https://www.fool.com/investing/2019/...nded-agai.aspx

Boeing (NYSE:BA) passed a major milestone in January when the first planes from
its long-delayed refueling tanker program were finally delivered to the Air
Force. Barely a month later, the government has grounded the fleet.

---- The Defense Contract Management Agency and the Air Force required Boeing
to ground the planes and make a series of procedural changes after inspectors
found tools and other debris left inside aircraft that were already completed.

The grounding was first reported by the Seattle Times, which quoted a memo from
Boeing factory management saying that Air Force pilots were not flying the
planes due to debris issues and "the current confidence they have in our
product," adding "this is a big deal."

The specific issues will likely be resolved fairly quickly, but execs are
correct in calling the grounding a big deal. The lingering impact on Boeing's
tanker business could last decades.

A long-running drag

This is far from the first issue Boeing has faced with the KC-46 fueling tanker.
The initial deliveries that finally happened in early 2019 were originally
slated for August 2017, but troubles, including issues with the tanker's
remote-vision system and the high-tech refueling boom, have been tough to
resolve. Boeing's contract with the Air Force capped development spending at
$4.9 billion and requires the company to pay for any overruns.

As of last year, the Air Force expects the development to cost more than $6
billion.

Boeing has taken more than $2 billion in charges due to fines and cost overruns
on the KC-46 and has been forced to endure a public shaming by Pentagon
officials. Air Force Secretary Heather Wilson last spring complained to Congress
that Boeing appears overly focused on its commercial cash cow at the detriment
of defense projects like the tanker. She said, "we have asked them to put their
A-team on this to get the problems fixed."

Not long after her comments, Boeing announced a major overhaul of its defense
business.

The competition is watching

Boeing's KC-46 tanker win is one of the most controversial procurement battles
in recent memory. Airbus (NASDAQOTH:EADSY), working with Northrop Grumman, in
2008 won a $35 billion deal to build tankers based on the company's A330
commercial design, but that deal was eventually overturned after political
pressure. Boeing in 2011 won the re-compete, a $49 billion contract to supply
179 tankers based on its 767 design.

Airbus has been sending signals that it's looking for a rematch. The company in
December teamed with Lockheed Martin (NYSE: LMT) to jointly pitch the tanker
variant of the A330 to the Pentagon. The two companies said they hope to
"address any identified capacity shortfall" for the Air Force, without
mentioning the KC-46 or its troubles specifically.

The Boeing KC-46 order is almost certainly not going to be scrapped, but even if
it proceeds as planned, it would represent only about half of the tankers the
Pentagon wants to buy in the decades to come. The Air Force in September argued
that it needs to eventually grow from 40 refueling squadrons to 54, potentially
requiring upwards of 150 additional aircraft on top of retirements and
replacement frames.

The A330 tanker, despite losing in the United States, has secured 60 orders from
governments including Australia, the United Kingdom, South Korea, and Saudi
Arabia, and the plane has already proven itself in the field. Airbus tankers
flown by U.S. allies have performed refueling missions involving American
coalition aircraft fighting militants in Iraq and Syria.

With each setback for the KC-46, the odds increase that the Air Force will
diversify its tanker fleet with any future order and the monopoly Boeing won in
2011 will be short-lived.

Boeing works even if the tanker doesn't

The news isn't all bad for Boeing Defense, which in the past six months has
scored major wins including defeating Lockheed Martin in a $9 billion Air Force
trainer jet competition and in a $2.4 billion Air Force helicopter competition.
Boeing also late last year won a significant U.S. Navy carrier-based drone
contract, and recently won a deal to construct four large unmanned submarines.

In fact, outside of the KC-46 headlines, I'd argue that Boeing's defense
business is enjoying its best run in recent memory, and the company's commercial
business remains strong. There's a lot for investors to like about Boeing.

This is all the more reason to hope Boeing Defense can soon work through its
tanker troubles and focus on its future.




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