Boeing Overhauls Defense Unit in Attempt to Save Reputation

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Boeing (NYSE: BA), which has come under criticism from Pentagon officials over delays to the KC-46 refueling tanker, is revamping its defense unit in a bid to better manage the tanker and other weapons programs and improve its reputation.

Boeing Defense CEO Leanne Caret, in an email to employees first reported by Defense One, said that the company next week will stand up two new divisions focused on commercial derivative aircraft and missiles and weapon systems. It will also eliminate a development unit created in 2015, changes that she said "refine our structure around our core markets, common missions and priorities, and position us to deliver."

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Focus on the KC-46

The move comes just weeks after Air Force Secretary Heather Wilson issued a rare public rebuke of the contractor, complaining before the House Armed Services Committee that Boeing seems to be overly focused on its commercial cash cow to the detriment of defense projects.

The first batch of tankers, originally slated for delivery last August, are now supposed to arrive before year's end, but Air Force officials have expressed concern that the timetable will slip into 2019. The Pentagon says there are still major deficiencies that must be worked out before deliveries can begin, including issues with the tanker's remote-vision system that have caused the refueling boom to scratch fighters.

"One of our frustrations with Boeing is they're much more focused on their commercial activity than on getting this right for the Air Force, and getting these aircraft to the Air Force," Wilson said, adding that Air Force officials held face-to-face meetings with Boeing in recent weeks about the KC-46, and that "we have asked them to put their A-team on this to get the problems fixed."

The commercial derivatives unit, which will be based in Seattle, would seemingly address Wilson's criticism and show that the company is devoting necessary resources to the KC-46 project. The tanker is a derivative of the 767 commercial model, and the new unit will be led by Tim Peters, a former KC-46 program manager.

Not a knee-jerk reaction

A Boeing spokesman told Defense One that the revamp has been under consideration for several months and was not prompted by Wilson's criticism. Regardless, investors and the Pentagon alike should be glad to see Boeing taking steps to get the KC-46 on track.

Boeing has already taken more than $2 billion in pre-tax charges due to fines and cost overruns on the tanker program, and is on the hook for all development costs over the $4.9 billion agreed to in the original contract.

The KC-46 has also been a missed opportunity for Boeing to prove its chops as a defense contractor. Wilson is correct in saying that commercial -- which accounted for more than 60% of total Boeing revenue -- has been the star attraction at Boeing over the last decade.

Boeing has an impressive array of military platforms, but some of its most high-profile items, like the F-18 Super Hornet fighter, the F-15 Strike Eagle, and the Apache helicopter, were added via acquisition. And the company has lost out in some big-ticket recent competitions, including the joint strike fighter, which went to Lockheed Martin (NYSE: LMT), and the long-range strike bomber, which went to Northrop Grumman (NYSE: NOC). The KC-46 was a big win for the company, and one it surely had hoped would help build its reputation and not lead to criticism.

No reason for panic

To be clear, Boeing is hardly the only defense contractor to deal with cost overruns or project delays. Look no further than Lockheed Martin's issues with the F-35 for another very visible example. Given the Pentagon's demand for bleeding-edge technologies, some delays or issues are to be expected.

What the Pentagon does demand is full effort from its contractors. The reason Wilson's statements were so notable was that she suggested Boeing wasn't taking its defense work seriously enough. To the extent that this overhaul shows that Boeing is focused on the issues with the KC-46, it's an important step even if the tanker does get pushed back into 2019.

With defense spending on the rise, it's a poor time to be on the Pentagon's bad side. Boeing's move to shore up the tanker program -- even if months in the making -- is a prudent one for the sake of its entire defense business.

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Lou Whiteman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.