In February 2011, Boeing won the competition to develop the Air Force's next generation aerial refueling tanker aircraft, the KC-46. To develop a tanker, Boeing modified a 767 aircraft in two phases. In the first phase, Boeing modified the design of the 767 with a cargo door and an advanced flight deck display borrowed from its 787 aircraft and is calling this modified version the 767-2C. The 767-2C is built on Boeing's existing production line. In the second phase, the 767-2C was militarized and brought to a KC-46 configuration. The KC-46 will allow for two types of refueling to be employed in the same mission--a refueling boom that is integrated with a computer- assisted control system and a permanent hose and drogue refueling system. The boom is a rigid, telescoping tube that an operator on the tanker aircraft extends and inserts into a receptacle on the aircraft being refueled. See figure 1 for an example of boom refueling. The "hose and drogue" system is comprised of a long, flexible refueling hose and a parachute-like metal basket that provides stability. Drogue refueling is available via the centerline drogue system in the middle of the aircraft, or via a wing air refueling pod (WARP) located on each wing. WARPs are used for simultaneous refueling of two aircraft. See figure 2 for a depiction of the conversion of the 767 aircraft into the KC-46 tanker with the boom deployed. The Federal Aviation Administration has previously certified Boeing's 767 commercial passenger airplane (referred to as a type certificate) and is to certify the design for both the 767-2C and the KC-46 with Amended and Supplemental type certificates, respectively. The Air Force is then responsible for certifying the airworthiness of the KC-46. The Air Force is also to verify that the KC-46 systems meet contractual requirements and that the KC-46 and various receiver aircraft are certified for refueling operations. Boeing was awarded a fixed price incentive (firm target) contract for development. The contract is designed to hold Boeing accountable for costs associated with the design, manufacture, and delivery of four test aircraft and includes options to manufacture the remaining 175 aircraft. A fixed price incentive development contract was awarded for the program because KC-46 development is considered to be a relatively low-risk effort to integrate mostly mature military technologies onto an aircraft designed for commercial use. The contract limits the government's financial liability and provides the contractor incentives to reduce costs in order to earn more profit. It also specifies that Boeing must correct any deficiencies and bring development and production aircraft to the final configuration at no additional cost to the government. The contract includes firm fixed price contract options for the first 2 production lots, and options with not-to-exceed fixed prices for production lots 3 through 13. The Air Force has already exercised the first 3 production lots totaling 34 aircraft and negotiated firm fixed prices for production lot 3. The original development contract requires Boeing to deliver 18 operational aircraft, 9 WARP sets and 2 spare engines by August 2017. The contract refers to this as required assets available, while we refer to it as fully capable aircraft in this report. In addition, according to the contract, all required training must be complete, and the required support equipment and sustainment support must be in place by August 2017. Barring any changes to KC-46 requirements by the Air Force, the development contract specifies a ceiling price of $4.9 billion for Boeing to develop the first 4 aircraft, at which point Boeing must assume responsibility for all additional costs. Due to several development-related problems experienced over the last 2 years, Boeing currently estimates that development costs will total about $5.9 billion, or about $1 billion over the ceiling price. The government is not responsible for the additional cost. The KC-46 program is meeting total acquisition cost and performance targets, but has experienced some recent schedule delays. The government's cost estimate has declined for a fourth consecutive year and is now about $7.3 billion less than the original estimate. In addition, the aircraft is projected to meet all performance capabilities. However, Boeing experienced some problems developing the aircraft. As a result, it now expects to deliver the first 18 fully capable aircraft in October 2018 instead of August 2017, 14 months later than expected. The Air Force is continuing to work within its total program acquisition cost estimate for the KC-46, which includes development, procurement, and military construction costs. The total program acquisition cost now stands at $44.4 billion. This is about $7.3 billion less than the original estimate of $51.7 billion or about 14 percent less. Average program acquisition unit costs have decreased by the same percent because quantities have remained the same. Table 1 provides a comparison of the initial and current quantity and cost estimates. The Air Force has been able to decrease its cost estimate over the past 4 years primarily because it has not added or changed requirements and therefore there were fewer engineering changes than expected. According to program officials, the Air Force's initial cost estimate included a large amount of risk funding for possible requirements changes, based on its experience with prior major acquisition programs. Military construction costs have also come in below estimates. The program estimates that the KC-46 will achieve its performance capabilities. This includes 9 key performance parameters and 5 key system attributes that are critical to the aircraft's military capability and 7 technical performance capabilities that track progress to meeting contract specifications. For example, the aircraft is expected to be ready for operational use when required at