WASHINGTON — When Harry Stonecipher took the helm at the Boeing Co. last week amid management upheaval, he proclaimed that his first duty was to improve the company’s reputation with its largest customer, the Pentagon. But it’s not just Boeing’s reputation that’s been hurting lately.
Boeing’s commercial aircraft business is struggling through an airline industry downturn and a fierce market-share battle with Europe’s Airbus. Boeing’s commercial satellite business, tethered to the dashed hopes of a telecommunications boom, is losing money. The company also has faced criticism for its performance on some defense contracts.
Stonecipher said he is not planning a shake-up, and company officials and industry analysts agree that Boeing doesn’t necessarily need one. But Stonecipher is facing some tough choices about what to sell, expand or stabilize.
One key issue confronting Stonecipher is the future of Boeing’s commercial aircraft business, industry analysts said. During the first nine months of the year, profit in the business fell 85 percent from a year earlier, to $236 million. The unit will lay off nearly 10,000 employees this year, and in November it announced it would close its 757 production line next year. At the same time, Boeing has been losing market share to Airbus, which is expected to surpass it in number of deliveries this year for the first time — though Boeing’s higher prices mean it is bringing in more revenue.
The best chance to regain ground against Airbus lies in the 7E7, known as the Dreamliner, which the company will propose to its board on Dec. 15. It would be the first new plane launched by Boeing in a decade and would reassure Wall Street that the company is committed to staying in the commercial aircraft business, analysts said.
Stonecipher has said he supports the plane, but some analysts remain skeptical. When Stonecipher was at the helm of McDonnell Douglas Corp. before Boeing acquired it in 1997, McDonnell did not invest in any new commercial aircraft and eventually was forced out of the business, industry analysts said. Development of the 7E7 would be expensive for Boeing, costing about $7 billion.
Even if Boeing is able to get partners to put up half the money, $3.5 billion is a lot to risk for a bottom-line-oriented executive such as Stonecipher, said Richard Aboulafia, a vice president for Teal Group Corp., a consulting firm in Virginia.
"He has a reputation as an excellent cost cutter, but he’s focused on exactly one customer, the U.S. government," Aboulafia said. "He has a history of strangling the commercial business by not investing and avoiding risk."
Stonecipher also must decide what to do with Boeing’s commercial space business. Boeing spent billions of dollars in the 1990s to get into the business, but just as the company solidified its place in the satellite and launch industry, the telecommunications sector that it relied on for business collapsed. In July, the firm took a $1 billion charge to account for unexpectedly high costs to complete some satellite programs and write down inventory.
The commercial satellite market will remain weak for the foreseeable future, forcing some competitors out of the market, said James Lewis, director for technology and public policy at the Center for Strategic and International Studies. "The question for Boeing, like for everyone, is, ‘Is it worth keeping a seat at the table as a satellite manufacturer?’ " Lewis said.
If Stonecipher lives up to his reputation as a cost cutter, he may balk at the unit’s continuing losses, said Marco Caceres, senior analyst and director of space studies at Teal Group. During the third quarter, the Launch &Orbital Systems unit lost $58 million.
James Albaugh, president of Boeing Integrated Defense Systems, recently illustrated the firm’s quandary. "I want to be in it. I love the zoom and boom," he said at a Morgan Stanley conference in September. "But we also have an obligation to our shareholders, and if we can’t make money, we will exit."
Stonecipher must also ensure that the company lives up to the promise of its aggressive push into defense contracts. Boeing surprised competitors when it won the contract to develop the Future Combat System, a program to update troops and equipment in the field, worth a potential $90 billion over several decades. It secured a position as the prime contractor on the national missile defense system and is churning out one of the military’s favorite weapons, the joint direct attack munition, or JDAM, a smart bomb.
But the company’s performance on one of its most high-profile contracts has been criticized. In January, the National Reconnaissance Office poured an additional $4 billion into a Boeing contract to develop a constellation of spy satellites. A Pentagon report found that the program had been underfunded, but also was plagued by technical problems. The satellites were too heavy, and neither the government nor Boeing understood the complexity of the company’s proposal, which required major technological breakthroughs, analysts have said.
Also, Boeing’s government space business is operating under an ethical cloud. In July, the Air Force found that Boeing employees possessed stolen proprietary Lockheed Martin Corp. documents while the two firms competed for a rocket launch contract. Boeing was stripped of $1 billion in business and suspended indefinitely from bidding on new space contracts. The Air Force had said it expected the suspension to be lifted by November, but now is considering revelations of other ethical lapses before it makes a decision.
Most pressing on Stonecipher’s agenda will be saving an Air Force tanker contract worth $17 billion to $18 billion. The Pentagon put the program on hold after Boeing fired chief financial officer Michael Sears, a 30-year Boeing veteran, and Darleen Druyun, a senior vice president, for violating company policies on hiring. Sears recruited Druyun to the company while she was negotiating the tanker deal on the Air Force’s behalf and supervising hundreds of other Boeing contracts, according to a Boeing inquiry. In the wake of those dismissals, Philip Condit, Boeing’s chairman and chief executive, also stepped down and Stonecipher, who was on Boeing’s board, was named to replace him.
The Pentagon’s inspector general is investigating whether the improper contact tainted the deal, which has been criticized by Sen. John McCain, R-Ariz., as a sweetheart deal for Boeing. If the program is dashed, production of the 767 — on which the tankers would be based — could be forced to shut down as early as 2005 because of dwindling orders, industry analysts said. Boeing would also have to take a $180 million to $270 million charge for investments it has already made in the program.
"Getting the tanker program going and reassuring the government that we are not only compliant but an exemplary supplier to them is one of the first, foremost, and most immediate tasks I have," Stonecipher said.
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