The defense division of Boeing (BA.N.) is more difficult to turn around than management had thought. This year, the company lost $1.7 billion on projects, including NASA’s Starliner spacecraft and the future Air Force One, primarily due to supplier failures and excessive manufacturing costs.

Executives said that by taking on $4.4 billion in losses in 2022, the company would be less vulnerable to cost overruns in the future. However, this year has seen no improvement for the unit.

A Reuters analysis of Boeing’s regulatory records shows that, excluding the previous year, the company lost more money on its defense contracts in 2023 than in any other year since 2014. Among its colleagues in the military contractor space, Boeing stands out as demand from the conflict in Ukraine is driving up sales for firms such as Lockheed Martin (LMT.N), General Dynamics (GD.N), and RTX (RTX.N).

In contrast to those companies, Boeing is required by a few contracts to pay the aircraft manufacturer’s loss when technological development costs exceed budget. The defense organization has lost $933 million so far this year, with most of those losses coming from the $482 million loss on constructing two Air Force One jets and the $315 million charge on an unnamed satellite program that has never before seen a failure.

To ensure that the company shifts from negative margins to high-single-digit margins by 2025–2026—when its most problematic programs are expected to have passed flight testing and be on more secure footing—Boeing management said they are implementing additional training and providing resources to suppliers.

During a Wednesday earnings call, Chief Financial Officer Brian West stated, “We’re driving lean manufacturing, program management rigor, and cost productivity consistently across the division.” Beyond the remarks made by management on the call, Boeing declined to comment.

According to military analyst Byron Callan of Capital Alpha Partners, Boeing’s 2025–2026 timetable to reach positive profits is doable. Still, he questioned why it took the business years to implement initiatives to enhance execution.

“Someone dropped the ball on all of this,” he stated. Compared to the S&P 500’s 9% rise this year, Boeing’s shares have lost 6% of their value.

Fixed-Price Agreements

Analysts also say that Boeing can not lessen the financial effects of its many fixed-price development contracts with clients such as NASA and the US Department of Defense. These contracts require the plane maker to pay all costs above a certain level.

These agreements, which account for 15% of Boeing’s revenue from defense programs, were made before the MAX crisis destroyed the company’s commercial aviation industry and before the pandemic and rising inflation drove up labor and material prices. A recent manufacturing mishap with an incorrectly coated KC-46 fuel tank by a supplier is among the additional issues.

As each new charge “is an upward revision to cost expectations, versus only three months prior,” JP Morgan’s Seth Seifman said in a letter to investors on Wednesday, suggesting that Boeing’s losses indicate a lack of genuine knowledge of costs. “Boeing Defense Space and Security (BDS) did not turn a genuine profit, even after removing charges.”

Boeing has clarified that it will not take on any further fixed-price contracts during the weapons development phase due to the unpredictable nature of creating and testing new products, frequently resulting in unanticipated expenses.

Nonetheless, the company’s ongoing fixed-priced development projects have continued to exceed budget this year. These projects include NASA’s Starliner, the Navy’s MQ-25 tanker drone, the Air Force One jet, the T-7 training jet, and the KC-46 refueling tanker.

Including the most recent penalty, Air Force One’s total losses on a $3.9 billion deal to construct two planes came to $2.4 billion. According to the program’s current timeline, the first jet should arrive by September 2027.

In addition, West disclosed that it had lost $136 million in the quarter, with a $71 million charge related to the MQ-25 program.

According to Richard Aboulafia of AeroDynamic Advisory, there is “not much you can do” for expensive, low-volume programs like Air Force One or MQ-25, even if KC-46 seems to be stabilizing and T-7 will ultimately turn a profit.

Securing future contracts for next-generation fighter planes and advanced drones is a better bet, one that Boeing’s defense sector is actively seeking. “The environment is rich in targets,” stated Aboulafia.