The KC-46 Pegasus is the Air Force's next-generation fuel tanker aircraft, designed to replace a rapidly aging aerial tanker fleet. Boeing Co. (BA, Financial) is slated to build 179 KC-46 aircraft under a $32 billion contract that is the venerable aerospace company’s single largest military program.
Unfortunately, the KC-46 has been plagued with problems from the beginning. As I discussed in a March 5 GuruFocus article, these problems continue to persist, and on March 30, Boeing turned the page on yet another chapter in the embarrassing saga that is the KC-46 development program: the tanker was found to leak fuel excessively.
A leaky fuel tanker
The KC-46’s fuel leakage problems were first identified in July 2019. Efforts to ameliorate the issue have thus far failed to bear fruit. Consequently, the Air Force issued a statement on March 30 announcing that it had “upgraded...deficiency of its K-46 Pegasus fuel system to Category I.” This upgrade further elevates the priority of the issue, and puts yet more pressure on the embattled aerospace company to deliver on its promises. The Air Force’s statement did not sugarcoat things, nor did it hide the military’s displeasure with Boeing’s progress to date:
“The Air Force and Boeing are working together to determine the root cause and implement corrective actions. The KC-46 Program Office continues to monitor the entire KC-46 fleet and is enhancing acceptance testing of the fuel system to identify potential leaks at the factory where they can be repaired prior to delivery. Boeing is contractually obligated to remedy this deficiency at no additional cost to the government.”
Boeing’s most lucrative government contract is causing serious headaches. If it cannot find a solution to the fuel leakage problem, it could cost the company billions of dollars.
A threat to national security
Boeing’s slow progress on the KC-46 has stoked the ire of the top brass. On Feb. 21, Gen. Stephen Lyons, commander of the United States Transportation Command (TRANSCOM), implored Congress to prevent the retirement of 23 aging fuel tankers, since the existing KC-46 are not up to the task:
“[It] creates a capacity bathtub with significant impacts to Combatant Command daily competition and wartime missions, and negatively impact senior leader decision space for mobilization when confronted with a crisis.”
In other words, the deficiencies of the KC-46 have created tangible national security problems.
Leadership change inspires hope
The Air Force appears to have fresh confidence in Dave Calhoun, who assumed the mantle of Boeing CEO upon the departure of Dennis Muilenberg. On Mar. 3, Air Force Chief of Staff General David Goldfein told a Senate committee as much:
“[Calhoun] committed to me that the KC-46 was his top military priority and he was going to do what was required to fix it. I have seen a change in the behavior of that company since he took over. That’s why we’re more confident sitting here today that we have a serious fix on the table.”
Even so, Goldfein admits that the KC-46 still faces “profound problems” that must be corrected before it can be cleared to enter regular service. “We are meeting every day on that topic,” Air Force Secretary Barbara Barrett told senators on March 3, “It is really one of the highest priorities in the building.”
Criticisms mount amid delays
Yet, according to Goldfein, a fix will not be in place until 2023 or 2024. Thus, despite some signs of limited progress, the Air Force clearly remains frustrated with Boeing, and that frustration is increasingly being expressed by federal legislators.
During the March 3 Senate committee hearing, Democratic Sen. Jeanne Shaheen of New Hampshire excoriated Boeing’s slow progress toward fixing the KC-46’s many deficiencies:
“Three or four years doesn’t sound like time is of the essence to me. I hope that this committee will do what we can to address that as well, because that’s unacceptable.”
Joni Ernst, a Republican senator from Iowa, also voiced great concern with Boeing’s failings, saying “Many of us are very, very concerned.”
In the tense political climate dominating Washington, DC – and the nation – displeasure with Boeing seems to be one of the few issues to retain bipartisan appeal. That could prove troubling for Boeing going forward.
Verdict
The KC-46 Pegasus program is a fixed-price development contract, meaning Boeing has to shoulder the burden of cost overruns. It has seen $3.2 billion in cost overruns already. Given the struggles facing the company’s commercial aircraft business thanks to both the continued 737 MAX grounding, and the novel coronavirus (Covid-19) outbreak, Boeing cannot afford to further damage its relationship with the federal government. Military contracts are lucrative and long-lasting. Irritating decision-makers at the Pentagon and on Capitol Hill is a recipe for trouble.
Disclosure: No positions.
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