Boeing Cuts Its Altitude As The Clouds Roll In

The timing was mere coincidence. But when Boeing Co. announced massive production cuts on the same day that IBM Chairman John F. Akers agreed to step down, one had to wonder: Is Boeing, too, a U. S. titan that has lost its grip? Its steeper-than-expected production cuts, announced on Jan. 26, and the likely loss of 20,000 jobs made that seem possible.

Looks may be deceiving, though. The largest U. S. exporter, Boeing has maintained its historical market share of at least 55%. And while the aerospace business is going through wrenching changes, Boeing is positioning itself for a rebound. "We're seeing the seeds sown for the next boom," says Donald Garvett of aviation consultant SH&E Inc.

CAUTIOUS. In the near term, the cuts, forced by tough times for airlines, will eat deeply into Boeing's sales and profits. The company had earlier slashed production plans for 737s, 757s, and 767s. Following deferrals by U. S. and foreign customers, the manufacturer cut those further and added highly profitable 747s to the list. From peak to trough, the cuts represent a 40% drop. But Boeing President Philip M. Condit says this downturn is less severe than those of 10 or 20 years ago, because Boeing was more cautious this time about increasing production. Still, NatWest Securities Corp.'s Nicholas P. Heymann predicts Boeing's revenues will drop to as low as $20 billion in 1994, from $30.2 billion last year (chart). Sales may pick up in 1995, when deliveries of its new 777 begin, but Condit won't predict a turnaround even by then. "Airline profitability, not only domestically but worldwide, will set the timing for a rebound," he says.

Most experts now expect the cycle to turn by the latter part of the decade. But Boeing will have to wrestle with new problems long after orders start climbing again. With major airlines turning short routes over to smaller, regional airlines, the demand for 737s may diminish in favor of smaller, 70- to 90-seat jets. Right now, Boeing doesn't make a plane that small. And with traditional lenders shunning the airline market, Boeing will have to provide more financing for airlines, possibly straining resources for research and development.

But Boeing can maintain its leadership. Already acknowledged to be the low-cost producer, it's cutting costs further by relying heavily on computers for design, reducing costly rework in the factory. The company's willingness to lay off thousands is further evidence that it intends to stay lean. It's even risking friction in its once-pacific relations with its engineers' union. Boeing refuses to sweeten its offer to those employees, despite their one-day strike on Jan. 19.

FOREIGN DIPLOMACY. Moreover, unlike IBM, Boeing does not rely on an outmoded product or face a huge field of fierce small competitors. With a smaller customer base than IBM or General Motors Corp., another ailing giant, Boeing stays closer to the needs of its buyers. Nor is it watching helplessly as foreign companies gobble market share. Boeing delivered 60% of all jets last year and booked at least 60% of all new orders. Its chief rival, European consortium Airbus Industrie, has gained--mostly at the expense of McDonnell Douglas Corp., the No. 3 player, which may exit the commercial-airliner market. "In five years, Boeing and Airbus will have the market to themselves," says Bertrand d'Yvoire, president of Consultair in Paris.

Boeing has also mastered the art of co-opting potential rivals. During the 1980s, it carefully increased the amount of subcontracting work it parceled out to the Japanese. Boeing also buys parts from China, Korea, Italy, and others. By steering revenues to those subcontractors and sharing its expertise with them, Boeing helps drum up business from those countries' state-owned carriers.

All that may be a mere warm-up for the next step. To create the next-generation jet--a "superjumbo" of 600 seats or more--Boeing may eliminate competition altogether. A day after announcing the production cuts, Boeing said the four partners in Airbus would join it in conducting a study on the feasibility of developing the huge jet.

The drumbeat for change doesn't stop there. Encouraged by retired Ford Motor Co. CEO Donald E. Petersen, a Boeing director, Chairman Frank A. Shrontz is pushing his top 15,000 white-collar workers through a course in "world-class competitiveness." A 384-page course manual begins with this from Shrontz: "During the past decade or so, we've seen a number of great American industries surrender their leadership to competitors abroad. It would be tragic if we allowed the same fate to strike the U. S. aerospace industry." With Boeing's recent moves, it hardly seems likely.

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