Boeing Throttles Output Back, Awaiting Upturn
SEATTLE — ITS customers in the airline industry have lost $9 billion since 1990, but the Boeing Company is spending $1 million a day on plant and equipment to improve its Seattle-area facilities.
That investment demonstrates that the world's leading aircraft manufacturer recognizes the serious long-term challenges it faces.
But because it cannot ignore the short-term picture, Boeing is slowing production and cutting its work force. Yet the company is preparing for a future in which demand for aircraft will be high and the competition higher.
"It's difficult to compete with Airbus," Europe's government-subsidized consortium, says Bill Whitlow, an analyst with Pacific Crest Securities in Seattle.
This summer, for example, United Airlines broke its tradition of ordering from Boeing and ordered 50 A-320s from Airbus Industrie on favorable terms that Boeing could not match.
Boeing aims to meet the Airbus threat and expand market share beyond the current 60 percent. "I think it's a reasonable goal, ... but it's going to be very difficult," Mr. Whitlow says.
The company is fighting the battle on several fronts:
* Foreign partnerships and supplier relationships: Boeing sells most of its planes overseas, and turning to foreign suppliers for components can nudge national airlines toward a purchase of Boeing planes.
China, Indonesia, and Australia are among those that have formal "offset" agreements, in which a percentage of the purchase price of aircraft is offset by a contract for parts - provided they meet Boeing standards.
JAPANESE companies will supply 20 percent of the components for Boeing's new 300- to 400-seat jetliner, the 777, scheduled for delivery starting in 1995.
Moreover, the development of a new large jet (600 or more seats) or supersonic jet would be so expensive that Boeing would seek equity partners.
Since several Asian nations, including Taiwan, are eager to expand their aerospace business, some observers have worried that such partnerships will give technology to would-be competitors. But the bigger danger could lie in avoiding such partnerships.
"Asia will either be a partner or a competitor," says Wolfgang Demisch, an analyst with UBS Securities in New York. Mr. Demisch adds that if the beleaguered McDonnell Douglas Corporation, the No. 3 manufacturer, remains a viable player in the industry, an Asian version of the Airbus consortium becomes less likely.
* Cost-cutting: Already the industry's low-cost producer, Boeing hopes to reduce rework by boosting quality and shortening production cycles (it recently cut a day of time spent on each 200-seat 757, saving $13 million a year). Also, the design of new planes is gaining efficiency from the company's large investment in computer technology.
"Our products will be better and less expensive," says Randy Harrison, a company spokesman.
* Ending subsidies: This summer the United States and European Community reached an agreement to limit government "launch aid" to about one-third of development costs for future aircraft. The agreement, under negotiation for six years, "is a good start," Mr. Harrison says.
In the past, such aid has provided about three-quarters of the development money for Airbus planes, without which the programs would not have been possible, according to a 1990 study by Gellman Research Associates.
"Obviously Airbus has more avenues open to them" than Boeing, says one of the authors of the study, Richard Golaszewski, referring to Boeing's loss of the United Airlines deal.
Boeing's cost-cutting should help it offer better deals. The question is, when will airlines start buying again? Analysts say that depends on when they start earning a profit again.
Even the healthiest US carriers are struggling as bankrupt or near-bankrupt competitors, hungry for cash, lead the industry through a string of fare wars.
"Now they've got fare cuts going well into February," Whitlow says. "Summer rates are key," since that is a busier season.
Jetmakers are "supplying an industry that is undergoing wrenching change," Demisch says. "The world is only beginning to open up the transport market to private enterprise.... The transition is not a smooth or an easy one."
Indeed the US, where deregulation came more than a decade ago, has borne the lion's share of the recent industry losses.
ALTHOUGH it still has a large backlog of orders to fill, Boeing laid off 6,500 workers this year, and will shed at least 2,000 more next year as it slows production of its midsize 757 and 767 airliners. The company employs 144,000 people, two-thirds in the greater Seattle area.
Phil Condit, Boeing's new president and heir-apparent to chairman Frank Shrontz, recently said production of the 747 may also be cut if conditions in the industry deteriorate further.
The job losses might have been worse, but Boeing's management allowed the backlog to build up in recent years rather than to increase staff to fill the boom in orders.
As it is, Boeing will still deliver 437 planes this year - twice its historic average. But where commercial-aircraft revenue fell dramatically during slowdowns in the late 1960s (down 50 percent) and early 1980s (35 percent), this time the decline is expected to be less than 25 percent.
Although layoffs have been held far below previous downturns, the company faces an unprecedented test on the labor front: A week ago its unionized engineers and technical workers authorized a strike over wages that could start as early as today.
Whitlow says a strike is unlikely before the end of the year, since these white-collar workers are "not the type of people who typically strike" and many of their co-workers are not in the union.
The company's problems have caused investors to flee the stock. It has traded as low as $33 per share recently, down from a high this year of $54.
Still, Boeing remains confident of the long-term outlook, predicting that the world's commercial fleet will almost double in size to 17,000 planes by 2010. Almost half of the current 9,000 aircraft in service will need to be replaced by then, the company predicts.
This strong growth is based on the assumption that as incomes rise people will travel more. Boeing predicts an average annual increase in worldwide traffic of 5.2 percent a year, with particularly strong growth in Asia. China is expected to boost its demand for airliners by an astounding 20 percent a year this decade.
China's booming market could be lost to Boeing if Bill Clinton revokes that country's most-favored nation trade status. Chinese officials have threatened to retaliate by blacklisting Boeing.