least 89 percent of the time and, once it is deployed for an aerial refueling mission, be able to complete that mission 92 percent of the time. Appendix I provides a description of each of the key performance parameters and system attributes as well as the status of technical performance capabilities. The program has collected actual test data that validates a few of the performance capabilities. For example, the aircraft is using less than 1,557 gallons of fuel per flight hour, its fuel usage rate target. In addition, the program also closely tracks the actual weight of the aircraft because weight has a direct effect on the amount of fuel that can be carried. As of January 2017, the program had approximately 595 pounds of margin to the operational empty weight target of 204,000 pounds. The program also tracks a reliability growth metric--the mean time between unscheduled maintenance events due to equipment failure--and set a reliability goal of 2.83 flight hours between these events by the time the aircraft reaches 50,000 flight hours. According to program officials, as of September 2016, the program had completed about 1,300 flight hours and was achieving 1.56 hours compared to its goal of 1.72 hours by that time. Program officials believe that the reliability will improve as additional flight hours are completed and as unreliable parts are identified and replaced. Program officials also report that the program does not yet have actual flight test data to validate many of the other key and technical performance capabilities, such as those for operational availability and mission capability mentioned above. In lieu of flight test data, it assesses the measures on a monthly basis, relying on other information such as data from ground testing; models and simulations; and prior tanker programs. Test officials eventually expect to collect and analyze this data through flight testing. In some cases the program will be tracking progress towards achieving some performance capabilities while the aircraft is in operation. For example, in addition to the reliability growth metric mentioned above, Boeing is expected to demonstrate that mechanical problems on the aircraft can be fixed within 12 hours at least 71 percent of the time once the aircraft has accumulated 50,000 flight hours. Since our last report in April 2016, the Under Secretary for Acquisition, Technology and Logistics approved the KC-46 program to enter low-rate initial production in August 2016, one year later than originally planned. In addition, the Air Force has exercised contract options for the first 3 low- rate production lots of aircraft. We previously reported that the delay to the low-rate initial production decision was the result of problems Boeing had wiring the aircraft, design issues discovered with the fuel system components, and a fuel contamination event that corroded the fuel tanks of one of the development aircraft. Those problems have been overcome, but time was lost working through them. Until the low-rate initial production decision, the program had met its major milestones. Boeing and KC-46 program officials modified the program schedule in January 2017 to reflect the work remaining, including obtaining Federal Aviation Administration confirmation that the aircraft's parts all match their design drawings. While the Federal Aviation Administration has approved the design of many aircraft components, it is expected that the WARPs will be the last subsystem to receive design approval for all of its parts and to demonstrate that the parts conform to the designs. According to Boeing officials, the company and its WARP supplier had underestimated the level of design drawing details the Federal Aviation Administration needed to review to determine that the parts conformed to the approved design. According to these officials, the WARP supplier has been negotiating with its various sub-tier suppliers over the past 3 years for the necessary design documentation. Program officials estimate that the WARP design will be approved by the Federal Aviation Administration in July 2017, which will then allow Boeing to complete remaining developmental flight tests and meet other key milestones. Program officials do not consider the WARP design to be a significant program risk because the WARPs performed well in flight testing leading up to the low- rate initial production decision. Changes to key milestones are shown in table 2. Overall, the current schedule reflects a 14-month delay in Boeing delivering the first 18 aircraft with 9 WARP sets under the terms of the development contract, referred to as 18 fully capable aircraft in table 2. Instead of meeting an August 2017 date, the program office now estimates that Boeing will deliver the first 18 aircraft by February 2018 and the 9 WARP sets separately by October 2018. Air Force officials are negotiating for considerations from Boeing to account for lost military tanker capability associated with the delivery delays. According to program officials, the lost capability includes lost benefits--such as the Air Force not being able to grow the overall U.S. tanker fleet to 479 aircraft until later--and additional costs--such as the government having to maintain and sustain legacy aircraft and its test infrastructure longer than originally planned. The planned delivery of the first 18 aircraft, though 6 months late, will provide boom and drogue refueling capability to the warfighter. When delivered, the WARPs will enable the refueling of two receiver aircraft simultaneously, a capability that is not used as frequently, according to Air Force officials. Air Force officials said the current schedule and considerations will be part of a contract modification that is expected to be finalized in summer 2017. Figure 3 provides a closer look at the original and current delivery schedules. As shown, under the current schedule Boeing plans to deliver aircraft over a compressed 