Boeing, the world’s largest aerospace company, has announced that it will stop bidding on fixed-price development contracts for its defense and space division, after suffering huge losses on several programs, including the Air Force One replacement.
Fixed-price contracts are agreements where the contractor agrees to deliver a product or service for a fixed amount of money, regardless of the actual costs incurred. This means that the contractor has to bear the risk of any cost overruns or technical difficulties.
Boeing has been struggling with fixed-price contracts that it bid aggressively on in the past decade, when its commercial jetliner business was booming. These contracts, such as the KC-46 tanker, the T-7 trainer, and the MQ-25 drone, have faced technical challenges and cost overruns that Boeing has to absorb.
The most prominent example is the Air Force One replacement program, which involves modifying two Boeing 747-8 jets to serve as presidential aircraft. The program has been plagued by delays and design changes, and has attracted political scrutiny and criticism from both former President Trump and current President Harris.
Boeing’s defense and space division reported a $401 million loss in the third quarter of 2023, mainly due to $1.3 billion in charges related to the Air Force One program. The program’s total cost is estimated at $5.3 billion, of which Boeing is responsible for $3.9 billion.
Boeing’s CEO Dave Calhoun and CFO Brian West said they will not sign any more fixed-price development contracts and will focus on improving profitability by 2025-2026. They also said they will seek to renegotiate some of the existing contracts with the Pentagon.
“We’re not going to do any more of these fixed-price development contracts. We’re just not going to do it.” Calhoun said in a conference call with analysts and reporters.
“We have a lot of work to do on defense margins. We’re not happy with where we are today.” West added.
The Air Force One program is considered a prestigious and strategic contract for Boeing, as it showcases its capabilities and reputation to the world. However, the program has also exposed the risks and challenges of fixed-price contracts, especially for complex and uncertain projects.
“This is a very complex development program with a lot of technical risk. It’s not just a paint job.” Richard Aboulafia, vice president of analysis at Teal Group, a consulting firm that tracks the aerospace industry, said.
“No more Air Force One rip-offs! I will make sure we build it right here in America at a fraction of the cost!” Kamala Harris, US President, tweeted in September 2023, echoing Trump’s previous complaints about the program’s price tag.
Boeing said it remains committed to delivering the Air Force One jets by 2026, but it also hopes to avoid similar situations in the future by changing its contracting strategy and improving its execution.
“We are working closely with our customer to drive down program costs while ensuring exceptional mission capability for our nation.” Leanne Caret, president and CEO of Boeing Defense, Space & Security, said in a statement.
– Boeing says it can’t make money with fixed-price contracts, Ars Technica, October 25, 2023
– Boeing reports another huge loss on Air Force One program, Defense One, October 25, 2023
– Air Force One replacement tops $2B in charges as Boeing logs new losses, Breaking Defense, October 25, 2023
– Boeing’s Air Force One charges now top $1.3 billion, drag down profits, Defense News, October 25, 2023