The future of Boeing as the world's largest aerospace company is being shaped on the banks of two rivers: one is the Chicago, where the company's new world headquarters is being set up; the other is the Missouri, where Boeing's leadership centre is training its top 2,000 executives to think of the company as a single, global entity.
Significantly, neither location is in the Seattle area, Boeing's home town for the last 85 years and still the centre of its largest business - commercial aircraft manufacturing. Largest for now, that is, because the company has embarked on a growth strategy that could see commercial aircraft slip from today's 60% of total revenue to less than 50% - "not by getting smaller, but because the other businesses are growing faster", says chairman and chief executive Phil Condit.
"We expect commercial aircraft to become a lesser percentage of the total company. It could be less than 50%, but it will not be for a while," he says. Reduced dependence on commercial aircraft would be good news for Boeing, which has spent $25 billion acquiring substantial military and space businesses, but still sees its share price tied closely to the inevitable cycles of the airliner industry. "I think the market sees the value of the McDonnell Douglas acquisition, and also Rockwell. The challenge is to get them to think of Boeing in broader terms," Condit says. "We're probably 50-60% of the way down that path."
Key to ensuring that financial markets recognise the full value of the "new" Boeing is the company's three-step strategy:
run healthy core businesses; leverage core strengths into new products and services; open new frontiers.All three stages are essential to meeting the company's growth targets. "If we run healthy core businesses we will grow at 5% per year. We can do much more. Our goal is to grow at 15% a year," Condit says.
That additional 10% is to come from new businesses which Boeing is creating out of its core units using what Condit calls the "next-square" philosophy. "Take new technologies and services to customers we already know, or take a technology we know to an adjacent customer, but don't take a new technology to a new customer. Learning new customers is really hard," he says. "We want to push the boundaries out one square at a time. There is no limit to how far we can go as long as we do it one step at a time."
Following this philosophy keeps Boeing close to its core market - aerospace - and its core skill - systems integration.
"Aerospace defines the space in which we operate. But as a leader, we define the boundaries of aerospace and so can open up the area in which we operate," says Condit. "Large-scale system integration is what we do. It's what our future will be."
The strategy is already unfolding. The company's three main business units - Boeing Commercial Airplanes (BCA), Military Aircraft & Missile Systems (A&M) and Space &Communications (S&C) - are performing well. Sales increased and operating margins improved in all three sectors last year, and are expected to do so again this year. The second step of leveraging the core businesses is already paying off, says chief financial officer Mike Sears, in the growth of financing arm Boeing Capital as well as BCA's Commercial Aviation Services and A&M's Aerospace Support Services units.
The next step in the strategy - opening new frontiers - is already under way with the creation of airborne internet service provider Connexion by Boeing and Boeing Air Traffic Management (ATM) as separate businesses. Boeing digital cinema, a venture to distribute digitised films via satellite to cinemas worldwide, is likely to be next.
"We currently have three major business units. Five years from now we will have four or five, and are likely to have eight within 10 years," says Condit. He expects Boeing Capital to be the first to move up: "It's coming fast and is clearly profitable." Connexion may be next, while ATM is further downstream, he says.
The new businesses face significant challenges. Protracted negotiations with airlines on revenue sharing have delayed the roll-out of Connexion's service to the middle of next year; political sensitivities surround ATM's efforts to revamp the US airspace system; and digital cinema is being promoted to a movie theatre industry that is struggling with overcapacity and large-scale bankruptcies.
"We are under no illusion that everything we try will become a fully-fledged unit. We will set up a number: some will work, some won't," says Condit. "Conn-exion and digital cinema are exciting, but not critical to our long-term plan. Boeing has the resources to try things. The challenge is to behave like a big venture capitalist. Find something and invest in it. If it makes it, it's a win; if it doesn't, move on."
In addition to generating growth in their own right, the new ventures have a role to play in supporting, and in some cases protecting, core businesses. This is certainly the case with ATM. Capacity constraints in the USA and Europe seriously endanger the traffic growth assumptions around which the company has built its forecast of future commercial aircraft deliveries. "Boeing has a strong vested self-interest in finding a solution," says ATM president John Hayhurst. "With $30 billion in business tied up in selling aircraft, we need improved air traffic management to support the market for commercial aircraft."
