Boeing's double squeeze

By Stephen Trimble

Boeing first-quarter earnings statement spared investors of any major new drama. Although net earnings dropped by halfand the 747-8I passenger model has suffered a new delay, the company appears to have avoided even scarier scenarios, such as an output rate cut for the 737 or new production or design problems for the 787.

On any other quarter perhaps the community of investment analysts would be satisfied. But with Boeing commercial revenues under threat from an unrelenting global economic crisis, and defence sales squeezed by budget cutbacks sought by the Obama administration, analysts remainpessimistic about the company's outlook.

"We continue to expect the commercial aerospace business to get worse and the stock's valuation is not compelling, in our view," Sam Pearlstein, co-head of equity research for Wachovia, wrote to investors on 22 April. "Historically, a declining commercial backlog has not been a positive for the stock."

Indeed, some analysts seem spooked by the omission of more alarming news.

"There's lots to worry about," says Teal Group aerospace consultant Richard Aboulafia. "Boeing isn't talking, and we don't know if that's because they're waiting to see how things evolve or because they just don't want to spook an already scared market."

In the weeks leading up to the first-quarter announcement, Boeing disclosed it must slash 777 production from June next year and trim planned rate increases for the 747 and 767. The 787 is expected to advance to a production rate of 10 a month by the end of 2010, and that plan remains.

On 6 April, Secretary of Defense Robert Gates announced plans for making sweeping budget cutbacks that target several key Boeing programmes, such as Future Combat Systems, the C-17, Airborne Laserand the Lockheed martin F-22, in which Boeing owns a one-third share.

"The market environment couldn't be any scarier," Aboulafia says. "All economic and industry indicators look awful, and many people believe the worst about the Obama administration's plans for defence.

"Most analysts seem quite aware of what's going on," he adds. "Boeing will cut 737 output, but won't talk about it now. Its 787 performance and maturation remains a huge question, but they won't talk about it now."

Boeing chief executive Jim McNerney acknowledges facing an "unprecedented economic environment", but both he and chief financial officer James Bell repeatedly dismissed concerns that a 737 rate cut is unavoidable.

Rather, Boeing's strategy all along focused on restraining growth of the 737 production rate to 31 amonth. The company also had overbooked 737 orders, particularly in 2011 in anticipation of a major demand slowdown, Bell says.

Now, the company has accommodated 60 aircraft delivery deferrals in 2010 and 2011, with slightly more than half belonging to the 737 programme. More deferrals are also being discussed that amount to at least another 60 aircraft during the same period, McNerney says.

But Boeing can still avoid slashing output on the 737 line while it continues to work through the backlog of over-booked orders, Bell says. But he acknowledges that could change if economic conditions do not improve.

Boeing also has not yet given up on certain major defence programmes, such as the C-17. The US Air Force has not requested funds to build another yearly allotment of 15, and Boeing would have to shut down the line in late 2011 if no additional orders from foreign military or commercial customers are received.

However, Boeing's supporters in Congress have inserted the funds to pay for continuing C-17 production for two of the past three years, while Boeing has signed up several foreign customers to also stretch production.

"It's the belief of ourselves and many of the customers we serve that this will remain an enduring requirement, the C-17, and as we go through this budget exercise it will survive," McNerney says. "If confronted with a production line cessation we would go through a normal process to do that, supported by the government. I don't think we're close to that, but we'll have to see."

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