Misery At 10,000 MetersDori Jones Yang
Even by the standards of the past several years, the recent news from Boeing Co. has been grim. Huge orders expected from Saudi Arabia and China have yet to materialize. And in January, Continental Airlines Inc. abruptly announced plans to defer delivery of 40 jets, while USAir, Air France, and All Nippon Airways delayed delivery of an additional 22 planes. Citing the shortfall, Boeing said it would pare production and cut 7,000 jobs.
The bright side? Boeing has company. The aircraft business, mired in a downturn deeper and longer than most industry executives had predicted, is terrible for everyone. "It has been an excruciating and protracted period," says Paul Nisbet of JSA Research. Even as it celebrates topping Boeing in orders for the first time ever, archrival Airbus Industrie, the European aircraft consortium, recognizes that business is slumping badly. McDonnell Douglas Corp., the industry's distant No.3, threatened on Feb. 6 to shut down production of its vaunted MD-11 widebody for six months if sluggish demand persists.
ANALYSTS CHEER. Amid the doldrums, Boeing's profits fell 31% last year, to $856 million, on revenues of $21.9 billion. Earnings could drop an additional 20% this year, analysts say. Still, the jet giant probably is stronger, in the long run, than the headlines indicate. That's because Boeing has moved so aggressively to cut costs. Atop 48,500 job cuts in five years, it has shortened production cycle times, slashed inventory, improved production processes, and automated parts of its factories. Now, Boeing plans to move aggressively to cut research and development expenses and lay off engineers and managers, relatively immune from previous reductions. Despite falling output, profit margins improved last year. "Boeing's performance during this cycle has been little short of spectacular," says Wolfgang H. Demisch at BT Securities Corp.
Airbus, meanwhile, enjoyed a deceptively strong 1994, booking a big leasing-company order on the last day of December. Its orders were higher than Boeing's, but "what really matters is how many airplanes you produce and deliver to customers," says Boeing President Philip M. Condit. And Boeing's 271 deliveries were more than double those of Airbus.
Layoffs haven't been as severe at Airbus. But that's largely because labor practices in Europe constrain its four member companies from hiring and firing workers readily. Airbus often keeps workers on even when production falls. "I don't think Boeing is being hurt worse than Airbus," says Terry Moulton, managing director of Airline Capital Associates Inc., a New York-based aviation consulting firm. "Boeing is down to where they want to be. Airbus is not capable of scaling back."
The industry downturn will likely persist through much of this year, as airlines nurse their fragile finances back to health. Although air traffic is growing at a record pace and profits are returning, continued fare wars have kept profits low--and heavy debt still weighs down balance sheets. As a result, airlines are flying planes longer each day and keeping older planes in their fleets.
Northwest Airlines Inc. and Delta Air Lines Inc., for example, plan to retrofit dozens of old planes to quiet their engines instead of buying new planes. Northwest figures that over the next 10 years, it will cost $6 million apiece to upgrade 120 aging DC-9s, a fraction of their $25 million replacement cost. So new-engine orders are at an all-time low.
SHARP REBOUND? But most plane manufacturers now predict that orders will pick up in late 1995 or early 1996, depending on this summer's air traffic. Some expect the recovery to be slow at first, with a strong pickup by the end of the decade, when noise requirements will force many older planes into retirement. A few expect a sharp rebound, as orders from U.S., European, and Japanese airlines supplement existing demand from the rest of Asia. "They'll be off to the races within the next year," says Michael K. Lowry, president of Aviation Forecasting & Economics.
Whether the recovery is slow or fast, Boeing's Condit hopes quicker response time will allow his company to ramp up production as easily as it has ramped down. "Long-term, one of our great strengths is our ability to respond when the market needs change," he says. Just now, what the market needs is a few more orders.