The first order of business for ATM, therefore, is to catalyse a revamp of the US airspace system that will increase capacity, reduce delays and enhance safety. The company has drawn up a "fundamentally revolutionary" new architecture, but its biggest task is to get all the key stakeholders, including the US Federal Aviation Administration and Congress, to buy into the concept. "This is an extremely complex endeavour. A very large group of shareholders with vested interests needs to be brought together," says Hayhurst. "The most optimistic person would not see this as an easy task."
Making ATM into a business comes later, and is probably five or more years away, says Condit. The market is estimated to be worth $2 billion a year in the USA, and $7 billion a year worldwide. Boeing has no plans to operate air traffic management systems, says Hayhurst. Instead, the business opportunity it sees is in providing the satellite-based network services on which the system is based.
Connexion will support the commercial aircraft and space sectors, by helping both airlines and satellite operators make more money. Increasing the value of satellite transponders with broadband communications services such as airborne internet and digital cinema could also boost Boeing's launch services sector. But Connexion, unlike ATM, offers the prospect of substantial near-term business in its own right - if Boeing has judged the market correctly.
"We are aiming for 10% of a $45 billion market - $4.5 billion in revenues by 2010," says Connexion president Scott Carson. What sets the venture apart from others offering internet access on aircraft is that it is the first to offer broadband, or high-speed, connectivity. "Passengers want real-time connectivity at the same speeds they have in the office," says director of communications services Bob Deal.
Connexion has its roots in military work on phased-array antennas which allow high-speed mobile communications via Ku-band satellites. The service will provide real-time airborne access to the internet and company intranets, live television and radio, and airline and flight information - all for less than 50 cents a minute. Aircraft would be equipped to bring broadband internet access to every seat, but passengers would bring their own "connectivity devices" - laptops or palmtops. "About 70% of business travellers carry some kind of a device," says Deal.
The business model involves Boeing owning the airborne equipment, and airlines paying a one-time fee to hook up their aircraft. Revenue from passenger access fees would be shared. "We think it will take five years to recoup our investment," says Carson. Connexion's plan to establish user accounts for big businesses has led to some difficult discussions with the airlines, which jealously guard their corporate customers. As a result, negotiating complex revenue-sharing agreements has delayed launch of the service until the middle of next year.
"This is a large decision for airlines," says Carson. "It's a question of finding the right balance of revenue sharing and getting the equipment into the cabin so that it works well." Airlines are understandably cautious because of their poor experience with cabin telephone usage and in-flight entertainment system reliability. "The industry has suffered some false starts," he says. Connexion is also eyeing other mobile markets, including business jets, military VIP aircraft and executive yachts.
Boeing has yet to start up digital cinema as a business, but it has demonstrated the capability to digitally and securely distribute first-run films to theatres via satellite and fibre-optic networks. The company is entering the market because it has "great compression technology and point-to-multipoint transmission capability", says Bob Dean, vice-president business development for Space & Communications. "Digital never loses quality and reduces distribution costs. We are well advanced in discussions with the US film industry."
Connexion, ATM and digital cinema all have their origins in Los Angeles-based Boeing Space &Communications (S&C), described as the "growth engine of the company". The business unit had sales of $10 billion last year and is "on track" to double its revenues in five years, according to president and chief executive Jim Albaugh. The sector is Boeing's most diversified, with 38% of its sales in information and communications, including airborne surveillance, intelligence and satellite communications; 26% in missile defence and space control; 23% in human spaceflight; and 13% in launch services.
In line with Boeing's strategy, S&C is leveraging these businesses with development of the new Delta IV launch vehicle and its prime contractor role on the US National Missile Defence programme, says Dean. It is opening new frontiers with the creation of Connexion, development of digital cinema and exploration of "digital battlefield" concepts.
The growth markets for S&C are missile defence, expected to double in size over 10 years, and satellite communications, projected to at least triple over the same period. But not all the businesses are in growing markets. "Launch services is likely to be flat for the next decade," says Dean. "There is and will be overcapacity, so we're investing in becoming the leading provider and expect to capture market share with the Delta IV." The human spaceflight market, which Boeing dominates through its leading roles on the Space Shuttle and International Space Station, is also flat. Here the company's strategy is to maintain market share by keeping the Shuttle in service to 2030.
In the same way that aircraft services have proved a lucrative new business for Boeing's commercial and military sectors, S&C is expanding into space services. In case anybody thinks Boeing is about to head down the high-cost, high-risk route taken by Iridium, Albaugh says: "It's not the same model as the low Earth orbit market. We're not investing in infrastructure." Originally, Connexion was a $5 billion programme involving 10 satellites. "We said find a better way. Now Connexion is not a big investment programme. We're using available technology and infrastructure and applying it to an area that is not served," he says.
