The Boeing Company (NYSE:BA)‘s stock has been on a roll in 2013, ignoring every hurdle from small distractions to the giant 787 grounding saga to gain 30% year to date. Yet The Boeing Company (NYSE:BA)’s defense division has pounded on, unhindered so far by the looming shadow of mandatory Department of Defense budget cuts forced because of sequestration.
Cuts are bound to hurt Boeing and its competitors in the defense industry in the next several years, but Boeing has a trump card. The company’s big-bucks KC-46 tanker program is on schedule as it prepares for the final stages before the aircraft’s production, and this ordinary-sounding jet could provide the right fuel to keep this stock soaring past sequestration’s turbulence.
All systems on track
Air Force personnel told Reuters last week that the KC-46 will soon face a significant design review, one of the last major hurdles the aircraft needs to overcome before The Boeing Company (NYSE:BA) can begin production. Boeing’s hopeful that it can begin delivery of the KC-46 by 2017, with the first of its 179 planned tankers in the Air Force’s next-generation refueling system.
Why’s the KC-46 so important to The Boeing Company (NYSE:BA)? This $52 billion program is one of the biggest developing projects in the DoD right now. It’s logical to question whether Boeing can deliver all of its planes over the project’s lifetime, considering the Pentagon needs to cut hundreds of billions of dollars over the next decade. Lockheed Martin Corporation (NYSE:LMT)‘s costly F-35 fighter program has already drawn similar criticism after numerous cost overruns, with the $400 million project — in U.S. costs alone — planned to deliver more than 2,400 jets over the craft’s lifetime. That’s money the DoD just doesn’t have in today’s budget-tightening environment.
Yet the KC-46 is a different beast from the F-35, much to Boeing’s benefit. The Air Force has kept a close eye on the project’s development to ensure costs don’t run away as they have with Lockheed’s fighter. Sequestration’s cuts in 2013, at just over 8% of the Pentagon’s budget, also afforded the DoD the flexibility needed to keep a costly project like this going. With the Air Force engaged more and more in overseas fighting that takes aircraft many hours to get to — the recent wars in Iraq and Afghanistan as major examples — a new, reliable tanker to keep planes fueled and ready for combat is a necessity for the Pentagon’s future.
Still, the KC-46 will need to complete flight testing and leap over other hurdles before deliveries can begin. The road’s hardly clear for this next-generation tanker.
If everything goes according to plan, however, this plane should become one of The Boeing Company (NYSE:BA)’s best sellers in its defense division. The company hopes to deliver 18 of its tankers in its first year of delivery, a number that would have given the aircraft the second highest number of deliveries out of all Boeing fixed-wing aircraft last year, trailing only the massively successful F-15 fighter’s 48 deliveries. If the latter keeps selling — and it should, particularly as foreign governments question the F-35’s hefty price tag and look for cheaper alternatives for a new fighter — The Boeing Company (NYSE:BA) will have a strong one-two punch in aircraft deliveries between the F-15 and the KC-46.