Boeing’s defence division is more difficult to turn around than management had thought. This year, the company lost $1.7 billion on projects including NASA’s Starliner capsule and the future Air Force One, mostly due to supplier failures and excessive manufacturing costs.

Executives said that by taking on $4.4 billion in losses in 2022, the company would be less vulnerable to cost overruns in the future. However, this year has seen little improvement for the unit.

A Reuters analysis of Boeing’s regulatory records shows that, excluding the previous year, the company lost more money on its defence programmes in 2023 than it had in any other year since 2014.

Among its colleagues in the defence contractor space, Boeing stands out as demand from the conflict in Ukraine is driving up revenues for firms like Lockheed Martin, General Dynamics, and RTX.

In contrast to those businesses, Boeing is obligated by a small number of contracts to bear the loss incurred by the aircraft manufacturer when costs for technology development exceed budget.

The defence organisation has lost $933 million so far this year, with the majority of those losses coming from the $482 million loss on the construction of two Air Force One planes and the $315 million charge on an unnamed satellite programme that has never before seen a loss.

In order to ensure that the company shifts from negative margins to high-single digit margins by 2025–2026—when its most problematic programmes are expected to have passed flight testing and be on more secure footing—Boeing management announced that they are implementing new training and providing resources to suppliers.

“We’re driving lean manufacturing, program management rigor and cost productivity consistently across the division,” Chief Financial Officer Brian West said during a Wednesday earnings call. Boeing declined to comment beyond executives’ comments on the call.

Boeing’s 2025–2026 timetable to reach positive profits is doable, according to defence analyst Byron Callan of Capital Alpha Partners, but he questioned why it took the business years to implement initiatives to enhance execution.

“Someone really dropped the ball on all of this,” he said.

Compared to the S&P 500’s 9% rise this year, Boeing’s shares have lost 6% of their value.

Additionally, analysts claim that Boeing is unable to mitigate the financial impact of its extensive portfolio of fixed-price development contracts, which bind the aircraft manufacturer to covering any expenditures over a predetermined level, with clients like NASA and the US Department of Defence.

These agreements, which account for 15% of Boeing’s revenue from defence programmes, were made before the MAX crisis completely destroyed the company’s commercial aviation industry and before the pandemic and rising inflation drove up labour and material prices. A recent manufacturing mishap with an incorrectly coated KC-46 fuel tank by a supplier is among the additional issues.

As each new charge “is an upward revision to cost expectations, versus only three months prior,” JP Morgan’s Seth Seifman said in a note to investors on Wednesday, suggesting that Boeing’s losses indicate a lack of a genuine understanding of costs. “Boeing Defence Space and Security (BDS) did not turn a genuine profit, even after removing charges.”

Boeing has made it clear that it will not take on any further fixed-price contracts during the weapons development phase due to the unpredictable nature of creating and testing new products, which frequently results in unanticipated expenses.

Nonetheless, the company’s ongoing fixed-price development projects have continued to exceed budget this year. These projects include NASA’s Starliner, the Navy’s MQ-25 tanker drone, the Air Force One jets, the T-7 training jet, and the KC-46 refuelling tanker.

Including the most recent penalty, Air Force One’s total losses on a $3.9 billion deal to develop two planes came to $2.4 billion. According to the program’s current timeline, the first jet should be delivered by September 2027.

In addition, West disclosed that it had lost $136 million in the quarter, with a $71 million charge related to the MQ-25 programme.

According to Richard Aboulafia of AeroDynamic Advisory, there is “not much you can do” for expensive, low-volume programmes like Air Force One or MQ-25, even though KC-46 seems to be stabilising and T-7 will eventually turn a profit.

Securing future contracts for next-generation fighter jets and advanced drones is a better bet, one that Boeing’s defence sector is actively pursuing.

“It’s a target-rich environment,” Aboulafia said.

(Adapted from MarketScreener.com)