Boeing's $52 Billion Defense Contract Is Set for Takeoff

It had a rocky start, but now the KC-46A Tanker is facing clearer skies.

Jan 18, 2014 at 10:00AM

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Boeing's KC-46A next-generation tanker. Photo: Boeing. 

It had a rocky start, but on Jan. 16, Boeing's (NYSE:BA) KC-46A tanker program got some very welcome news: It's on schedule, and Boeing is assembling the fourth and final KC-46A test aircraft for the U.S. Air Force.

Clear skies ahead?
During the development phase for the tanker, cost overruns soared to approximately $700 million -- and thanks to the fixed-price nature of the contract, Boeing is responsible for that. However, with a price tag of $52 billion, the KC tanker contract is one of the Pentagon's largest weapons initiatives. Consequently, even with cost overruns, the tanker stands to make Boeing a pretty penny. But first it has to deliver the tanker, and to do that, Boeing has to complete a series of steps. 

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Two Boeing KC-46 Tankers. Photo: Boeing.

It looks as if Boeing is progressing through these steps nicely, and on Jan. 16, it released a statement saying, "Boeing is assembling the fourth and final KC-46A test aircraft for the U.S. Air Force's next-generation aerial refueling tanker program at the company's Everett factory, keeping the program on track to deliver the initial 18 tankers to the Air Force by 2017." 

This is fantastic news for Boeing, but it's also great news for its subcontractors on the project. That list includes Honeywell International (NYSE:HON), which is supplying the auxiliary power unit and cabin pressure control unit; Northrop Grumman (NYSE:NOC), which is supplying Large Aircraft Infrared Countermeasures; United Technologies' (NYSE:UTX) subsidiary Pratt & Whitney, which is supplying the engines; Rockwell Collins (NYSE:COL), which is supplying the integrated display system; and Raytheon, which is supplying the digital radar-warning receiver.  

What to watch
There's a lot that could go wrong between now and delivery of the tankers. However, so far, Boeing has played its hand well and is on schedule. This is great news for Boeing investors, and Boeing's partners on the project. Further, the initial KC-46 tanker contract win was worth $35 billion for the purchase of 179 tankers. But that worth has climbed to an estimated $52 billion, and some analysts estimate that with future parts and maintenance, it could climb to $100 billion. As such, this is one of Boeing's biggest projects and could have a substantial impact on the company. Consequently, investors would do well to continue keeping close tabs on Boeing's tanker progress.

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Fool contributor Katie Spence owns shares of Northrop Grumman. The Motley Fool owns shares of Northrop Grumman. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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