Dennis Muilenburg is president and CEO of Boeing's Defense, Space & Security unit, which employs 58,000 and generates $33 billion in annual sales. He met with Aviation Week editors in Washington for a wide-ranging discussion about the company's future in the challenging defense and space markets.

AW&ST: There is a sentiment among some U.S. politicians that the automatic budget cuts, known as sequestration, are working and have reduced the federal deficit to a more manageable level. What do you say?

Muilenburg: The combination of sequestration and the [recent] government shutdown is causing chaos for the aerospace industry. The resulting uncertainty is upending plans for our customers at the Defense Department, FAA and NASA. The inability to do consistent, long-term planning also causes difficulty for the industry as we think about capital outlays and investments. It's a destructive force, and we really need an alternative solution to the nation's budget situation before it causes irreparable damage. We're seeing damage every day with facility closures, job reductions and impact on the supply chain.

How has the downturn affected Boeing's defense and space unit?

We're planning for a “full-sequestration” scenario and getting our cost structure in the right place so that we can continue to hold and grow our investment in R&D. Our employment is down about 20% from three years ago and we've had executive reductions of more than 30%. We've made difficult decisions to close facilities like Wichita, where we had 80 years of Boeing history. We're assuming roughly another $500 billion in defense budget reductions over the next 10 years. For fiscal 2014, that implies a $52 billion reduction to the president's budget request. It is very difficult to project where those cuts will fall. We know that tanker and long-range strike are very high priorities for the U.S. Air Force. But the lack of clarity on how [cuts] will flow down to individual programs makes capital outlays, R&D planning and talent planning very difficult. That's the devastating impact.

How much are international and commercial airplane sales offsetting the downturn in defense?

International customers have gone from 7% of our defense business five years ago to 28-29% this year, and we project they will account for roughly one-third over the next 5-10 years. We're looking at the strength of the commercial airplane market, our ability to invest in the defense and space business in combination with that in a global sense. That's part of what we call our “One Boeing” strategy.

South Korea is reopening its fighter competition after initially selecting Boeing's F-15SE Silent Eagle as the only qualified bidder. There is a lot of support there for the F-35, and cost may not be their primary concern. Will you re-bid?

We were certainly disappointed by the decision. We followed the competitive process precisely over the last two years and provided an offering that met all of the technical and budget requirements. A large majority of our customers' missions do not require all-aspect stealth; they require an all-aspect fighter: range, payload, acceleration, speed and avionics. The Silent Eagle is 50% faster in acceleration and top speed than the F-35. It carries 60% more payload and has a 70% greater combat radius. You have two seats and two engines, which provide a lot of additional capabilities, and avionics that are at the leading edge in networking and situational awareness. And we know exactly when we'll deliver them, what they'll cost and the cost to support them in the field, which is roughly half of the projected support cost for the F-35.

So what would make the South Koreans look at your proposition the way you see it?

The acquisition that was just delayed was for 60 aircraft of the same type. Our South Korean customer not only faces evolving threats; they also have some tough schedule and cost constraints. The upcoming operational transfer between the U.S. and South Korea is driving the schedule, so they need jets in 2017. So you could perhaps look at a split buy of some sort. There are a lot of alternatives.

Boeing has known for several years that the F-35 was not going to meet its cost and schedule targets, yet only came out swinging this year in making the case for the F/A-18 Advanced Super Hornet. Why did you hold back?

We understand the need for the F-35 and how it fits into the future force structure. But if you look at the U.S. Navy's plan for their fleet through 2030, more than half of the airplanes on carrier decks are F/A-18s and [EA-18G] Growlers. So our motivation to invest in that product line reflects the fact that the F-35 is not a replacement for the F/A-18 and the Growler; it's intended to be a complement. Our commitment is to continue to inject technology while we reduce cost. This year's Super Hornet costs less than last year's, and it is more capable. That is a great value proposition in a budget-constrained environment.

What spurred you to join forces with Lockheed Martin to compete for the U.S. Air Force's Long-Range Strike-Bomber program with Boeing as prime and Lockheed as your chief teammate?

We believe this teaming arrangement will meet the U.S. Air Force's affordability, schedule and performance requirements better than any other approach, and we are dedicating the combined talent and capabilities of both enterprises to serve this top customer priority. We know how to design, develop, produce and support complex, highly survivable systems, and have proven that in delivering most of the advanced systems and aircraft assets that the Air Force operates.

