By John T. Bennett - 07/20/11 08:07 PM EDT
Boeing officials do not expect to breach the cost estimates that the Air Force endorsed when it handed the company a $35 billion contract for new tanker aircraft.
“There are no overruns. … We remain on cost, on schedule,” Boeing executive Chris Chadwick told The Hill on Wednesday. “Our bid has not changed since the Air Force accepted it. Our expectation of cost has not changed since the Air Force selected the Boeing plane.
“Nothing’s changed from the day we signed on the dotted line to today,” said Chadwick, the president of Boeing Military Aircraft. “No cost increases, no overruns. No nothing.”
The Boeing executive’s comments come as Senate Armed Services Committee ranking member John McCain (R-Ariz.) is hammering Boeing over a contract arrangement that he says could cost the Air Force a previously undisclosed $600 million.
“Given the fiscal constraints facing the country, I would absolutely expect that taxpayers and Congress will not tolerate a $1 billion overrun on a contract to develop four airplanes,” McCain wrote in a July 15 letter to Pentagon acquisition chief Ashton Carter.
Reuters reported earlier this month that the revised cost estimate for the first four KC-45 aerial tankers was $4.9 billion. That is $1 billion higher than the previous estimate, as stated when the contract was awarded to Boeing earlier this year.
Boeing sources confirmed that arrangement on Wednesday, saying if the costs fall in the $3.9 billion to $4.9 billion “delta,” the Air Force would pay 60 percent and Boeing 40 percent. That is the contract structure and cost arrangement accepted by the Air Force, the Boeing sources said, noting the service weighed this against cost projections for the same scenario offered by Airbus's EADS.
McCain contends that if the work under the first KC-46 contract — which includes the first four tanker planes — falls between the $3.9 billion and $4.9 billion, the Air Force would pay around $600 million and Boeing would be responsible for the remaining amount.
“I can also assure you that Congress and taxpayers will find a $600 million subsidy of a low-ball bid by Boeing is something they feel they should not have to pay for,” McCain told Carter in the letter. “In the current era of fiscal austerity, we need to assure taxpayers that their interests are protected and that every scarce defense dollar is being used wisely.”
Boeing sources say the $4.9 billion figure has been misconstrued, and that figure is the “ceiling” price for the cost of the tankers as written into the contract with the Air Force. If total program costs rise above that figure, Boeing would pay every penny, sources with the company told The Hill.
Boeing officials stressed that their latest program cost projections are on track to meet the $3.9 billion that the Air Force first disclosed months ago.
“The nature of a fixed-priced contract; both us and EADS were evaluated at the ceiling of the contract,” Chadwick said, “and if we ever breach that ceiling, then Boeing will have to pay for any overruns at that point. Once you breach ceiling, then we have to pay for all overruns.”
McCain and other Boeing critics have accused the Chicago-based firm of winning the contract with a “low-ball bid” that includes cost promises on which it cannot deliver.
Pentagon officials say the difference in costs between the Boeing and EADS bids was not even close.
Some defense and aviation experts contend Boeing could lose money on the program — a hit they say the firm was willing to take to keep the Air Force contract out of the hands of its European rival, EADS, the parent company of Airbus.
“Our belief is it’ll turn out positive,” Chadwick said. “We tend to look at it as, any development program is always tough. There’s a competitive aspect. You’ve got to get it to production. There are challenges there.”
Boeing kept its tanker team working after it submitted its bid, instead of halting work until a contract was awarded.
Asked if company brass are concerned Wall Street and its shareholders will grow queasy if the KC-46 program fails to make money for a number of years, Chadwick said no.
“Our business is a long-cycle business. How we are judged by our customers is do we perform to plan and deliver on our promises,” the Boeing executive said. “By the street and our shareholders, we are judged as a business entity.
“We continue to forecast a positive compound annual growth rate and high single-digit margins, and we have no reason to change that, even with the addition of the ... tanker program into the portfolio,” he said. “Our business remains very fundamentally strong.”