means the KC-46 has now racked up more than $7 billion in charges, and follow a $1.2 billion hit the company took on the Air Force tanker in the third quarter of 2022.

https://www.defenseone.com/business/202 ... on/385685/


How much more can they spend on this thing before someone puts the foot down ?

Mortyman wrote:

How much more can they spend on this thing before someone puts the foot down ?

Billions more. This is just accounting and tax minimisation.

The best example is the 747-8. As production was winding down faster than expected they took a billion dollar loss one year and a billion dollar loss the next year. There was no development costs being paid for during those years. Each 747-8 frame was sold at a price higher than the cost to manufacturer.

For instance if the upcoming USAF KC-Z contract required the KC-46 to operate with 2, 1 or even zero crew members they would be developing this as part of the KC-46 program accounting budget each year.

Another good tactic is to underbid with a fixed price purchase contract to win a contract but then have an open ended service contract on the back end. The service contract will not be listed under the same KC-46 accounting budget.

When a new aircraft costs billions to develop they can take a multi billion dollar accounting loss during the development years. But once the aircraft is in production it would provide high profit and more tax must be paid. Companies will then decide to only write off portion of the development cost straight away but then allocate the rest to be paid off as the aircraft is produced. This means the profit per aircraft is less during the production years saving on tax. A company can change these values how much gets paid per aircraft to minimise tax.

This is how Boeing magically made a profit during the long 737MAX grounding. They kept making billions of dollars worth of aircraft and parked them without getting payment. Amateurs expected a multi billion loss but they were left scratching their heads. Boeing just shifted the accounting losses from other programs to other years.

Probably not the answer you wanted.

Yes, we have had this discussion so many times now. Boeing certainly would have liked for development costs to be under budget. But if they are not, they can be written off against future profits.

In the case of the KC-46, they will be offset by future earnings on a 50-year program. They are already making a profit in production, and in service and upgrade contracts. But it will be awhile before the program, when taken together as a whole, is in the black.

The VC-25B contract is another matter, there is no volume production to offset the loss. As Calhoun has said, it will be a prestige project as the two aircraft serve as Air Force One for the next several decades.

In the earnings call, Calhoun noted that the Boeing Defense losses are driven by these two fixed-cost contracts. All the other programs are profitable. In 5 years, the KC-46 program will be as well, and the VC-25B will be completed and off the books, except for service which will be minor but profitable.

RJMAZ wrote:

Another good tactic is to underbid with a fixed price purchase contract to win a contract but then have an open ended service contract on the back end. The service contract will not be listed under the same KC-46 accounting budget.

That's assuming that Boeing wins the servicing contract and keeps it.

There have been instances before where the OEM isn't necessarily the winner of the servicing and upgrade contracts; for example, Boeing won the USAF's contract for avionics modernization of the C-130 Hercules fleet:
https://www.dote.osd.mil/Portals/97/pub ... 112948-130

ThePointblank wrote:

That's assuming that Boeing wins the servicing contract and keeps it.

There have been instances before where the OEM isn't necessarily the winner of the servicing and upgrade contracts; for example, Boeing won the USAF's contract for avionics modernization of the C-130 Hercules fleet:
https://www.dote.osd.mil/Portals/97/pub ... 112948-130

The way the KC-46 production contract is structured, the acquisition is done as a package that includes parts and servicing. So at least as long as they are delivering aircraft, they are building the service business at the same time.

Lot 1 7 aircraft (4 development, 3 production)
Lot 2 12 aircraft $2.8B (15 with Lot 1 production)
Lot 3 15 aircraft $2.1B
Lot 4 18 aircraft $2.9B
Lot 5 15 aircraft $2.6B
Lot 6 12 aircraft $1.7B
Lot 7 15 aircraft $2.1B
Lot 8 15 aircraft $2.2B
Lot 9 15 aircraft $2.3B
Israel 4 aircraft $0.9B
Japan 6 aircraft $1.3B
------------------------------------
To date: 134 aircraft $20.9B

However after the acquisition is done, then the USAF could compete the service renewals and upgrade projects, as you indicated. Given that Boeing needs that business to offset losses, they will likely be very competitive.

For the development contract, the USAF portion was $5B, with Boeing paying anything above that. The true cost sits around $12B. That will likely grow as the RVS retrofit is made to the existing fleet.

Not all of those charges are related to development, for example the latest charge for the fuel tanks is a supply chain production issue.

Makes me long for the days of the KC-767 and Darlene Drunyun. Proceeding with that buy would have been infinitely better than the "KC-46".

744SPX wrote:

Makes me long for the days of the KC-767 and Darlene Drunyun. Proceeding with that buy would have been infinitely better than the "KC-46".

That was the lease deal that John McCain torpedoed, although it looked pricey back then it is cheap compared. But it would have more like the KC-767 sold to Japan, much less of a plane.

JayinKitsap wrote:

744SPX wrote:

Makes me long for the days of the KC-767 and Darlene Drunyun. Proceeding with that buy would have been infinitely better than the "KC-46".

That was the lease deal that John McCain torpedoed, although it looked pricey back then it is cheap compared. But it would have more like the KC-767 sold to Japan, much less of a plane.

Being available has a quality all of its own, if one looks at the number of years that have passed since that lease deal was cancelled and the funds spent maintaining the KC-135 fleet and the payments to experts to use equations on paper to extend the life of the engines, frame, avionics and change the expert expectations of how long the fleet can continue.....
Also now when they need funds for their new fighters and bombers I am sure there is a cadre in the Air Force that has already crunched the numbers and can show that the KC-135 fleet can continue for another 100 years and the KC-46 should be cancelled and the funds used for the fighter fleet, new bomber and NGAD.