6-month period of time compared to its original plan to deliver aircraft over a 14-month period of time. This delivery period assumes Boeing will deliver 3 aircraft per month, a greater pace than planned during full rate production. According to program officials, Boeing is already in the process of manufacturing 18 aircraft from the first 3 low- rate production lots; 12 of these aircraft are over 70 percent complete. The current schedule also takes into account the decision by the Under Secretary for Acquisition, Technology and Logistics to designate productions lots 3 and 4 (of 15 aircraft each) as low-rate instead of full- rate lots. This was done to help Boeing avoid a break in production while it completes developmental and operational testing. The program expects to begin delivering these aircraft in 2018 and 2019, respectively. As a result, as shown in figure 4, concurrency between developmental flight testing and production has increased. The Air Force will have contracted for 49 aircraft before developmental flight testing is completed, representing 27 percent of the total aircraft, compared to the original plan of 19 aircraft, or about 11 percent. Further, the first 18 aircraft without WARPs will be delivered before most of operational testing has been completed. There is risk that Boeing may identify problems during flight testing that will lead to design changes. However, according to the terms of the development contract, the cost to fix these discoveries will be borne by Boeing, as it is required to bring all aircraft to the final configuration after completion of testing. Boeing faces two primary challenges in meeting the current delivery schedule, both of which relate to its developmental test schedule. Our analysis indicates that testing may take longer than the program is estimating. If test points are not completed at the planned rate, then aircraft deliveries will be delayed, indicating that the new delivery schedule is optimistic. Electromagnetic Effects Testing Schedule: First, there is risk that Boeing will not be able to complete required electromagnetic effects testing on the KC-46 in May 2017, as currently planned. Boeing officials stated this is because the WARP supplier has not yet provided all detailed design drawings to the Federal Aviation Administration for approval. While Boeing had planned on delivery of an approved WARP by March 2017, it now expects that to occur in late July 2017. The original plan, according to agency officials, was to have all aircraft parts, including the WARPs, conform to design drawings and gain Federal Aviation Administration approval prior to this testing. During the testing, the KC-46's electrical systems will be examined to verify that they do not create any electromagnetic interference, a process that requires a unique government facility that is also in high demand by other programs. Consequently, Boeing officials report that if the KC-46 is not ready for its scheduled time, these critical tests could potentially be delayed until the facility is available. The program is working on ways to mitigate the potential for delays in the delivery of the first 18 aircraft. For example, program officials stated that they are considering separate electromagnetic testing on the aircraft and the WARPs. Flight Test Completion Rate: Second, Boeing is projecting that it can complete test points over the remaining developmental flight test schedule at a rate higher than it has been able to demonstrate consistently. If test points are not completed at the planned rate, then aircraft deliveries will be delayed. The developmental flight test program contains about 29,000 total test points to be completed over a 32-month period. Government test officials report that these test points are a combination of Boeing-specific tests that it is conducting to reduce the risk of test failure and government-specific tests to verify the KC-46's performance. Boeing has completed 53 percent of planned testing since the KC-46 developmental flight test program began in January 2015. The company would need to complete an average of 1,713 test points per month to complete remaining testing on time so that it can begin delivering aircraft in September 2017. As shown in figure 5, Boeing has only completed this number of test points once, in October 2016, when it completed 2,240 test points, which program officials reported was part of a planned test surge. Boeing test data shows that from March 2016 to January 2017, it completed an average rate of 811 test points per month. As shown in figure 6, at that rate, we project that Boeing would finish the remaining 13,706 test points in early June 2018, 9 months later than the planned completion date. The Director for Operational Test and Evaluation has previously assessed and continues to assess the KC-46 schedule as aggressive and unlikely to be executed as planned, stating that execution of the current schedule assumes historically unrealistic test aircraft flight rates. Boeing's test schedule is based on flying 65 flight test hours on 767-2C aircraft per month and 50 hours on KC-46 aircraft per month. The program has actually averaged--across all aircraft in the development test program-- about 25 hours per aircraft per month. A government test official stated that similar programs in the past have sustained a pace of about 30 hours a month per aircraft. Government test officials noted that a large portion of testing completed so far was for Boeing-specific test points that could include tests that were cancelled if Boeing believed it had sufficient data already, and more time will likely be needed to plan and coordinate upcoming government-required testing. Boeing test officials believe the company can complete developmental testing by September 2017 because they plan to increase the number of test points it can complete per month by adding flight hours on nights and weekends. Boeing officials