The extraordinary changes that have wrought at Boeing in the last six years have left it better prepared to succeed globally
Boeing has a vision, and is sticking to it through the longest down cycle in decades. The strategy calls for the company to diversify its business base and reduce its dependence on highly cyclical commercial aviation. "I'm glad the strategy is there in such tough times," says chairman and chief executive officer Phil Condit.
The vision was crafted in 1996, when Boeing was 80% commercial. This year it will be 55% defence, through a combination of the civil downturn and military growth. This dramatic change results from a series of acquisitions and mergers that have balanced Boeing's business portfolio and expanded its global presence.
"In late 1995/early 1996, I felt that we needed a long-view strategy," says Condit, "so we took a 20-year look to 2016, which happens to be Boeing's 100th anniversary. We were going towards 80% commercial aircraft. We asked ourselves: if we won every single military competition, would we change the picture much? The answer was no. The only way was through mergers and acquisitions."
A year later, Boeing merged with McDonnell Douglas, in one move achieving its desire for business and geographic diversity. "We moved on becoming global more quickly than we thought," says Condit. "The integration into a single company has been a success." Boeing today has more than a touch of McDonnell Douglas in its make-up, not least in its financial discipline.
"This is a company in transformation," says chief financial officer Mike Sears. "We are moving from a product culture to a business-focused culture. On the military side, they would provide a product, then negotiate a price. On the civil side, they would say what's the next aircraft look like?" Now Boeing is focused firstly on running healthy businesses and secondly on developing new products.
Decision time
The biggest decision facing Boeing is whether to launch the 7E7 airliner. After abandoning the larger 747X to pursue the Sonic Cruiser, then shelving the high-speed airliner in favour of the super-efficient 7E7, it has been accused of having a muddled product strategy. "For 30 years, the process of getting an aircraft to market has been relatively messy," says Condit. "The 777 started as a 767 derivative and the 767 started as the QSH, a very quiet aircraft, but came out much more conventional. The process, while messy, is constructive. We shouldn't worry about trying a couple that don't work out."
The 7E7 is aimed at the same 200- to 250-seat 757/767 replacement market as was the Sonic Cruiser. The technologies are the same too, but applied to efficiency rather than speed. "The technology of design and manufacture is more important than the product," says Condit. "It has never been that way before. We began the process on the 777 and moved it over to the JSF, where we learned a lot, then carried it right back again. If the 7E7 does not go, we will find the right vehicle."
But Condit says the 7E7 is "likely" to happen. "We had better be in the 200- to 250-seat market with a good aircraft. I think we can get there." As well as giving 737 operators something to grow into, and 777 operators a smaller aircraft with similar range, Condit believes that the 7E7, with its reduced operating costs, could create new markets. "I have no idea when it is going to break, but the international low-cost market will be big, and it could be the 7E7's."
Equally as important as the technology is the business model, because the 7E7 will be the first Boeing developed with substantial risk-sharing participation. "When we pick a supplier, he gets a 25-year value stream," says Sears. "When you look at the life cycle of the revenue generated, I see a case for suppliers paying to be on the programme and not just getting that revenue stream for nothing. Then we all share in the risk and reward."
Board approval to offer the 7E7 to airlines is scheduled for late this year or early next. There have been reports of a board split over the 7E7, which Boeing has dismissed as healthy debate. "It will only get launched when the board says we can spend the money," says Sears. "We need to look at the business model and understand the business case. Whether we go and buy Raytheon or invest in the 7E7 will be decided by Phil Condit and Mike Sears."
Despite his half-joking reference to Raytheon, Sears sees little room for further major consolidation in the industry. "The Department of Defense will not let Boeing, Lockheed Martin or Northrop Grumman merge. Below that, with Raytheon it is different, but Boeing does not want to be vertically integrated." Internationally, only BAE Systems could be considered a merger target, he says, because of the UK/US relationship on technology transfer.
Before that, Sears expects Boeing's wide-ranging alliance with Italian aerospace and defence state holding company Finmeccanica to move quickly. Signed in January, the agreement is the first of its kind between the US manufacturer and a European company. Previous deals were inked project by project, and Finmeccanica subsidiary Alenia already co-operates with Boeing on commercial aerostructures, 767 aerial tankers and space systems.
Costly diversification
Boeing has invested heavily in its diversification strategy, following the $3 billion acquisition of Rockwell's aerospace business, the $13.3 billion McDonnell Douglas merger, and the purchase of Hughes Space & Communications for $3.75 billion and Jeppesen for $1.5 billion. But its share price continues to be tied to commercial aircraft.
The share price is grounded for two reasons - the continued crisis in the airline industry, and concerns about performance in the defence sector. "Every quarter for the last five we have said 'oops'," says Sears. Charges have ranged from overruns on development of the airborne early warning and control 737 to write-downs on asset values and lease rates at Boeing Capital. Aircraft financing and unfunded pensions are still concerns.
The airline industry is undergoing "fundamental changes", says Condit. "Some are due to market forces. The move to low-cost carriers was going to happen, but it may have accelerated." After seeing its theory of fragmentation proved right with the rise in point-to-point service, Boeing is now talking about segmentation, with airlines differentiating themselves by level of service.
"This cycle could change things for the airlines, although it could take 10 years," says Sears. "A step-change in labour costs for the majors will not be enough. The low-costs are taking market share and people are looking for value. The majors, as they have evolved, cannot survive. Simply cutting costs will not suffice." Condit says US airlines have yet to shed the infrastructure they built before deregulation. "They are still in the process of deregulating."
Sears adds: "Investors are concerned about commercial, if there really is 10 years of change ahead for the airline industry. The uncertainly discounts our future cashflow and is a big drain in the share price." To tackle concerns over Capital, Boeing will limit its total exposure to aircraft financing "so it will never endanger the liquidity of the company", he says.
Looking long, not down
Despite the commercial downturn, Boeing's strategy has unfolded without significant discrepancies, says Condit. Even in the depths of the down-cycle, the company is taking the long view. "Historically, we have pulled everything in to keep our own operations running, and have injured our supply base," he says. "We have got to have healthy suppliers, so we are correct to right-size our operations."
Cost reductions at Boeing Commercial Airplanes are "sustainable and fundamental", says Condit, and Sears points out: "In a commercial downturn, BCAis making money - and this is anything but a normal downturn. As the commercial business gets going again, BCA's profits will skyrocket."
The strategy has required some adjustment, not least in the satellite sector. "Going in, we thought the strong market was commercial," says Condit, "but it looks a lot like commercial aircraft. The reality is a strong military business, supporting commercial." Boeing has restructured its space sector around military satellites and launches, using the new Delta IV. "Launches are not core to our vision - satellites are, but when you have a first-class launcher, you ride that horse."
Despite losing the Joint Strike Fighter competition in 2001, Boeing's defence business is growing, boosted by winning two key network-centric programmes, the US Army's Future Combat Systems and the Joint Tactical Radio System. Creating Integrated Defense Systems is helping to weave network-centric thinking throughout its military business. "We did not see network-centric in our 2016 vision, but it's in there now," says Condit.
So, will Boeing still be building airliners two decades from now? The fact that such a question can be asked shows how much the company has changed in the past decade. Sears makes it clear that whether Boeing builds another airliner will be a business decision, not a product decision. But Condit says: "I think we will still be building commercial aircraft in 2016."
Source: Flight International