JayinKitsap wrote:

But it would have more like the KC-767 sold to Japan, much less of a plane.

If you look at it from a different perspective. If Boeing won the 200 KC-767 order it would have been a more gradual transition to any future KC-46 upgrades. They may not have experienced the number of dumb mistakes in design if there was continous design improvements along the way.

bt

Don't these losses just reduce the corporate income tax BA would pay the Feds? So they are getting some of their money back for the overruns.

MohawkWeekend wrote:

Don't these losses just reduce the corporate income tax BA would pay the Feds? So they are getting some of their money back for the overruns.

Yes, there is a tax return on the "investment" of taking a charge and retiring the loss, as opposed to carrying it forward against future program revenue. It's not that large, maybe 30% at absolute most, usually much lower. But it helps. The law also allows the tax benefit to be distributed over multiple years, which can lower the overall tax burden, if there are significant fluctuations year on year.

The main benefit of retiring loss is that it goes against current revenue and profits, which are known, as opposed to future which may be unknown, or even non-existent. So it's a derisking strategy.

Avatar2go wrote:

MohawkWeekend wrote:

Don't these losses just reduce the corporate income tax BA would pay the Feds? So they are getting some of their money back for the overruns.

Yes, there is a tax return on the "investment" of taking a charge and retiring the loss, as opposed to carrying it forward against future program revenue. It's not that large, maybe 30% at absolute most, usually much lower. But it helps. The law also allows the tax benefit to be distributed over multiple years, which can lower the overall tax burden, if there are significant fluctuations year on year.

The main benefit of retiring loss is that it goes against current revenue and profits, which are known, as opposed to future which may be unknown, or even non-existent. So it's a derisking strategy.

Not sure how long losses can be carried to future years, but Boeing has certainly been trying the NO corporate taxes for a while. No profit >> No corporate tax LOL. Lets hope they get back to paying large amounts of taxes.

JayinKitsap wrote:

Not sure how long losses can be carried to future years, but Boeing has certainly been trying the NO corporate taxes for a while. No profit >> No corporate tax LOL. Lets hope they get back to paying large amounts of taxes.

The IRS allows distributing both profits and losses over multiple years. Boeing still cites tax benefits in its statements. Not sure how they do it, but possibly there is still income being distributed from 2018, or before. You'd need a tax accountant to figure it out.

Mortyman wrote:

Further problems at Boeing ...

Boeing’s tanker losses top $7 billion

— Boeing reported a $245 million charge on the KC-46A Pegasus tanker in the first quarter of 2023, due to a supplier’s quality issues.

The penalty means the KC-46 has now racked up more than $7 billion in charges, and follow a $1.2 billion hit the company took on the Air Force tanker in the third quarter of 2022.

https://www.defenseone.com/business/202 ... on/385685/


How much more can they spend on this thing before someone puts the foot down ?

In retrospect overturning the 2008 selection of the A330-based tanker was not such a clever idea, was it?

art wrote:

In retrospect overturning the 2008 selection of the A330-based tanker was not such a clever idea, was it?

A critical point of these charges is that Boeing absorbs them fully, due to the fixed cost contract. So USAF receives a continuously improved aircraft for no additional cost. That essentially trades schedule for capability. The USAF has had to wait much longer, but the delivered capability is much greater than specified.

The KC-45 is the road not taken, so there is no way to know if they would have fared better to meet the USAF specs and missions.

The one thing that is certain, is the MRTT RVS system was already in service, so that problem would not have occurred with the KC-45. However as things have worked out, the USAF gets the upgraded vision system included, that will be a forthcoming option on the MRTT.

art wrote:

In retrospect overturning the 2008 selection of the A330-based tanker was not such a clever idea, was it?

Small silver lining. The KC-46 production line allowed Boeing to deliver a few 767F to various air carriers. This buys both Boeing and the carriers some time before the 787F is ready.

bt

Avatar2go wrote:

The one thing that is certain, is the MRTT RVS system was already in service, so that problem would not have occurred with the KC-45. However as things have worked out, the USAF gets the upgraded vision system included, that will be a forthcoming option on the MRTT.

Just for confirmation, I'm not sure to read it well.
Are you suggesting here that at some point Airbus may consider fitting Boeing RVS in their MRTT ?
The system with which they already perform automatic refuelling (A3R), and on its way of certification to take control of UAV's during refuelling phase (Auto'mate)?

Grizzly410 wrote:

Just for confirmation, I'm not sure to read it well.
Are you suggesting here that at some point Airbus may consider fitting Boeing RVS in their MRTT ?
The system with which they already perform automatic refuelling (A3R), and on its way of certification to take control of UAV's during refuelling phase (Auto'mate)?

Sorry if unclear. I meant that the new LIDAR-equipped system that is automation-ready (RVS 2.0), which will be a free upgrade on the KC-46, is roughly equivalent in capability to the A3R that Airbus will offer as an upgrade to the MRTT fleet.

My point was that neither system was available at the time of the KC-X contract award. Many people think that RVS 2.0 is just a fix or a patch, but in fact is an entirely new system.

Airbus is ahead of Boeing in the certification of the automation capabilities. Boeing has demonstrated operational automation in the MQ-25, which is drogue only. For the boom system, Boeing has only done development flights, whereas Airbus is presently certifying those capabilities.