Air Force Holds Back $336 Million on Flawed Boeing Tanker

(Bloomberg) -- The U.S. Air Force has set aside $336 million in development payments for Boeing Co. and is doling out the funds over time as the contractor shows progress in fixing the flawed camera system on its KC-46 tanker plane.

It's a new tactic after years of frustration at the Pentagon over persistent problems with the $44 billion tanker program that Boeing was awarded in 2011. So far, $135 million of the previously undisclosed set-aside has been released, according to the service.

The funds are “outstanding KC-46 development payments that have been realigned to incentivize Boeing to perform,” Captain Joshua Benedetti, an Air Force spokesman, said in a statement.

A final, improved version of the “Remote Vision System 2.0,” needed for the tanker crew to connect to another plane in midair, is expected to complete development and flight testing late in 2023. Then it will be deployed on new aircraft and retrofitted on those already delivered.

Boeing agreed in April to complete a major overhaul of the camera system at its cost. The Air Force discovered in 2017 that shadows or the sun's glare sometimes can hamper the cameras' view, resulting in occasional scraping of planes being refueled or difficulty in performing the operation.

Billions in Charges

Since 2014 Boeing has amassed $5.1 billion in accounting charges for the program's numerous development issues, said Ron Epstein, a defense analyst with Bank of America Corp., including $275 million announced on Jan. 27 with the company's fourth-quarter earnings. The total exceeds Boeing's original $4.9 billion fixed-price incentive contract for development and delivery of four test aircraft.

Any delay in payments will sting for Boeing, which has been leaning on its defense division while its commercial business grapples with a global pandemic that's crushed jetliner demand. Boeing burned through almost $20 billion last year, and is on pace to consume $5 billion to $11 billion in free cash this year, Moody's Investors Service said in a report on Jan. 28.

As part of the agreement on the Remote Vision System, Boeing and the Air Force added a warranty clause “reinforcing Boeing's obligation to correct all non-conformances. Boeing remains committed to, and has made continued progress, resolving all remaining deficiencies,” Benedetti said.

The Air Force also can immediately reimpose withholding of as much as $28 million per plane if progress slips. Withholding was stopped as part of the April agreement, and $882 million was returned to Boeing to help improve company cash flow as part of Covid-19 relief efforts.

General Jacqueline Van Ovost, who has direct command of KC-46 aircraft as head of the Air Mobility Command, told reporters Monday that although she can't undo the previous nine years of technical problems, “we are making lemonade out of lemons.” She said that in the last year “we've become more of a team with Boeing, and I am heartened” by the attitude shown by its officials.

Van Ovost said the Air Force and Boeing “are doing everything we can to accelerate” production and fielding of the improved vision system by late 2023 or 2024.

94 Planes

Including awards made last month the Air Force has put 94 of a planned 179 tankers on contract, with 42 delivered as of Jan. 14.

The Air Force continues to work with Chicago-based Boeing to resolve serious “Category 1” deficiencies on the KC-46. The Air Force said Monday that four remain -- two with the Remote Vision System, one with the retractable refueling boom and one with the fuel system.

Asked why the Air Force continues to put aircraft on contract in spite of the unresolved flaws, Benedetti said producing and fielding the tanker in parallel and fixing deficiencies through operational testing “is the quickest route to achieving Full Operational Capability and meeting warfighter requirements.”

The Air Force and Boeing have “made steady progress” to providing solutions for the Category 1 deficiencies, he said.

Boeing spokeswoman Jane McCarthy said the $336 million that was set aside represents “reallocated progress payments from existing KC-46 contracts” and not additional funding. Boeing and the Air Force “are working together to make the KC-46 the world's most capable refueling tanker,” she said.

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