Boeing's winning bid for the U.S. Air Force's fiercely contested tanker development deal means it likely will show no profit in the program's first phase and shift $600 million in development costs to taxpayers, new government figures showed.
Boeing could be on the hook for $700 million in development costs of its own, according to a compilation of figures provided by the government and a congressional source.
Boeing's below-cost bid for the contract was part of a carefully crafted strategy to deny the deal to Europe's EADS, parent of rival commercial jet builder Airbus SA.
EADS was to have opened an assembly plant in Mobile, Alabama, to produce the tankers used to refuel other planes in flight.
The competition between Boeing and EADS resulted in significant savings to taxpayers, Air Force spokesman Lieutenant Colonel Wesley Miller said last month.
Chicago-based Boeing knew it had to be "aggressive and responsible" to beat EADS for the so-called KC-46 tanker contract "and that's the decision we made," William Barksdale, a company spokesman, said last week.
"We will make money on the KC-46 program," he added in response to a question. At issue for now is only the contract that covers engineering, manufacturing and development, or EMD.
With deliveries through the 2020s for a total of 179 aircraft, the overall deal is valued at more than $30 billion, one of the Pentagon's costliest purchases.
The Air Force, in a written reply to queries from Reuters, said on Monday that Boeing's target cost had been $3.9 billion to develop the aerial-refueling plane based on its 767 widebody and to deliver an initial 18 aircraft by the fourth quarter of 2017.
"For every dollar the program costs above target cost of $3.9B, the government pays $0.60 and the contractor pays $0.40, until the total amount paid to Boeing reaches $4.9 billion," at which point Boeing assumes all further costs, the service said.
Under this formula, taxpayers would pick up $600 million up to the $4.9 billion ceiling. Boeing would cover the other $400 million plus any ceiling overrun.
Last week a congressional source said Boeing had predicted it would have cost overruns above the ceiling of $300 million for the development phase.
Boeing told the Air Force on April 25 that it projected that it would spend more than the ceiling price for the development phase of the contract, Miller said.
The ceiling is set at 125 percent of the target cost. Boeing's potential profit under the deal likewise was built in and would have totaled 12.5 percent, or about $500 million, if the target were hit. The company would break even if the development phase is completed at the ceiling.
The Air Force said it was neither improper nor uncommon for a company to bid a development price that is below actual cost in a competition.
The Air Force and Department of Defense "will now tightly control" the program's execution to make sure Boeing delivers on its promises within negotiated cost, schedule and performance baselines, said Miller, the Air Force spokesman.
The competition between Boeing and EADS resulted in significant savings to taxpayers, Miller, said in a June 28 written reply to a query.
Previously, Boeing's target had been reported to have been $4.4 billion, the figure used in slides at a March 4 news briefing by EADS' North American arm. The losing bidder at the time cited U.S. government-supplied data it received a week after the Feb. 24 contract award.
The difference between the two figures matters because the lower the target cost, the more the government chips in up to the ceiling under a risk-sharing formula.
Conversely, the government would keep 60 cents and the contractor, 40 cents, if the program ended up costing less than the target.