As part of its second-quarter earnings results, the Chicago-based aerospace giant on July 24 announced a $272 million after-tax charge to redesign wiring on the aircraft. The expense was necessary to deliver 18 of the 767-based planes by August 2017 as planned under a $4.9 billion contract with the service, according to Chief Executive Officer Jim McNerney.
"While challenges resolving engineering and systems installation issues on our tanker test aircraft are resulting in higher spending to maintain schedule, the issues are well understood and we remain on path to begin flight testing fully provisioned tankers the first part of next year," he said in a statement.
Indeed, the company previously predicted the cost overrun. Boeing estimated costs for the acquisition program would be over the contractual ceiling price by about $271 million, according to an April report from the Government Accountability Office, the investigative arm of Congress.
However, the Air Force's program office put the figure at $787 million and cited as more significant areas of concern the "challenging" schedule for software verification testing and "aggressive pace" of flight testing, according to the document.
The refueling tanker, known as Pegasus, will require some 15.8 million lines of code, the vast majority of which -- 83 percent -- is slated to come from existing software, according to the report. While Boeing plans to recycle most of the software from the 767-2C, it will still need to modify or write new code for the military subsystems on the KC-46, it states.
"Approximately 735,000 lines of the code are new and relate in large part to key military unique systems," the auditors wrote. "Moreover, Boeing's software integration lab that simulates the KC-46 cockpit will be at near capacity between February and June 2014. Boeing could have difficulty completing all testing if more retests are needed than expected."
What's more, some 600 software problem reports were filed as of January, more than a third of which were "urgent" or "high-priority," according to the document. Many of the problems stemmed from faulty avionics flight management code supplied by a subcontractor, which later dispatched two dozen employees -- up from just three -- to deal with the backlog, it states.
McNerney downplayed the assessment that the risks could delay the aircraft's operational start date of August 2017 by six months to a year.
"Other than the problems that Greg described on the wiring separation ... the rest of the program is moving along well," he said during a conference call with analysts and reporters, according to a transcript provided by the website www.SeekingAlpha.com. "It doesn't mean that something can't crop up in the future, but we don't see it now."
The Air Force plans to buy a total of 179 KC-46A tankers at a total cost of almost $50 billion through 2028, according to Pentagon budget documents. Boeing envisions a long-term potential market of 400 planes valued at $80 billion.
Boeing in 2011 beat the European Aeronautic Defence and Space Co., now part of the Airbus Group NV, for the award after a previous deal in 2004 was canceled amid a scandal involving Air Force and Boeing officials. The company submitted its bid knowing it wouldn't make a profit on the first four aircraft.
"Given the company's experience building over 1,000 767s and eight KC-767s for two customers, you think they'd have a better handle on the costs and risks associated with turning the plane in to a tanker," Richard Aboulafia, vice president of analysis at the Teal Group, a Fairfax, Virginia-based consultant group, said in an e-mail.
"On the other hand, the circumstances of the competition forced them to submit an aggressive bid, which is probably the root cause of the problem here," he added. "In other words, some company-funded overruns were inevitable, but it probably won't get too terrible."