Boeing tanker charge not expected to impact Spirit

An airplane under development and important to Wichita has had some hiccups and will cost Boeing about half a billion dollars more.

A re-designed and re-manufactured fuel system on Boeing’s KC-46 air refueling tanker is prompting the Chicago-based airplane maker to recognize a $536 million after-tax charge when it reports its second quarter 2015 financial results on Wednesday.

The charge comes after the company identified “required rework on the airplane’s integrated fuel system” during second-quarter testing of the fuel system, which Boeing said is complex because it provides fuel to the tanker as well as to aircraft the tanker is fueling in flight. The higher costs reflect changes to the fuel system’s engineering and manufacturing, Boeing said.

“While we are disappointed with this charge, we are investing the necessary resources to keep this vitally important program on schedule for our customer and meet our commitments for delivering the initial 18 tankers to the U.S. Air Force by August 2017 and building 179 tankers by 2027,” Boeing CEO Dennis Muilenburg said in a news release.

The KC-46 is why hundreds of millions of dollars in construction are being spent at McConnell Air Force Base. The installation will eventually receive 36 of the airplanes to replace its fleet of 59, 1950s-era KC-135 air refueling tankers.

McConnell also will serve as a regional training center for the KC-46 and is one of only three Air Force bases in the country to receive them.

The airplane is also relevant to Spirit AeroSystems, the area’s largest private employer. Spirit builds the forward fuselage, struts, pylons and wing leading edge of the Boeing 767, which serves as the airframe of the KC-46.

A Spirit spokesman said on Friday there is “no impact to us at this time” from the tanker charge.

Analysts on Friday said in notes to investors that this is the second charge Boeing has taken on the KC-46. In the second quarter of 2014, Boeing recorded a $425 million charge on initial engineering and design of the airplane for the Air Force.

Boeing said this newest charge is not expected to affect its revenue and cash flow guidance for the year, which Wells Fargo Securities analyst Sam Pearlstein said in his note Friday “means that Boeing will generate over ($500 million) in additional cash from elsewhere in the company.”

“This should be viewed positively in the context of the additional charge and, we believe, should allow the stock to see less pressure than it did after the 2014 tanker charge,” Pearlstein wrote.

But Robert Stallard of RBC Capital Markets said in his note that two big charges before Boeing has delivered the first KC-46 illustrates how “financially perilous” fixed-price development contracts are for defense contractors, and “highlight that Boeing is much more than a simple 787 cashflow story.”

“… There are actually a lot of moving parts – some of which are not moving in the right direction,” Stallard wrote.

This story was originally published July 17, 2015 at 5:47 PM with the headline "Boeing tanker charge not expected to impact Spirit."