News: Analysis & Commentary: AEROSPACE
A FIERCE DOWNDRAFT AT BOEING
As troubles mount, it's clear that record orders won't bring fat profits
There were already thousands of new faces at Boeing Co.'s plants in Wichita and suburban Seattle, as the company ramped up for record production. Then on Jan. 12, a smaller and far less welcome group appeared--Federal Aviation Administration inspectors. Prompted by the unexplained Dec. 19 crash in Indonesia of a 10-month-old 737-300, which killed all 104 aboard, the FAA dispatched a team for an unscheduled review of quality-control procedures at the 737 factories.
Their weeklong visit--and the planned Jan. 21 release of a safety audit--caps a tumultuous half-year for the aerospace giant. Just when Boeing should be on a path to record profits, its production system has spun out of control, and costs are spiraling. If it turns out that sloppy work caused the crash of the Singapore SilkAir jet--which no officials have yet suggested--Boeing could be in for far worse problems ahead. As of Jan. 14, FAA inspectors had turned up 19 cases of loose or missing tail-section screws in 737s built since September, 1995.
Boeing has also been hit with the first flack from the crisis in Asia, where it has 35% of its backlogged orders. On Jan. 14, Philippine Airlines canceled delivery of four 747s. Up till then, Boeing had been saying that its orders--which are placed years in advance--were holding. "Asia is going to be a problem," says Peter Jacobs of Ragen Mackenzie in Seattle.
Six months ago, analysts were saying that Boeing would earn $2.6 billion on sales of $47 billion in 1997. For 1998, they expected a surge to $3.8 billion in earnings. Now, the math has changed. After $1.6 billion in charges to cover cost overruns on new 737s, Boeing will probably show a $384 million loss for 1997. Profit estimates for 1998 were trimmed to just $2.3 billion after Boeing warned that it would take $1 billion in additional charges to cover higher-than-expected production costs. "We anticipate continued weak margins in 1998," says Paul H. Nisbet of JSA Research in Newport, R.I.
AMBITIOUS. What went wrong? While booking record orders for 717 planes in 1996, the company laid plans to more than double output by April of this year, from 18 planes a month to 43. Meanwhile, it cut prices and counted on manufacturing efficiencies to make up the slack. Boeing remodeled its Renton (Wash.) factory, streamlined assembly steps, and installed new computer systems.
By mid-year, however, it was clear that the plan was too ambitious. To catch up with deadlines for new 737 and 747 orders, the company scrambled to hire and train 41,000 workers, recruiting in desperation from its suppliers--a move it would regret when parts shipments were delayed. As early as May, the FAA raised a warning flag, telling Boeing that its procedures for filing paperwork on interior modifications to 737s were "out of control." This wasn't a safety issue but reflected chaos on the plant floor.
By fall, things were so bad that the company shut down its 747 and 737 lines so workers could catch up with out-of-sequence work and back-ordered parts could arrive. That delayed deliveries to airlines--and forced Boeing to pay what analysts estimate were $300 million in penalties to customers.
Instead of trimming costs on its new lines, the company managed to inflate them. "It was aggressive planning, and they missed," says Goldman Sachs analyst Howard Rubel. Bottom line: The company will record zero profit on the first 400 of its newest 737 models.
"CHICKEN LITTLE." Boeing hasn't seen any cancellations in the U.S.--for production delays or any other reasons. "We have no safety issues with Boeing," says Gordon M. Bethune, CEO of Continental Airlines Inc.--even though at least one of his 737s had missing screws. "This is no reason for Chicken Little to come through the halls." Continental expects to receive 64 Boeing planes this year and a further 100 over the next few years.
Still, analysts are concerned about Asia. By 2000, says Steve Binder, an analyst at Bear, Stearns & Co., fewer orders from the region could cut production revenues by 10% to 15% a year. That doesn't factor in further canceled orders.
Meanwhile, Boeing faces stiffer rivalry from Airbus Industrie. The European jetmaker's market share edged up to around 45%, as it booked record 1997 orders and cut prices.
Even if the Asian market holds and Airbus does not grab more business, Boeing has missed the chance to maximize profits in the current boom. Most carriers have already placed orders to rebuild their fleets, and analysts expect the rate of new orders to drop by 2000. In other words, by the time Boeing gets its house in order, the window will have closed. "Traditionally, Boeing has blown it in periods of prosperity," sighs Wolfgang Demisch of BT Alex. Brown. It's a tradition that should be abandoned.By Seanna Browder in Seattle and Andy Reinhardt in San Mateo, Calif., with bureau reportsReturn to top