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.