Why Boeing Doesn't Have The All Clear Yet

When nearly 70 hard-bitten Wall Street analysts flew to Seattle to visit Boeing Co. in March, Alan R. Mulally, who heads the engineering team designing Boeing's 777 jet, wowed them with his enthusiasm about the new, computerized design process. "That guy must eat pixie dust for breakfast," says Howard A. Rubel, C.J. Lawrence Morgan Grenfell Inc.'s aerospace analyst. "Nine out of 10 people in that room would have gotten up and followed him wherever he went." But when the analysts returned to New York, not one recommendation was upgraded--not even Rubel's, which has carried a "hold" rating for 14 months. Investors are so bearish that the company has been trading at its worst multiple relative to the market since it imploded in the early 1970s.

At Boeing headquarters, the pessimism is hard to fathom: The company has a rock-solid balance sheet, a mammoth $90.2 billion backlog of orders, and three years of rising sales and earnings. Despite a steep decline in new orders last year, Boeing has weathered the recession remarkably well, selling enough jets to keep its backlog from shrinking. Its first-quarter income for 1992 jumped 43%, to $441 million. And even with defense cutbacks, Boeing's military business is returning to profitability after four years, thanks in part to a major streamlining. The country's largest exporter even managed to gain market share in 1991 against Airbus Industrie, an aggressive, European government-supported rival. Boeing won 64% of the world's commercial jet orders, in dollars, up from 61% in 1990. "I'll take that sort of disastrous year anytime," says Richard R. Albrecht, Boeing's executive vice-president for sales and marketing.

Now, the bad news: The fall-off in new orders that Boeing has insisted was a short-term setback may last much longer. After peaking at 1,662 in 1989, worldwide orders of all aircraft fell to 439 last year--not including cancellations. Edmund S. Greenslet, publisher of The Airline Monitor, expects orders to fall to around 250 this year. So far, Boeing has booked 63 orders.

Deferred deliveries, which some see as cancellations in disguise, compound the problem. The company's stock dropped sharply after United Air Lines Inc. and American Airlines Inc. announced plans to postpone deliveries and cancel options of new Boeing planes worth $9 billion. And on Apr. 29, Delta Air Lines Inc. announced it would cut capital expenditures by $5 billion by 2001 and reduce planned acquisitions by more than 100 airplanes--some from Boeing.

Meanwhile, Continental Airlines Inc.'s 50 orders for 737s and 25 for 757s--equivalent to three months of production apiece--remain tied up in bankruptcy court. Industry executives say Northwest Airlines Inc. may do some "fine-tuning" to orders as well. Plus, a near-record 736 used jets are available worldwide for sale or lease--at low prices that may persuade some airlines to forgo buying new planes. Says Steven F. Udvar-Hazy, president of Interna-tional Lease Finance Corp., the world'ssecond-largest aircraft-leasing firm: "We've seen roughly half of the badnews."

The other half may come if the industry's long-awaited recovery doesn't materialize. U.S. airlines had expected strong profits in 1992, but hopes for that are waning as new fare wars cut into the bottom line. European carriers will also find themselves financially pressed as U.S. airlines step up competition. And a Japanese recession is eating into profits at Japan Air Lines Co. and All Nippon Airways Co., both big Boeing customers. Lower debt ratings and the evaporation of Japanese capital will make it tougher than ever for airlines to find financing. Noting that many former lenders are pulling back, James A. Paduano, a general partner at Lazard Freres & Co., says it will take one to two years for new players to gain the confidence to lend significant amounts.

Increasingly, Boeing has had to step in and offer its own customer financing, vying with archrival Airbus to offer ever-more-generous packages. "It's the nature of the market at the moment," says David Jennings, marketing vice president for Airbus Industrie. "It's not something we do willingly."

Airbus is targeting longtime Boeing customers. United, Boeing's biggest customer, is now flirting with Airbus. Louis J. Valerio, a United senior vice-president, says Airbus' A320 may be a better plane for United than Boeing's 737-400. "It carries more passengers and has good fuel efficiency," he says. Soon, Boeing may even have to worry about competition at the high end of the market, which the manufacturer has had to itself for 20 years. Boeing's highly profitable 747 will come under attack if both Airbus and McDonnell Douglas Corp. produce four-engine jumbo jetliners that could carry 200 more passengers than Boeing's 747-400.

Until January, Boeing was able to shift deliveries to healthier airlines eager for new planes. But demand for narrowbodies has fallen so drastically that Boeing will have to sharply cut production of the 737, its smallest model, from 21 to 14 per month, starting in October. Boeing insists it has no plans for further cuts, but analysts worry about the 757, a more modern narrowbody. GPA Group PLC, the world's largest leasing company, has predicted a 42% cut in worldwide deliveries of narrowbodies by 1995.

The production cut hurts. Boeing will still be able to increase deliveries to 440 this year--a world record for commercial aircraft. But it's downhill from there. The company has already announced plans to slash employment by more than 8,000 this year, half because of defense cuts and half because of the 737 slowdown. It has laid off 854 of the 7,600 people to whom it has given warning notices so far. And another big round of layoffs is expected to be announced on May 8. Although demand for pricier widebodies remains strong, Boeing's revenues will suffer as deliveries slow further. And analysts worry that earnings, already burdened by heavy spending on research and development and new factories, will drop, too. At the most bearish end of the spectrum, George D. Shapiro of Salomon Brothers Inc. predicts that Boeing's earnings will fall sharply after 1992.

Boeing executives say that they are not worried. New orders are coming in from such strong Asian carriers as Cathay Pacific Airways Ltd. and Thai Airways International Ltd., and some options are being exercised. Orders jumped 93% for 1992's first quarter, though the comparison must be tempered, since 1991's (during the Persian Gulf war) was particularly weak. Boeing expects orders to rise six to nine months after airlines regain profitability. Meanwhile, it can afford to eat into its backlog, which is more than three times the $25 billion worth of planes it expects to deliver this year.

NO QUESTION. Boeing's long-term forecasts are positively rosy. The company expects air traffic to grow 5.2% per year this decade and next, down from the 7.2% growth of 1970 to 1990. By 2010, Boeing expects air traffic to triple. No one questions that Boeing's long-term prospects are very strong. But to stock analysts, "the next 20 years don't matter--the next six months do," says Cai von Rumohr, an analyst at Boston's Cowen & Co.

Boeing hopes its backlog of pricier widebodies will keep profits from falling. But the company is spending a hefty $1.8 billion on R&D this year, mainly to develop its new two-engine widebody, the 777. Upfront costs are higher than usual because it's doing all the design by computer, hoping to save later by avoiding costly reworking of errors on the factory floor. So far, all has gone smoothly. But if glitches pop up, Boeing might not be able to cut R&D costs to the $1.4 billion to $1.6 billion range, as it expects to next year.

At the same time, Boeing execs must start thinking about whether to proceed on a superjumbo, larger than the 747, and a supersonic jet. Such decisions force them to think long term, doubling their frustration with the Street's short-term focus. In January, the company even hired its first investor-relations specialist to push the message that Boeing's prospects must be judged long term. "Our business is not without its risks and cyclical fluctuations," Chairman Frank A. Shrontz told investors at the annual meeting, "but I'm very bullish about our future." Maybe so, but asking Wall Street to wait several years for that future is a tall order indeed.

    Before it's here, it's on the Bloomberg Terminal.