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Wed Aug 7, 2013, 08:21 AM

Will Boeing's Tanker Destroy Lockheed Martin's F-35?


Will Boeing's Tanker Destroy Lockheed Martin's F-35?
By Katie Spence
August 6, 2013 |

In a world where sequestration is the norm, and defense spending exists in a proverbial vice, one thing a company doesn't want to do is have a product that's too expensive. And $10 billion above budget is way, way too expensive. Unfortunately for Boeing's (NYSE: BA ) KC-46A tanker, that's exactly what's happening. But in a surprising twist, this actually may be bad news for Lockheed Martin's (NYSE: LMT ) F-35, not the tanker. Here's what you need to know.

n a report given to Congress in May, the Air Force estimated that over the five decades of planned service, the support costs for the KC-46A tankers would be $103 billion. That's 11% more than the previous estimate of $92.7 billion. More pointedly, it breaches a key component of the program's acquisition baseline plan.

The good news is that this breach isn't something Boeing is liable for -- which is especially good considering Boeing's already liable for an estimated $700 million in cost overruns during the development phase. In fact, this breach is due to the fact that the Air Force intends to increase flying hours on the tanker, as well as assigning 3.5 aircrews to the aircraft, instead of 2.5. What's even better news for taxpayers is that the Air Force stated that it's committed to staying within its budget, and will not seek additional funding for the KC-46A. But that, right there, is bad news for Lockheed.

There have been a number of defense budgets bouncing back and forth between the House and the Senate. But the latest 2014 Defense Appropriations proposal that passed last week in a Senate committee includes funding for the KC-46A development. It also cuts funding for Lockheed's advanced F-35 procurement funding for 2015.

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