Boeing is one of the Pentagon’s biggest contractors and therefore a heavyweight supplier for US allies. So its alarming financial condition is much more than investment news.
The company has got itself into loss-making defence programs by overestimating the potential for production profits to cover research-and-development losses. Expect it to be wary in future.
Meanwhile, the other two big US military aircraft builders, Lockheed Martin and Northrop Grumman, look more interested in defending current business, such as the F-35 (Joint Strike Fighter) and B-21 programs, than moving on new and riskier ones.
Boeing’s Defense & Space division on 23 October posted a US$5.5 billion loss for the third quarter of 2024. Most of the drag came from write-offs of future losses on current programs, mainly the T-7A Redhawk trainer and the KC-46 Pegasus tanker. And the company’s civil division, which makes airliners, has its own enormous problems.
Boeing’s profit estimate at completion (EAC) for the KC-47 and T-7 programs is negative. Quite likely, the MQ-25 carrier-based tanker drone and VC-25B presidential transport programs are no longer expected to make money, either.
‘Our EAC process needs to get better,’ CEO Kelly Ortberg said. Advisedly so: after bidding low to get the tanker job, Boeing tried to save money by building the basic airframe at its civil plant at Everett, Washington, rather than setting up a military line in Wichita, which was needed.
Boeing’s rock-bottom bid on the T-7 was influenced by its partnership with Sweden’s Saab, which offered new and cheaper process. But as far back as 2019, Saab people were quietly saying that Boeing didn’t seem to understand those processes.
In 2018, Boeing agreed with then president Donald Trump to cut costs of the two new presidential aircraft by adapting surplus 747-8 airliners it had already built. An independent VIP conversion specialist, GDC Technics, was supposed to convert them, but it went bust and Boeing had to take the work in-house.
As well as being stuck with loss-making aircraft projects, Boeing Defence and Space is under pressure from SpaceX and other newcomers in the space industry.
The result is that the division is losing money, hard to sell, and hard to grow. One analyst asked Ortberg about ‘the potential of just exiting some programs or some contracts where you’ve got absolutely no path to profitability’. Not viable, Ortberg said. ‘These are our core customers that need this capability. We’ve got long-term commitments.’
Well, that, at least, was reassurance the Pentagon wanted to hear.
But are things better in the rest of the US industry? Its structure was established by the Last Supper, the 1993 meeting where deputy defence secretary Bill Perry advised bosses of aerospace prime contractors who still considered their businesses viable to look to their left and their right, ‘because one of you will be out of business in five years.’
It triggered a wave of mergers and acquisitions.
But from the end of 1996, when JSF program kicked off, there was a long drought of major combat aircraft programs (imagine no new projects between the P-80 of 1944 and the F-111 of 1967), because of the Pentagon’s focus on counter-insurgent war in the Middle East.
Next, the Pentagon focused on squeezing the industry on initial acquisition cost, through projects such as Better Buying Power.
Finally, we saw the shift of business emphasis towards maximising shareholder value. What is good for that is cash profit. What is less good is low- or negative-margin research and development, and what is even worse is spending money competing for programs that you don’t win or might win only to see them cancelled or delayed.
For US defence prime contractors today, the path to prosperity is to defend your existing programs and the future support business that goes with them. With few new starts for suppliers to bid on, the primes can demand lower prices from them by threatening to look elsewhere. They can squeeze suppliers until the pips squeak, raiding them for their best-performing people, and then complaining about late deliveries and quality problems.
New programs? Well there is one for fighter-like drones, the Collaborative Combat Aircraft (CCA), but it doesn’t look anything like the sort of big-money effort that the air force’s stalled Next Generation Air Dominance (NGAD) was supposed to be, fielding a so-called sixth-generation fighter.
Lockheed Martin CEO Jim Taiclet could have been more enthusiastic about prospects. At Lockheed Martin’s earnings call, he said, ‘We have to be able to meet the J-20 with enough numbers in the Pacific. F-35 and F-22 now are the only really competitive jets against the J-20, one to one. We have to field enough of those aircraft in a short enough timeframe to maintain an effective deterrent in the Pacific. We need to be able to bring autonomy in the Collaborative Combat Aircraft concept into fifth gen—and sixth gen, if there is one.’
If there is one?
Northrop Grumman CEO Kathy Warden had a similar message when an analyst asked, ‘With the Air Force reevaluating at least the manned part of NGAD, could that free up to get your funding for the Air Force to get to that desired B-21 inventory of 150 units?’
Warden responded, ‘I think that’s exactly what the air force is looking at. They are undertaking a force structure design review, and we know that B-21 is in the mix.’
There’s common sense to this approach. The walls are going up around the major programs, and the case is being made that the CCA or other capabilities can augment them but cannot be allowed to replace them.
And if any money is freed up by postponing a new generation of fighters, Taiclet and Warden will happily take it. (And don’t forget that Northrop Grumman has a very large stake in F-35.) They’re betting, not unreasonably, that CCA money going to other, smaller aircraft suppliers will not come out of their pockets.
