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Boeing to Get a Boost from KC-46 Air Tanker Approval

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Air Force accepts KC-46 first delivery

On February 10, Boeing (BA) announced that it finally got the U.S. Air Force’s (or USAF) approval for the first delivery of its long-delayed KC-46 Pegasus tanker aircraft. The acceptance of this aircraft by the USAF has come as a big relief for Boeing, as the delayed project has cost the company over $3 billion.

The KC-46 Pegasus tanker is a military aerial refueling and transport aircraft and is based on Boeing’s airframe for its commercial 767 jets. The aerospace and defense (XLI) company won the contract from USAF for 179 aircraft in February 2011 and was scheduled to deliver the first jet in August 2017.

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However, the model failed to get final acceptance for over two years due to a series of technical glitches found by the USAF. The delays and fixes have cost Boeing billions of dollars. In its 2018 Annual Report filing with the SEC, Boeing revealed that it had recorded $736 million as reach-forward losses in 2018, which included higher estimated costs associated with flight testing and certification. The company also disclosed that the total cost overrun reached $3.6 billion on a pre-tax basis or $2.4 billion on an after-tax basis through 2016 to 2018.

Therefore, the approval from the USAF means a strong revival from earlier financial losses to a stream of incremental revenues and cash flows beginning this quarter. Of the 179 jets, Boeing plans to deliver the first four KC-46 Pegasus tankers to the USAF’s McConnell Air Force Base by the end of this month, and the next four could be shipped to Oklahoma’s Altus Air Force Base at the beginning of March.

Incremental revenues and margins for Boeing

Acceptance of the KC-46 tanker by the USAF is expected to further drive Boeing’s Defense, Space, and Security segment’s revenues, which accounted for ~23% of the company’s 2018 total revenues. Also, as the delivery of the tanker is scheduled to begin this month, it should bring in additional revenues and cash flows for the company along with boosting the margins.

Further, we believe that the latest development could spark fresh positive momentum in Boeing’s stock price today. The stock has been on quite a ride since the beginning of 2019. In the YTD period, Boeing stock has gained 25.6% and is currently the best performer among the stocks that make up the Dow 30 Index (^DJI). With a YTD gain of 17.6%, IBM (IBM) is the second-best performer, followed by United Technologies (UTX) with 15% gains and Goldman Sachs (GS) with 14.7% gains.

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