Boeing U.S. tanker program seen $1 billion over budget

Boeing NewGen Tanker

(Reuters) – The U.S. Air Force on Friday estimated that Boeing Co’s (BA.N) development of a new refueling plane will cost nearly $1.1 billion more than initially planned, but the terms of the government’s contract mean Boeing must cover the added costs.

The latest estimate from the Air Force office that runs the KC-46A aerial tanker program puts the total development cost at $5.85 billion. The Air Force plans to spend $52 billion to develop and buy 179 of the new refueling planes to start replacing its fleet of 50-year-old KC-135 tankers, which are used to refuel fighter jets and other warplanes during flight.

Air Force spokesman Ed Gulick said the new estimate was $250 million over last year’s projection for the program’s development cost, but gave no additional details on what drove the increase. He said the annual mandatory estimates could increase or decrease as the program continued.

“Despite this estimated increase, the government liability remains capped at the contract ceiling price of $4.9 billion, and Boeing continues to meet all contractual milestones, including the development and delivery of the four EMD aircraft,” Gulick said.

The Air Force has repeatedly raised its cost estimates of the development part of the tanker program, but insists that the fixed-price terms of its contract with Boeing will keep cost overruns from affecting the federal budget. Last year, it forecast a cost overrun of around $700 million.

Chicago-based Boeing said it remains on track to meet its initial $5.1 billion estimate for developing the new military tanker, which will replace some of the Air Force’s aging fleet of KC-135 tankers.

The company also said it expects to make a profit on the overall program, and that it continues to look for additional orders from the United States and other countries.

“Boeing’s cost estimate to complete engineering, manufacturing and development on the KC-46 tanker program is consistent with our estimate at the time we developed our bid,” said spokesman Jerry Drelling. “And the fixed-price nature of the contract ensures that there are no additional costs that will accrue to the U.S. government.”

Drelling declined to provide any details on the company’s expected profit, saying Boeing did not break down that data by specific programs. He said Boeing continued to work on reducing the program’s cost on a daily basis.