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Boeing's defense business is proving harder to turn around than executives initially predicted, with supplier errors and high manufacturing costs contributing to $1.7 billion in losses this year on programs like the next Air Force One and NASA's Starliner capsule.
Despite absorbing $4.4 billion in losses in 2022 – which executives said would lower the risk of future cost overruns – the unit has seen little improvement this year.
Excluding last year, losses on Boeing's defense programs in 2023 exceed those from all years since 2014, according to a Reuters review of Boeing’s regulatory filings. Boeing is unique among its defense contractor peers, as companies like Lockheed Martin, General Dynamics and RTX are seeing higher revenues due to demand from the war in Ukraine.
Unlike those companies, however, Boeing is locked into handful of contracts that force the planemaker to take a loss when technology development goes over budget.
The defense unit's losses this year include $933 million in charges in the third quarter, mostly comprising a $482-million loss building two Air Force One planes and a $315-million charge on an unidentified satellite program that had not previously lost money.
Boeing's executives said they are putting in place new training and deploying resources to suppliers to ensure the unit moves from negative margins to high-single digit margins by 2025-2026, when its most troubled programs are slated to be past flight testing and on more stable footing.
“We're driving lean manufacturing, program management rigor and cost productivity consistently across the division,” Chief Financial Officer Brian West said during a Wednesday earnings call. Boeing declined to comment beyond executives' comments on the call.
Byron Callan, a defense analyst with Capital Alpha Partners, said Boeing's 2025-2026 timeline to get to positive margins is feasible but questioned why it took the company years to institute programs to improve execution.
"Someone really dropped the ball on all of this," he said.
Boeing shares have lost 6% this year, compared with the broad-market S&P 500's 9% gain.
FIXED PRICE CONTRACTS
Analysts also say there is little Boeing can do to offset the financial burden of its long list of fixed-price development contracts with customers like the U.S. Defense Department and NASA, which lock the planemaker into paying all costs above an agreed-upon threshold.
These deals, which make up 15% of Boeing's defense program revenue, were reached before Boeing's commercial airplanes business was decimated by the MAX crisis and before the pandemic and high inflation caused costs to spike for materials and labor. Other headaches include a recent manufacturing snafu where a supplier improperly coated KC-46 fuel tanks.