Boeing Takes $2.76B Hit On Space, Fixed-Price Defense Programs

Credit: Boeing

A chronic shortage of parts and labor drove Boeing executives on Oct. 26 to report $2.76 billion in new reach-forward losses in the third quarter across five fixed-price development programs in the Defense, Space and Security (BDS) division. 

The fresh charge and break-even performance by mature production programs resulted in BDS posting a $2.8 billion quarterly loss from operations. Quarterly revenues declined by 20% compared to the same period a year ago, totaling $5.31 billion.

Reach-forward losses have become a familiar pattern among the five fixed-price development programs that Boeing has acquired since 2011, which are the KC-46, VC-25B, MQ-25, T-7A and Commercial Crew programs. Since reporting an initial loss on the KC-46 program in 2014, the five programs have now combined to accumulate nearly $11.5 billion in reach-forward losses over an 8-year period for a division that currently reports about $26.5 billion annually in sales. 

The scale of the new reach-forward losses within Boeing staggered some market analysts. But Boeing executives offered no apologies for charges that they blamed on macroeconomic forces rather than internal performance. 

“We’re not embarrassed by [the $2.76 billion reach-forward losses],” says Boeing CEO David Calhoun. “They are what they are.”

The KC-46 program continued to lead all of the five fixed-price programs in the scale of the reach-forward losses. The 767-derived U.S. Air Force tanker accounted for $1.17 billion of the $2.76 billion of the third-quarter accounting charges. Since 2014, Boeing has now reported a total of $6.58 billion in reach-forward losses on the KC-46 alone. 

In this case, Calhoun says the charges were driven by macroeconomic forces beyond Boeing’s control, especially a crippling shortage of parts flowing from suppliers to the KC-46 assembly line in Everett, Washington. The parts shortage is aggravated by a lack of trained workers amidst a wider, unstable labor market, he adds.

Most programs expect to see costs decline as efficiency improves along a reliable learning curve. But the labor market instability and chronic supply chain disruptions have forced Boeing to change its expectations, Calhoun says. A recent review of the five fixed-price programs prompted Boeing to lower its expectations for improved performance. 

“We don’t have any baked-in learning curves anymore,” Calhoun says. “These supply constraints we face today will not end until we finish [the programs].”

That change in philosophy created a ripple effect throughout Boeing’s portfolio of fixed-priced programs. In addition to the $1.17 billion charge for the KC-46, the company also reported reach-forward losses of $766 million on the VC-25B, $351 million on the MQ-25, $285 million on the T-7 and $195 million on the Commercial Crew program. 

The T-7 program has sustained losses on development and production. Including a $185 million charge in the third quarter, Boeing has reported $936 million in reach-forward losses for the new Air Force trainer since 2018. The Air Force plans to order 346 T-7 jets, so Boeing expects to lose an average of $2.7 million per aircraft over the life of the program. 

The finances for each of the fixed-priced programs could still worsen, Calhoun says. Boeing expects the macroeconomic conditions that caused the latest charges to persist at least through 2023. 

“The best fact set I can give is that we’re getting closer to the end of these programs,” Calhoun says.

Steve Trimble

Steve covers military aviation, missiles and space for the Aviation Week Network, based in Washington DC.