Cost Increases Come As Company Risks Losing C-130 Contract

Business is booming for Boeing right now... as long as you're talking about commercial aircraft, where the aerospace manufacturer still enjoys relatively brisk sales and a 1,002-order book for 2005 to work from. Building all of those aircraft does cost money, however... which is why, on Thursday, Boeing announced an average price increase of four percent on the list prices of its commercial airliners.

According to a posting on the Boeing website, the price increases range from a low of three percent on the 737-600 series, to a high of 5.2 percent for the 777-200ER widebody. By family, the increases for 737s range from three percent to 4.9 percent; for 747s from 4.7 percent to five percent; for 767s from four percent to 4.7 percent; and for 777s from 3.6 percent to 5.2 percent. Prices for Boeing's still-in-development 787 Dreamliner have also gone up, from 4.4 percent to 4.9 percent.

Boeing says that price increase reflects a rise in costs of manufactured parts needed to build its planes -- a plausible excuse, especially considering the rising prices for titanium right now. However, while the commercial market is likely to absorb the increase (and, let's face it... airlines rarely pay sticker price on planes, anyway), over on its defense side Boeing is also facing increased costs... and the US government is less likely to pay.

Bloomberg reports an independent analysis commissioned by the US Air Force suggests the cost of a lucrative contract to modernize electronics on C-130 transports has mushroomed to 130 percent above estimates... and, as ANN first reported in February, that the contract is now in danger of being cancelled.

There are now some hard numbers to back that up. According to the analysis, the C-130 modernization program's cost has grown to $1.5 billion, from $670 million. What's worse, costs could eventually reach as high as $2.86 billion. The first plane to be delivered under the program is now scheduled for delivery in 2009 -- a year later than planned -- and the program has been cut to 423 aircraft from 519.

"The program was the product of an aggressive campaign by Boeing to expand its defense business beyond traditional products and customers and into aircraft upgrades but it was won under questionable circumstances and performance has been uneven at best," Loren Thompson, a defense analyst for the Lexington Institute, told Bloomberg.

Instead of shelling out the money to upgrade existing C-130s -- some of which are already 45 years old -- it could prove cheaper in the long run for the military to purchase new C-130s from Lockheed Martin. The cancellation of the contract would be a blow to Boeing's already-struggling defense and aerospace division, the company's largest.

In response to the analysis, Boeing C-130 program manager Mike Harris said the company and its subcontractors have been surprised by problems caused by aircraft that are in worse condition than expected when initial estimates were made.

Harris added that Boeing's performance has rebounded since the analysis was performed.

FMI: www.boeing.com