Four years ago this month, Boeing won a decade-long battle over rival Airbus to build new U.S. Air Force aerial refueling tankers. It was a huge $35 billion win for the Chicago-based aerospace and defense firm.
While company officials acknowledged Boeing submitted an aggressive bid, they considered it responsible. And the deal was considered good for the Pentagon as the company would have to pay for development cost overruns.
Boeing has been building commercial 767 airliners for more than 30 years and aerial tankers since President Dwight Eisenhower was in the White House. So, even though the new Air Force tanker would have more modern equipment, the project has not been considered incredibly high tech and few issues were anticipated.
Still, unforeseen problems with the plane’s wiring led to embarrassing delays and cost overruns. Boeing still says it will meet the terms of its contract to deliver the Air Force 18 new tankers by 2017, but it will have to eat millions of dollars in cost overruns.
“The issues we had with tanker last year certainly got everybody’s minds focused on the need to do things differently,” said Todd Blecher, a company spokesman.
Those early issues with the Air Force tanker and other new development projects have prompted Boeing to create a new defense business unit that will oversee projects before they enter production. In the past, the individual business units, such as Boeing Military Aircraft and Network and Space Systems, managed their own development projects.
“It’s a classic centralization activity to bring together skills that have been dispersed and diverse across the organization,” Blecher said.
The company made a similar move two years ago in its commercial airplane business when it created a jetliner development unit.
“This [new] development organization is the next step in breaking the cost curve on our programs,” Chris Chadwick, Boeing defense president and CEO, said in a statement. “We expect our customers to see step-function improvements in affordability and schedule performance as we more effectively apply engineering expertise, development program best practices, and program management and integration from across Boeing to our most important development activities.”
Six programs including the new tanker have been moved into the new defense development division along with a new Air Force One, the CST-100 spacecraft that is part of NASA’s Commercial Crew project, NASA’s Space Launch System rocket, Boeing’s 502 small satellite effort and defense-related work on Boeing’s 777X commercial jetliner.
“[The new unit] reflects the fact that development is a very unique activity that you have to get right,” Blecher said. “If you don’t have a successful development program, you’re going to be behind the curve for years on your programs.”
The creation of the new defense development arm seems like a good idea, particularly in light of problems with the Air Force tanker, said Richard Aboulafia, vice president for analysis at the Teal Group consulting firm.
“Obviously the tanker experience shows they could use some help in the development department,” Aboulafia said. “To a certain extent, you can transfer around development engineers and so having a single organization to allocate resources makes some sense.”
Boeing’s reorganization is part of a growing trend within defense companies to operate their businesses more commercially. With fewer defense dollars on the horizon, the Pentagon has pressured companies to cut production and development costs. To remain competitive, firms have been looking at a myriad of ways to lower the cost of all types weapons ranging from fighter jets to warships. This has included everything from consolidating facilities, automating production and shrinking the workforce.
In recent years, the Pentagon has pulled the plug on number of projects not doing well in development. Defense Department funding for project development has slimmed in recent years, placing a higher emphasis on contractor performance.