The company has become the largest producer of satellites through its Hughes and Rockwell acquisitions. Boeing Satellite Systems (BSS) has the highest production rate and orderbook in the industry, says president Randy Brinkley: 20 satellites per year with over 38 in backlog. "For the last five years the commercial sector has outgrown the military. Now it's two-thirds commercial/one-third government, the reverse of five to seven years ago," he says.
Today the commercial market is coming to the aid of the government sector. Earlier this year, a Boeing-led team was awarded the $1.3 billion contract to build the US Department of Defense's Wideband Gapfiller Satellite system of up to six spacecraft, based on the Boeing 702 large commercial satellite bus. "Our strategy is to offer a standardised bus and customised payload. This shortens cycle time and provides flexibility," says Brinkley.
The number of satellites launched over the next five to 10 years will stay relatively constant, but their capability will increase, says Dean. An example is the three Spaceway broadband communication satellites BSS is building for Hughes Network Systems. The largest 702-series spacecraft yet produced, the Spaceway satellites will feature onboard processing and phased-array antennas. "Customers are demanding more transponders and more flexibility," says Dean.
This is impacting the launch services market, driving demand for heavier-payload boosters. While Boeing's family of 11 Delta vehicles "covers the whole range of payloads we see in the future", says Delta Launch Services vice-president Dave Schweikle, he admits the 4t-class Delta III, first launched in 1995, has been overtaken by events. "Most payloads are now bigger than the Delta III was designed for," he says. Boeing has built 20 Delta IIIs, but launched only three of them.
Until the Delta IV enters service next year, the Sea Launch is Boeing's heaviest lifter. This joint venture with Russian, Ukrainian and Norwegian companies to launch satellites from a floating platform at the equator was formed before Boeing acquired McDonnell Douglas and its Delta line. Now Sea Launch promises to be a valuable adjunct to the Delta IV. Mutual backup agreements have been signed and joint marketing will follow, says Sea Launch chief executive Will Trafton.
Boeing's other launch vehicle, the Space Shuttle, poses its own set of issues. NASA plans to retire the Shuttle in 2012, replacing it with a commercially developed second-generation reusable launch vehicle (RLV). Boeing participates in the agency's $4.8 billion Space Launch Initiative to develop technology for a next-generation RLV, but believes a human-rated vehicle will be too expensive to develop commercially, putting the price at $15-20 billion. Instead, the company is drawing up a plan to keep the Shuttle in service to 2030, its lifetime at current launch rates.
When it merged with McDonnell Douglas in 1997, Boeing became the leading producer of military aircraft and a niche player in missile systems. Last year, St Louis-based A&M saw revenues climb to $12.2 billion and operating earnings to $1.3 billion, making it Boeing's most profitable business unit. With US defence spending on the rise, revenue is expected to grow steadily at 8% a year through 2005, according to president and chief executive Jerry Daniels.
Over this decade, Boeing expects to secure 25% of the tactical aircraft market, 48% of bomber/airlift, 21% of military rotorcraft and 14% of the strike weapons market. The company has 25 international sales campaigns worth $20-30 billion under way, says A&M vice-president business development George Roman: four for fighters, six for tanker/transports, 11 for rotorcraft and four for weapons.
The current impressive production line-up includes F-15E and F/A-18E/F fighters, C-17 transport, AH-64 and CH-47 helicopters, T-45 trainer, Harpoon and SLAM-ER missiles and Joint Direct Attack Munition guided bomb. Boeing is also a partner with Lockheed Martin on the F-22, Bell on the V-22 and Sikorsky on the RAH-66. It is competing against Lockheed Martin for the Joint Strike Fighter programme, scheduled to be awarded later this year.
The military business is not without its challenges. F-15 production is likely to end if Boeing does not win the $4 billion, 40-fighter competition now under way in South Korea. This will leave the F/A-18E/F as the company's sole export offering, but the Super Hornet will not be competitive until the avionics have been upgraded and its cost significantly reduced. While the US Navy is underwriting the upgrade, Boeing has undertaken to reduce the aircraft's price to around $40 million. Changes will include a new forward fuselage, moving final-assembly line and cost-saving partnerships with suppliers.
