Ripping off the Army to pad your pockets is probably not a great business practice. Unfortunately for Boeing (NYSE:BA), it might learn this lesson the hard way.
New, used... what's the difference?
In 2008, the Army Aviation and Missile Life Cycle Management Command, or AMCOM, awarded Boeing a five-year production contract -- valued at $4.4 billion -- for 181 CH-47F helicopters. Specifically, the contract was for 109 new and 72 remanufactured helicopters. However, according to a report obtained by Bloomberg titled "For Official Use Only," the inspector general's office found that "Boeing installed significantly more reworked or salvaged parts instead of the proposed safety stock for remanufactured helicopters."
Further, Boeing "overcharged the U.S. Army by as much as $16.6 million by exaggerating how many new ones were required while installing refurbished equipment salvaged from old aircraft." However, in all fairness to Boeing, the inspector general office's report found that the contract didn't include a separate line item for safety stock, and AMCOM didn't evaluate Boeing's proposed quantities, meaning that some of the blame rests with the Army. Further, Damien Mills, a Boeing company spokesman, told Bloomberg that Boeing was "fully compliant with all government contract policies and guidance applicable to the first CH-47F multiyear contract."
What this could mean for Boeing
Hopefully, Boeing didn't rip off the U.S. army. But if it did -- whether through the fault of the Army or Boeing -- Boeing needs to fix its company policy and contract terms. Regardless, this scandal won't ruin Boeing. It could damage its reputation, but considering that Boeing had to pay $615 million, and its chief financial officer, Michael Sears, went to prison because of illegal shenanigans during the first round of contract bidding on the KC-46a tanker -- which Boeing came back to win – the chances of this latest scandal doing Boeing in are slim.
More pointedly, in its latest quarterly report, Boeing reported that it had a total backlog of $410 billion as of June 30, 2013. Of that, $339 billion is for commercial airlines, while only $71 billion comes from defense, space, and security. In other words, while Boeing gets a significant amount of money from defense contracts, a majority of its revenue comes from commercial airline sales. Moreover, the jet market is estimated to be worth $100 billion a year, and Boeing and European Aeronautical Defense and Space's Airbus are the two top dogs when it comes to jet sales.
Consequently, while there is cause for concern, especially regarding Boeing's management (as I've highlighted in this article), this latest scandal, though bad for the Army and for Boeing's reputation, won't bring the company to ruin.
Fool contributor Katie Spence has no position in any stocks mentioned. Follow her on Twitter @TMFKSpence. The Motley Fool has no position in any of the stocks mentioned, either. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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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