also believe the test pace will gain greater efficiency as the aircraft's design and test plans stabilize. The program was working on a "test once" approach with Boeing, the Federal Aviation Administration, and DOD whereby common test activities required by multiple entities would only be performed once. According to program officials, Boeing is moving away from the test once approach and towards sequential testing as a mitigation strategy. They report that Boeing expects this will help it perform key tests more quickly because it will not need to wait for several systems to be approved for testing. Program officials, however, believe that the transition to a new testing approach will require weeks of test plan rewriting, and that obtaining approval for the design of all parts, including the WARPs, from the Federal Aviation Administration will continue to pose risk to test completion as currently planned. We are not making recommendations in this report. We provided a draft of this report to DOD for comment. DOD did not provide any written comments, but the KC-46 program office provided technical comments, which we incorporated as appropriate. We are sending copies of this report to the appropriate congressional committees; the Secretary of Defense; the Secretary of the Air Force; and the Director of the Office of Management and Budget. The report is also available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions concerning this report, please contact me at (202) 512-4841 or sullivanm@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix II. The program office has 14 key performance parameters and system attributes that are critical to the KC-46 aircraft's military capability and 7 technical performance capabilities that track progress to meeting contract specifications. Table 3 provides a description of each key performance parameter and system attribute. Table 4 provides the status of each technical performance capability. In addition to the contact named above, Cheryl Andrew, Assistant Director; Kurt Gurka; Stephanie Gustafson; Katheryn Hubbell; Nate Vaught; and Robin Wilson made key contributions to this report. KC-46 Tanker Aircraft: Challenging Testing and Delivery Schedules Lie Ahead. GAO-16-346. Washington, D.C.: April 8, 2016. KC-46 Tanker Aircraft: Key Aerial Refueling Capabilities Should Be Demonstrated Prior to the Production Decision. GAO-15-308. Washington, D.C.: April 9, 2015. KC-46 Tanker Aircraft: Program Generally on Track, but Upcoming Schedule Remains Challenging. GAO-14-190. Washington, D.C.: April 10, 2014. KC-46 Tanker Aircraft: Program Generally Stable but Improvements in Managing Schedule Are Needed. GAO-13-258. Washington, D.C.: February 27, 2013. KC-46 Tanker Aircraft: Acquisition Plans Have Good Features but Contain Schedule Risk. GAO-12-366. Washington, D.C.: March 26, 2012.

Summary:
The KC-46 tanker modernization program, valued at about $44 billion, is among the Air Force's highest acquisition priorities. Aerial refueling--the transfer of fuel from airborne tankers to combat and airlift forces--is critical to the U.S. military's ability to effectively operate globally. The Air Force initiated the KC-46 program to replace about a third of its aging KC-135 aerial refueling fleet. Boeing was awarded a fixed price incentive contract to develop the first four aircraft, which are being used for testing. Among other things, Boeing is contractually required to deliver a total of 18 aircraft and 9 wing air refueling pod sets by August 2017. This is defined as required assets available. The program plans to eventually field 179 aircraft in total. The National Defense Authorization Act for Fiscal Year 2012 included a provision for GAO to review the KC-46 program annually through 2017. This is GAO's sixth report on this issue. It addresses (1) progress made in 2016 toward achieving cost, performance, and schedule goals and (2) development risk remaining. GAO analyzed key cost, schedule, development, test, and manufacturing documents and discussed results with officials from the KC-46 program office, other defense offices, the Federal Aviation Administration, and Boeing. The KC-46 tanker modernization program is meeting cost and performance targets, but has experienced some recent schedule delays. Costs: As shown in the table below, the program's total acquisition cost estimate has decreased about $7.3 billion, or 14 percent, since the initial estimate. This is primarily because there have been no requirements changes and there have been fewer engineering changes than expected. (then-year dollars in millions) Performance: The program office estimates that the KC-46 will achieve its key and technical performance capabilities, such as completing a mission 92 percent of the time. As noted below, though, much testing remains. Schedule: The program fixed design problems and was approved for low-rate initial production in August 2016, a year late. Boeing (the prime contractor) will not meet the original required assets available delivery schedule due to ongoing Federal Aviation Administration certifications of the aircraft, including the wing air refueling pods, and flight test delays. As shown, the remaining schedule was modified to allow Boeing to deliver the first 18 aircraft and pods separately by October 2018, 14 months later than first planned. GAO's analysis shows there is risk to the current delivery schedule due to potential delays in Federal Aviation Administration certifications and key test events. Boeing must also complete over 1,700 test points on average for each month from February to September 2017, a level that is more than double what it completed in the last 11 months. Program officials agree that there is risk to Boeing's test completion rate until it obtains Federal Aviation Administration approval for the design of all parts, including the pods, but test mitigation strategies are underway. GAO is not making recommendations.