11:05 AM, Apr 19, 2018 — The Government Accountability Office said in a report on Thursday that the Boeing (BA) KC-46 tanker project may be on track in terms of costs but again risks missing its production deadline.
Boeing’s first delivery of 18 of the KC-46 aircraft could slip to May 2019, the GAO said. The company already received an extension from August 2017 to October 2018 to deliver the airplanes.
“The GAO provides an update on the KC-46 about once a year, and this potential delay past the initial 2018 target for initial delivery will not surprise investors considering this has been widely speculated,” Canaccord Genuity analyst Ken Herbert said in a note to clients. “We do not expect Boeing to necessarily take a charge on the program this quarter, but we do expect additional charges before the delivery of the initial 18 aircraft.”
The program is consuming more cash than expected, but Canaccord said it further delays or additional charges will necessarily be a negative for Boeing’s stock, which is reflecting sentiment on the commercial aerospace cycle. The GAO said total development costs are now pegged at $5.9 billion — a billion dollars over the initial contract ceiling.
The government report highlights challenges including updating test aircraft to current configurations, “substantially” increasing the pace of the flight test program, certifying the refueling on necessary aircraft, additional retrofits and fixing the boom problem of contacting receiving aircraft outside the refueling receptacle, Herbert said.
Despite Boeing taking the necessary steps to address the risks, the GAO said in the report that it believes assumptions around acceleration of the flight test program, certification time for aircraft and risks associated with accelerated production are not realistic, he said.
The company will produce 49 aircraft before the program is complete, resulting in greater-than-expected retrofit and fix activity, Herbert said. The government said Boeing already needs to retrofit 18 aircraft with an updated wing design, and six with new flooring.
The Air Force is expected to initially purchase 179 aircraft at a unit cost of $245 million to replace a third of the existing KC-135 refueling fleet. The market, however, is much bigger amid the potential international sales and increased acquisitions by the US military, he said.
Boeing is required under its current contract to delivery the 18 KC-46s and nine sets of aerial refueling pods.
“So while we expect the program to be a greater cash investment than initially expected, and we do see the strong potential of delivery delays into 2019, we do not believe this will materially impact the narrative on Boeing stock,” Herbert said. “Sentiment on the stock today focuses on the strong commercial fundamentals, FCF growth and a very shareholder friendly capital allocation strategy, which we continue to believe is largely reflected in the stock.”
Companies: Boeing Company (The)
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