In line with Boeing's strategy, A&M is leveraging its strengths into adjacent markets. This involves growing its aerospace support business and finding both commercial applications for military aircraft and military applications for commercial aircraft. The latter includes C-32s (757s) for the USAir Force, C-40s (737NGs) for the US Navy and the KC-767 tanker/ transport now being offered to a number of countries. Although the 737 Airborne Early Warning and Control system is an S&C product, the same airframe is the basis of A&M's offering for the US Navy's Multi-Mission Maritime Aircraft requirement to replace the Lockheed Martin P-3 Orion.
Finding a commercial customer for the C-17 military transport is proving more difficult. Although the company sees a heavy, outsize cargo market for around 30 commercial BC-17Xs, it has yet to secure an order. The aircraft will cost $300-400 million to certificate to civil standards. On the military side, Boeing has renewed an offer of 60 additional C-17s to the USAir Force and is pursuing leasing deals with international customers similar to the seven-year, four-aircraft agreement signed with the UK.
Aerospace support, meanwhile, is A&M's fastest growing segment, with its $3 billion in sales expected to triple within 10 years, says director international business development Tim Moreland. There is plenty of opportunity for growth. Worldwide Boeing military aircraft support is worth $4 billion annually, the company calculates, while the total domestic and international military aircraft support market is $70 billion.
Although the corporate strategy and headquarters relocation are intended to emphasise that Boeing is more than a commercial aircraft manufacturer, the building and supporting of airliners remain central to the company's business. With sales of $31 billion last year, BCA remains Boeing's biggest business unit. Revenues are expected to reach $35 billion this year, and grow at 5-7% a year thereafter.
"The market looks good for commercial aircraft," says president and chief executive Alan Mulally. "We will deliver 530 aircraft this year, and around 530 next year. We are making a reasonable return on our aircraft." Operating margins will reach 10% this year, having fallen to 5.4% in 1999.
As the commercial aircraft market is slowing, growth will come from the "next squares" in BCA's market, including training and support, engineering and modifications, and information services ranging from flight planning to airspace modelling. Opportunities exist for fleet management deals such as those struck with package carriers DHL and UPS, which include sourcing, financing, converting and supporting freighter aircraft.
Boeing's commercial aircraft product line is shaped by its philosophy of "fragmentation", which Condit describes simply as more airlines providing non-stop services and bypassing hubs. "We've seen it happen on the North Atlantic, where the average aircraft size has gone down," says Mulally. "Now the 777 is fragmenting the Pacific like the 767 did to the Atlantic."
The company sees its failure to interest airlines in a stretched, rewinged, reengined 747X as proof of the fragmentation theory. So rather than compete head-on with Airbus' ultra-large A380, Boeing has switched attention to what it sees as the ultimate fragmenter - an aircraft with the speed and range to connect any two city pairs in the world non-stop and quicker. "There is a market for very large aircraft, but we think it is small," Condit says, "Our resources are better invested in a smaller, faster aircraft."
Boeing's Mach 0.95-0.98 sonic cruiser also represents another Boeing philosophy - segmentation. This is the trend for airlines to introduce different levels of service tailored to different sectors of the market. Condit cites United Airlines' decision to enter the business-jet fractional ownership market to win back premium passengers. "The opportunity is in front of us for a market shift in the category of segmentation - for a premier product focused on premier clientele," Condit says.
Mulally stresses that Boeing's product strategy is driven by its customers, and not Airbus. Condit is equally adamant: "The transformation of Boeing is not a competitive response to Airbus inroads. First, we wanted a business less attuned to economic cycles. Commercial aircraft will always be economic-cycle dependent, and military and space are on different cycles.
"Second, we have technologies that can move back and forth broadly in aerospace. Our business is to do with large-scale systems integration and commercial aircraft are not that different to military aircraft and spacecraft. Moving technology back and forth either way has advantages," Condit says. "Third, if we want to grow long term, we need multiple paths."
Condit, as architect of the transformation, recognises Boeing must operate globally if it is to grow. "We are more global today than two years ago, but we're not there yet," says Condit. The company has a significant presence in Australia, a design centre in Moscow and is opening a European research and development centre in Spain. "We want to operate globally, but be perceived as local in each country."
Here the leadership centre overlooking the Missouri River comes into its own. Three times a year, in addition to regular courses which deliberately mix managers from the different Boeing businesses, executives visit a country to examine and pursue specific business opportunities. "The result is a broader set of executives with wider experience and attitudes," says Condit. Slowly, but surely, the transformation of Boeing is being felt across the company.
Source: Flight International
