Pentagon May Seek Compensation From Boeing for Delays

LONDON—The Pentagon may seek compensation from Boeing Co. for delays to the U.S. Air Force KC-46A refueling plane, potentially deepening the financial hole the company has to recover from to make money on its biggest military project.

The Air Force, which oversees the multibillion-dollar development program, "is in discussion with Boeing about getting consideration for the schedule delays," Frank Kendall, the Pentagon's weapons acquisition czar, said on the eve of the Farnborough Air Show. "There are a number of options for how to do that."

The Air Force in May announced a five-month delay on the KC-46A program. Boeing has said it may have to take more than the $1.5 billion in extra charges racked up on the program that modifies 767 airliners and turns them into airborne fuel stations for other planes.

Boeing has said it expects to make little, if any, money on the initial contract, a fixed-price deal that left it responsible for cost overruns following delays in the first flight of the heavily modified 767 jets because of design and technical problems.

Mr. Kendall said that even though there are no penalty clauses in the current contract for schedule delays, "the government is losing some of the value we had contracted for, so we are entitled to some consideration for that." He wouldn't detail what demands the government may put on Boeing.

Gen. David L. Goldfein, the new Air Force Chief of Staff, on Friday said he was " concerned and disappointed" by the latest delays Boeing has suffered in developing the refueling plane.

Boeing's latest schedule setback on the project came after problems with the refueling system used to pass fuel from the KC-46A to other planes in-flight. Boeing tried to deal with flaws in operating the telescoping tail boom through software, but it abandoned that approach for a hardware fix.

Leanne Caret, president of Boeing Defense, Space & Security, on Sunday said she was "confident" in the latest fix, which is now in flight testing.

Mr. Kendall said he was "cautiously optimistic" about the current fix, though he said more work was needed. He said the financial hit Boeing has already taken on the program leaves it "highly motivated" to overcome the latest problems.

The company expects to make a profit from follow-on deals to build an initial 179 of the jets for the Air Force and hopes it can sell about 400 of the aircraft world-wide.

Mr. Kendall also said he had concerns about another major U.S. Air Force program, a Raytheon Co. effort to modernize the ground-segment of the Global Positioning System satellites.

The program has run at least 25% over cost and fallen behind schedule, the Air Force has said.

Mr. Kendall, who has begun quarterly reviews of the so-called Operational Control System, said Raytheon's recent performance has been "a mixed bag. I'm seeing some evidence of progress, but I'm still seeing some problems."

Even so, he said pulling the plug on the program would be "very disruptive." Lawmakers are threatening to strip money for the program and put in place other restrictions. Mr. Kendall said those actions were a concern and threatened to undermine efforts to rectify shortcomings.

He remained hopeful Raytheon would still be able to deliver the system.

Write to Robert Wall at [e-mail]

(END) Dow Jones Newswires

July 11, 2016 08:15 ET (12:15 GMT)

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