When Boeing Co bagged a US$30 billion Pentagon order for refueling tankers in February, skeptics said its budget for the program was unrealistic.
But even if its costs exceed internal estimates, many analysts say the company eventually will come out a winner on the deal.
Speaking this week at the Reuters Aerospace and Defense Summit in Washington, Dennis Muilenburg, chief executive of Boeing’s space, security and defense arm, insisted the tanker program was “on cost and on schedule.”
“As we stated before, it was an aggressive bid, but one that was also responsible,” Muilenburg told the summit by teleconference, Reuters reports.
Concerns about Boeing’s aggressive bid emerged in the wake of its triumph over European rival EADS (EAD.PA), the maker of Airbus planes, for a contract to build 179 refueling planes for the U.S. Air Force.
Concerns intensified this summer when government figures showed the program likely will see no profit in its first phase and will shift $600 million in development costs to taxpayers.
But Muilenburg told the summit, “We are very confident that over time it will allow us to deliver leading-edge war-fighting capability to our U.S. Air Force, that it’s a great deal for the taxpayers, and that it will return value for our shareholders.”
He shrugged off criticism that taxpayers might shoulder the added cost if the program blows its budget. If there are cost overruns, Boeing bears that risk, he said, “and that was clearly factored into our bid.”
Alex Hamilton, managing director with EarlyBirdCapital, said concerns about the contract were spurred by a weak economy that has tightened the belt for military programs.
“Anything that looks like the government is going to take a loss on it, people are hypersensitive to it,” he said, adding that it is simply too early to know if the program will exceed its budget.
“Despite what anyone says, I don’t think that it is unusual to be at a loss or break-even on the first part of an aircraft program,” Hamilton said. “That’s very typical.
“It’s pretty well known that you recoup that in the later life of the program.”
For the most part, aerospace experts agree, and they say Boeing’s surprise victory in the contest allowed the company to preserve dominance over EADS in the lucrative U.S. military market.
“It’s a market that Boeing has historically controlled,” said aerospace analyst Richard Aboulafia of Teal Group. “There’s a lot of aftermarket revenue associated with it — support and upgrade, some export potential, too.
“It would be a revenue blow and a psychological blow if Boeing were to lose control of that market,” Aboulafia said. “A lot of people would see a story of a company in decline if they lost that segment.”
The tanker contract marks the Pentagon’s third effort since 2001 to start replacing its 50-year-old Boeing-made KC-135 Stratotankers.
Boeing’s business is split almost evenly between defense and commercial airplane products, but its shares more closely track developments in commercial orders and deliveries.