How are you going to pitch a solution for the U.S. Navy's Unmanned Carrier-Launched Airborne Surveillance and Strike (Uclass) program?

The primary mission for Uclass is a carrier-based, long-range intelligence, surveillance and reconnaissance capability. We want to start with those requirements and design a purpose-built system. It's important not to start with some existing solution and then try to backfit it into the customer's requirements. Stealth for the sake of stealth is interesting. Stealth that can be fielded and supported in an affordable way is one of the places where we have a technology advantage.

Are plans to close the C-17 line after 2015 a result of the uncertain budget environment or lack of a market to support continued production?

Really a combination. We've been working hard the last few years to extend the C-17 production line, principally on international sales, and we've had some good successes, such as India. We have 22 aircraft to deliver yet. But when you look at the timing of international sales and the uncertain budget situation in the U.S., you quickly come to the conclusion that we can't spend our limited R&D dollars to keep that line open.

Can you tell us about Boeing's discussions with Saab?

We have had discussions with Saab, along with other companies, on the [U.S. Air Force's] TX [trainer]. Some comments came out about whether we would use [Saab's JAS 39 Gripen] as our TX offering. That is not the path we're on. We are maintaining our strategy of defining a clean-sheet solution that responds directly to our customer's requirements. We've had broad discussions with Saab beyond the TX.

What are your plans for Boeing's space business?

We see space as a strong and growing sector. We're looking at unmanned vehicles, human space exploration and satellites. Additional investments include broadening the applications of the X-37B [reusable unmanned demonstrator] and NASA's new Space Launch System, which will provide exploration capability to the Moon and Mars.

It's interesting that you mention human spaceflight as a growth market.

That market has gone through some tough times with the dismantling of the Constellation program and the shutdown of the space shuttle. We've emerged from that, and the two areas of principal growth are commercial crew and the Space Launch System. The commercial crew marketplace is initially focused on supplying crew and cargo to the International Space Station. That alone provides a sufficient business case for us. If a broader commercial transportation market to low Earth orbit evolves, that would represent upside to the business case and might draw additional investment.

Is Boeing interested in satellite servicing?

The ability to do unmanned operations in space in an affordable, reliable way will be important for both commercial and military customers. It's hard for me to put a dollar figure on the market, but it's clear that it has a high strategic value. There is also a lot of innovation around hosted payloads—getting dual use out of satellites. That technology is rapidly maturing and being fielded.

In missile defense, the Ground-based Midcourse Defense system has not been consistently tested, and the testing that has occurred has not been largely successful.

Overall, the program is going well. Clearly, we were disappointed that the last flight test did not get a successful intercept. When we do major flight tests, we learn a lot every time, which allows us to improve and inject technology into the system. But to have a reliable missile defense capability for the country, we have to be able to test it on a regular basis. And so we've been advocating, along with the Missile Defense Agency, for more frequent, consistent, periodic testing of the system—a combination of regular testing of the system and testing associated with technology injection, including kill-vehicle technology.

This is a multibillion-dollar system, and the U.S. is not capable of showing the world that it works.

That goes back to my point. Currently, there are multiple years between tests. The fact that failures and technology obsolescence occur should not surprise anyone. While an intercept wasn't achieved in the last test, all the rest of the integrated system worked magnificently well: the networking systems, the radar connectivity, the situational awareness and the multiple asset control. We didn't get the intercept, but you shouldn't conclude that the entire test didn't work. It actually verified a great deal of the system. Our ability to continue to make it better and reliable is dependent on regular testing.

On the tanker program, the government's estimated cost of completion still exceeds the contract value by up to $500 million. How much will Boeing have to pay to have this tanker on the ramp in 2017?

We don't have to pay anything additional. Our execution to date is exactly what we proposed, and we haven't changed our [cost] estimate. We completed critical design review in July, the technology is completely on track and risk reduction is on schedule. We have high confidence that we will perform to what we proposed: flying the first green airplane in the middle of next year, having the first full-up tanker flying early in 2015, first delivery in 2016, and having 18 tankers in 2017. We are performing exactly to the contract as proposed and signed. We're not to the cost ceiling, and we will perform to plan.

Dennis A. Muilenburg

Age: 49

Education: Bachelor's degree in aerospace engineering from Iowa State University and a Master's degree in aeronautics and astronautics from the University of Washington.

Career: Joined Boeing in 1985. Prior to assuming his current role in 2009, ran Boeing's Global Services & Support business, Combat Systems division and Future Combat Systems program.