Boeing's (NYSE: BA ) stock has been on a roll in 2013, ignoring every hurdle from small distractions to the giant 787 grounding saga to gain 30% year to date. Yet Boeing's defense division has pounded on, unhindered so far by the looming shadow of mandatory Department of Defense budget cuts forced because of sequestration.
Cuts are bound to hurt Boeing and its competitors in the defense industry in the next several years, but Boeing has a trump card. The company's big-bucks KC-46 tanker program is on schedule as it prepares for the final stages before the aircraft's production, and this ordinary-sounding jet could provide the right fuel to keep this stock soaring past sequestration's turbulence.
All systems on track
Air Force personnel told Reuters last week that the KC-46 will soon face a significant design review, one of the last major hurdles the aircraft needs to overcome before Boeing can begin production. Boeing's hopeful that it can begin delivery of the KC-46 by 2017, with the first of its 179 planned tankers in the Air Force's next-generation refueling system.
Why's the KC-46 so important to Boeing? This $52 billion program is one of the biggest developing projects in the DoD right now. It's logical to question whether Boeing can deliver all of its planes over the project's lifetime, considering the Pentagon needs to cut hundreds of billions of dollars over the next decade. Lockheed Martin's (NYSE: LMT ) costly F-35 fighter program has already drawn similar criticism after numerous cost overruns, with the $400 million project -- in U.S. costs alone -- planned to deliver more than 2,400 jets over the craft's lifetime. That's money the DoD just doesn't have in today's budget-tightening environment.
Yet the KC-46 is a different beast from the F-35, much to Boeing's benefit. The Air Force has kept a close eye on the project's development to ensure costs don't run away as they have with Lockheed's fighter. Sequestration's cuts in 2013, at just over 8% of the Pentagon's budget, also afforded the DoD the flexibility needed to keep a costly project like this going. With the Air Force engaged more and more in overseas fighting that takes aircraft many hours to get to -- the recent wars in Iraq and Afghanistan as major examples -- a new, reliable tanker to keep planes fueled and ready for combat is a necessity for the Pentagon's future.
Still, the KC-46 will need to complete flight testing and leap over other hurdles before deliveries can begin. The road's hardly clear for this next-generation tanker.
If everything goes according to plan, however, this plane should become one of Boeing's best sellers in its defense division. The company hopes to deliver 18 of its tankers in its first year of delivery, a number that would have given the aircraft the second highest number of deliveries out of all Boeing fixed-wing aircraft last year, trailing only the massively successful F-15 fighter's 48 deliveries. If the latter keeps selling -- and it should, particularly as foreign governments question the F-35's hefty price tag and look for cheaper alternatives for a new fighter -- Boeing will have a strong one-two punch in aircraft deliveries between the F-15 and the KC-46.
The tanker could earn Boeing international sales as well if it passes all its tests. Singapore has reportedly looked into the craft as a future solution to its tanker needs, and Boeing deputy KC-46 program manager Jake Howitt has said the company could earn between 25 and 50 foreign sales of KC-46 planes in the aircraft's future, increasing deliveries by up to nearly 28% over the U.S. planned total.
The KC-46 won't take over Boeing's defense division by itself -- not when the segment already earned more than $32.6 billion last year. However, the Air Force's need and the KC-46's strong developmental showing so far anchor the program as a foundation of the future and safeguard this stock against budget cut-related hits, should the KC-46 successfully progress to production and delivery. Also, the craft is another hit against Boeing's chief rival, EADS (NASDAQOTH: EADSY ) , which lost out to Boeing on the next-generation tanker bid in 2011. While Boeing's low bid may mean that the first deliveries of KC-46s make little money, EADS' American rival is set to win out in the long term.
Boeing will have to deal with much more than just the KC-46 over the coming years. The company's passenger aircraft segment still makes up the bulk of its sales. Even in its defense business, Boeing will have to continue growing its backlog of existing craft while developing the KC-46 into a top moneymaker. Still, if this tanker takes off, it could be just what Boeing's stock needs to thrive in the slimmed-down future of the defense industry.
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