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Boeing : Trump Says U.S. Should 'Cancel Order' for New Air Force One, Citing Costs -- 7th Update

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12/06/2016 | 08:46pm CET
By Doug Cameron and Damian Paletta 

President-elect Donald Trump on Tuesday suggested the U.S. government should cancel a planned order with Boeing Co. for planes to serve as the new Air Force One, making the aircraft maker the latest company to come under scrutiny by the incoming commander-in-chief.

The move broadens Mr. Trump's effort to influence industrial policy beyond rebuking companies for moving jobs overseas by tackling the single largest source of discretionary federal spending: the federal defense budget.

In a Twitter post Tuesday, Mr. Trump said the cost for a new "Air Force One" plane for future presidents was "more than $4 billion. Cancel order!"

Shares in defense companies have climbed sharply since the election as investors expected the military budget to rise, with Mr. Trump focusing on reforms to the Pentagon bureaucracy to help foot the bill.

Wading into the complex system of buying weapons and other military systems and singling out individual programs wasn't expected, said defense experts.

Defense stocks shrugged off early losses following Mr. Trump's remarks and were broadly ahead by midday, in line with the broader market.

"The contractors are really bemused," said Loren Thompson at the Lexington Institute, a think tank part-funded by Boeing and other defense companies.

Efforts to replace the fleet of aircraft and helicopters that serve the president have come under attack by previous administrations and even been canceled. The Pentagon is now looking to balance costs and capabilities by rewarding contractors with higher profits if they deliver on time and under budget.

Boeing is the second-largest Pentagon contractor after Lockheed Martin Corp. -- which is building the fleet of new helicopters that will serve as Marine One -- and makes fighter jets, surveillance planes, bombs and other systems that generated sales of almost $19 billion from the Pentagon last year, a fifth of its total revenues.

Chicago-based Boeing hasn't secured deals to build the planes that would replace the current aircraft used as Air Force One, which have been in flight since the administration of George H.W. Bush.

The two heavily modified 747-200 planes used by the president are due to reach the end of their planned 30-year life in 2017. This can be extended a few more years, and the Air Force has said in budget documents it wanted to have the first new jet in place by 2023 or 2024.

The company has so far received development deals worth about $170 million, it said on Tuesday, to convert the 747-8 jumbo jets that would replace the existing fleet.

"We look forward to working with the US Air Force on subsequent phases of the program," Boeing said Tuesday. Representatives for the Pentagon didn't respond to requests for comment.

The development deals include proposed modifications to the aircraft, from sophisticated communications equipment to other upgrades such as antimissile devices, according to experts.

While defense contractors are regularly reprimanded by the Pentagon and lawmakers for cost overruns and delays in supplying new weapons, defense experts said much of the blame lies with military chiefs changing requirements and delays by Congress in setting a budget.

The $4 billion price tag Mr. Trump referenced for the cost of the new aircraft couldn't be immediately confirmed, but defense experts questioned it.

The Air Force earmarked $1.65 billion between 2015 and 2019 for two replacement jets, and said it may acquire up to three, but hasn't detailed the expected cost or delivery dates for the planes.

"The statistics that have been cited [by Mr. Trump], shall we say, don't appear to reflect the nature of the financial arrangement between Boeing and the Department of Defense," said Obama White House spokesman Josh Earnest.

Mr. Trump on several occasions during the election campaign castigated Boeing over its plan to build a plant near Shanghai to paint and install seats on U.S.-assembled commercial jets destined for China.

This is the first time since becoming president-elect that Mr. Trump has singled out a particular government contractor in a procurement deal.

"I think it's ridiculous," Mr. Trump said of the planned Air Force One deal in brief remarks in the lobby of Trump Tower in New York City. "I think Boeing is doing a little bit of a number. We want Boeing to make a lot of money but not that much money."

Boeing generated a 5% profit margin on its defense business last year, though excluding one-off charges these have historically tracked around 10%.

"As a general rule, government procurement experts on both sides, the government and the contractor-side, will be extremely anxious," said Steven Schooner, co-director of the government procurement law program at George Washington University Law School.

Jason Miller, a spokesman for the Trump transition team, said Mr. Trump could continue to weigh in when he believes it is necessary to keep government costs down.

The Air Force has previously specified it needed a four-engine plane to serve as Air Force One. Airbus Group SE is the only other maker of such jets, but experts said it was unlikely to bid even if the presidential replacement program is restarted. Airbus didn't respond to a request for comment.

Boeing's 747-8 carries a list price of $378 million and uses General Electric Co. engines, but the final cost of modifications will depend on final Air Force requirements.

"The Air Force will be forced to scrub all of the [requirements] to make sure they are really necessary," said Lexington's Mr. Thompson. He predicted Boeing would reach a fixed-price deal that left it to pay for any cost overruns.

Last week, Mr. Trump appointed Jim McNerney, a former Boeing chief executive, to be on a new board of executive advisers he plans to meet with to discuss economic, regulatory, and labor issues.

Mr. Trump has used Twitter extensively throughout his presidential campaign and following the election. Tuesday's tweet is his latest rebuke to a major U.S. company. Mr. Trump has also used Twitter to hit Ford Motor Co. and United Technologies Corp.'s Carrier unit for plans to move production overseas.

Write to Doug Cameron at doug.cameron@wsj.com and Damian Paletta at damian.paletta@wsj.com

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