VC-25B issues helped drag down Boeing defense margins in third quarter

By Dan Schere  / October 25, 2023

Continuing issues with the VC-25B, the eventual replacement for presidential escort aircraft Air Force One, were contributing factors to negative margins in Boeing’s defense sector for the third quarter of 2023, company executives noted during an earnings call Wednesday.

The VC-25B has been delayed by more than two years, according to the Government Accountability Office’s Weapon Systems Annual Assessment. Among the contributing factors have been a new supplier for interior subsystem work, design errors, workforce challenges and “stress-corrosion cracks” in the aircraft the VC-25B is based on. GAO has estimated a delivery date of January 2027 for the first aircraft and April 2027 for the second aircraft.

As of June 2022, the contract for the two aircraft had incurred more than $1 billion in charges to Boeing, Inside Defense reported at the time.

Boeing President and CEO David Calhoun said Wednesday that they are incorporating engineering changes to better support the installation process for the VC-25B and have “resolved important supplier negotiations” during the third quarter.

“I'll note that none of these items will impact performance and capability of the end product. The increased [cost] estimates reflect the process by which we build the airplanes. But in a fixed price environment, any unplanned hurdles can introduce unrecoverable cost. At the end of the day, we have two airplanes to build,” he said.

Boeing Executive Vice President and Chief Financial Officer Brian West said Wednesday that Boeing had estimated in September that defense margins would be around -9% in the quarter, with the “driver” being a $482 million charge on the VC-25B fixed price development program, stemming from “higher estimated manufacturing costs, related engineering changes, labor instability and the resolution of supplier negotiations.”

However, West said the actual defense margins were 16.9% for the quarter due in part to a $350 million loss tied to “customer considerations, and higher estimated costs to deliver a highly innovative satellite constellation contract” signed several years ago.

“This performance is below our expectations. And we acknowledge that we aren't as far along in this recovery as we expect it to be at the stage,” West said.

In its second quarter earnings call, Boeing had set a goal of turning an operating profit in the defense sector by 2025.

Calhoun acknowledged Wednesday that recovery in the defense sector is “slower than we’d like.”

“But we're confident in the future and our path and normalizing BDS margin performance by that 25-26 timeframe is intact,” he said.

Positive developments in the quarter included the delivery of the first T-7A aircraft to the Air Force, and the start of critical phases of flight testing, West said. Additionally, the Navy’s MQ-25 Stingray is transitioning out of the development phase, and the company received an award from the Army for 21 Apache aircraft, he said.

Calhoun was also asked by an investor about Lockheed Martin’s recent decision to withdraw from the Air Force’s refueling tanker competition. Airbus, which had partnered with Lockheed in the competition, plans to compete on its own in the next phase of the KC-135 recapitalization effort.

Boeing, maker of the KC-46 Pegasus that represents the first phase of the recapitalization, is expected to bid on the second phase with an updated version of that aircraft. The first phase contract was awarded at a firm, fixed price before the disruptions of the pandemic and has resulted in more than $1 billion in charges for the company.

Calhoun said Wednesday that Boeing is prepared for the competition from Airbus.

“We shouldn't expect them to sort of vacate,” he said.

“We are not afraid of competition. And yes, that next contract matters a lot. We have to ultimately underwrite the costs and get this right.”