Boeing's Defense Business Struggles but Remains Core

By Mike Stone
Date: October 2023

WASHINGTON (Reuters) – Boeing (NYSE:BA) CEO Kelly Ortberg anticipates that the planemaker's defense business will continue to struggle under the weight of budget-busting older contracts. Despite the issues, he stated on Wednesday that the unit responsible for helicopters, fighter jets, and missiles remains "core" to the company's future.

Cost overruns at the KC-46 midair refueling tanker program have exceeded $7 billion in recent years. Additionally, a fixed-price contract to upgrade two Air Force One planes has led to a $2 billion loss for the top U.S. defense contractor.

Boeing shares fell by 1.76% on Wednesday after the company reported a quarterly loss of $6 billion, impacted by a five-week strike and issues with airplane manufacturing.

The Boeing Defense, Space & Security unit is in need of a new CEO, following the departure of its previous leader last month, and has faced significant setbacks due to costly mistakes in its space division.

Boeing's Starliner spacecraft has suffered from years of development delays and technical problems, leading to more than $1.8 billion in private cost overruns. Two NASA astronauts, whom the company sent to the International Space Station, are still there and are expected to return in February on a SpaceX craft, as Boeing has struggled to provide a second ride.

Boeing also faces mounting pressure to cut costs on its multibillion-dollar SLS rocket contract with NASA, which is billions of dollars over budget and years behind schedule.

During the earnings call with Wall Street analysts, Ortberg described the company's core of commercial airplanes and defense systems as vital for the long-term future of the Boeing company. He emphasized the need for improved management and increased discipline amid multiple crises, including a strike and the prolonged grounding of the 737 MAX aircraft.

The company aims to enhance cost estimation accuracy and may exit competitions for new defense contracts to establish a more profitable path moving forward. In the recently reported third quarter, cost overruns on Air Force contracts led to another loss of $2 billion for the unit.

"Even if we wanted to, I don't think we can walk away from these contracts," Ortberg told analysts during the post-earnings conference call.

Boeing is already in discussions to sell its joint rocket-launching venture with Lockheed Martin (NYSE:LMT), United Launch Alliance. The drone business, Insitu, has also been identified for potential divestiture, although Boeing has not officially started the sale process, according to two sources.

A Boeing spokesperson declined to comment regarding the divestitures. Recently, Boeing sold its Digital Receiver Technology (DTS) business to France's Thales SA for about $100 million.

However, sources indicated that the company's executive leadership is overwhelmed and understaffed, hindering the acceleration of ongoing divestitures in its space and defense unit and preparation for potential sales of other units despite the urgent need for cash.

The CEO of Boeing Defense, Ted Colbert, departed from the company last month.

Ortberg himself noted, "we are somewhat consumed with the challenges of today," stating he aims to gain control of company matters by the year's end.

Boeing Defense, Space & Security encompasses a variety of products and services, including military aircraft, drones, satellites, weapons systems, missile defense, and space exploration. Key components include the F-15 and F/A-18 fighter jets, Apache and Chinook helicopters, the KC-46 tanker, and various space and satellite systems.

This story has been corrected to fix the spelling of Ortberg in paragraph 12.