Boeing Will Get Smaller to Grow Faster

The giant plane maker plans to close a huge plant and outsource more parts to boost efficiency, combat rival Airbus, and impress the Street

In a dramatic move that could save Boeing Co. (BA ) an estimated $1 billion a year and make it a leaner global player, the plane maker is planning to shut down its massive 737 and 757 assembly lines on the southern outskirts of Seattle and combine them with the existing 747 widebody plant to the north in Everett, Wash., people close to the decision have told BusinessWeek.

The plant closure is part of an effort to help the company surpass Europe's subsidized Airbus Industrie. In addition, Boeing plans to accelerate efforts to outsource more component work, cut a number of suppliers, and sell off real estate in 27 states. And, for the first time ever, Boeing could farm out the manufacture of airline wings for the new 747X jet -- to Mitsubishi Heavy Industries in Japan. "The fact they are willing to outsource a wing is a major step to becoming a new kind of aircraft company," says Edward Jones analyst Bill Fiala. "Boeing doesn't need to be in the wing, engine, landing gear, or electronics business."

Boeing spokesman John Kvasnosky declined to confirm whether the division outside Seattle would be moved, but he said the company continues to look for ways to reduce real estate and shrink factory capacity. "We continue to be in a tight, competitive environment," Kvasnosky said. "We have to continue to keep reducing costs."


  The roughly 8,000 employees at the plant due to be closed, in Renton, Wash., will be given the option of driving 30 miles north. Boeing is counting on attrition to trim that workforce, but it can anticipate trouble with the unions. If Boeing goes through with the closure, "our members would be highly upset [and] come out swinging," says International Association of Machinists President-elect Mark Blondin. The IAM represents 26,000 hourly workers at the aerospace company.

Trouble is, Boeing may not have the luxury of waiting. Airbus has shrewdly combined political savvy, innovative airplane designs, and government subsidies to snatch nearly 50% of the global commercial airplane market. It has won airline and passenger kudos for wider cabins in its smaller jets, for its pioneering use of new technology such as fly-by-wire controls for pilots, and for its zest for dealmaking.

Now, the European plane maker is raising the stakes by launching its all-new A380 superjumbo aircraft. The 555-seat, double-decker has notched 60 orders and threatens Boeing's 30-year monopoly on highly profitable jumbo jets. Airbus has also offered discounts of up to 40% off the $220 million list price, say industry executives.

Boeing's counter to the A380 -- an upgraded and enlarged 747 jumbo jet -- has yet to book its first order. And Boeing execs complain they can't match Airbus on pricing and still make a profit. Says Lehman Brothers analyst Joe Campbell: "If Airbus keeps going the way it's going, Boeing doesn't have a very strong 747 line."


  Despite the potential for political uproar in the Seattle area, Boeing execs plan to recommend to the board in February that the Renton assembly factory be shut down in a phased process that could take up to seven years to complete. Last year, that division earned nearly a $1 billion in estimated profit on an estimated $11.4 billion worth of airplanes flowing through its assembly lines.

Boeing first will tackle the slower-selling 757 assembly line. Segments of the assembly process will be farmed out or moved to different locations within the company. Alenia of Italy, an Italian aerospace supplier, will build fuselage panels for the 757. Boeing's Wichita (Kan.) production plant will assemble the 757 fuselage sections, company sources say. Both jobs are done in Renton today.

Boeing then will move the 757 final assembly line to vacant space inside its cavernous Everett plant, the world's biggest factory. Room also will be carved out for the final assembly of Boeing's popular-selling 737 series, which will follow the 757 to Everett a few years later. Renton's highly automated wing line and its aircraft-engine assembly operation likely would go north as well. "We'd get that [757 line] under control and get it stable and learn from it," says a Boeing official. "Eventually, we'd move the 737 line."


  The relocation would require little, if any, additional capital costs and put prime industrial real estate just south of Seattle up for sale. Unclear is how much it will cost to truck big tooling jigs and other heavy manufacturing equipment to Everett. Additionally, people still will have to build airplanes while moving the production lines up north -- an engineering feat fraught with potential hazards. Even so, a Boeing official calls the potential savings "dramatic."

Relocating the Renton division falls into Boeing's broader cost-cutting strategy aimed at shrinking plants, overhead, and other real estate. The goal is to better manage company assets and eliminate factory and office capacity. Vacancy has run as high as 80% in some facilities. Boeing has shed more than 50,000 jobs nationwide from its peak of 238,600 in 1998. More than 25,000 came from the commercial airplane division.

The company last year sold its St. Louis parts fabrication plant to GKN Aerospace, reducing assets by 15% and shifting 1,700 employees to the British supplier. Boeing also is consolidating most of its Delta rocket production at plants in Pueblo, Colo. and to Decatur, Ala., a move that eliminated 600 production and support jobs and shifted rocket assembly out of costly Southern California.


  But analysts believe the most dramatic savings can be found inside Boeing's commercial jet factories. Located near Seattle and in Long Beach, Calif., they have enough capacity to build nearly all of the commercial airplanes in the world -- more than 800 jetliners. For years, Boeing has tried to streamline and overhaul its archaic and cumbersome production processes but with little success. And in 1997, executives realized their worst nightmare: Record order boom overloaded the antiquated and inefficient system. Managers had to shut down two assembly lines, causing a pileup of unfinished airplanes. Result: Boeing logged its first annual loss in half a century.

While Wall Street has applauded Boeing's impressive rebound over the past three years, some still remain skeptical that the company can truly overhaul its costly factory system. "I think Boeing has a long way to go," says Campbell of Lehman Brothers. "The question is: How can they become more efficient in the factories and change the structure of the company?"

Underscoring those concerns, investors had a mixed response on Jan. 17 to Boeing's stellar fourth-quarter earnings, which beat estimates for the eighth consecutive quarter. Despite expanding profit margins and free-cash flow exceeding $4 billion, shareholders yawned, and the stock has slipped from 58 3/17 on Jan. 17 to 57 7/17 on Jan. 24.


  Boeing is under pressure to generate 15% profit margins across its operating units. Though the company is diversifying into higher-margin services businesses, it still relies on the commercial aircraft division to generate 60% of its $51.3 billion in annual revenue.

Last year, the company squeezed 7.4% profit out of its businesses. That was a 25% improvement over 1999, but a telling reminder of how far the world's largest aerospace company still needs to go to please Wall Street. CEO Phil Condit insists that Boeing would continue to extract costs out of its commercial operations and elsewhere. "We've got three to five years here where I think we've got great margin play," Condit told analysts. "There are just tremendous opportunities."

After its 59% runup last year, Boeing's stock has a tough road to travel. Other factors such as a potential slowdown in airplane orders and rising fuel costs also are contributing to a cooling enthusiasm for the stock.

With commercial jet deliveries expected to flatten over the next two years and Airbus turning up the pressure, it looks like Boeing has decided it can't afford to wait another day before becoming that "new kind of aircraft company."

By Stanley Holmes in Seattle

Edited by Douglas Harbrecht

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