With demand for commercial jets losing altitude, Boeing (BA) reported a $56 million net loss for the fourth quarter of 2008 and said it is taking some tough steps to keep itself aloft. Will the moves pay off? It's not clear, and Boeing managers for now say they can't see well enough beyond 2009 to make a firm call. The "visibility" just isn't there from 2010 and beyond, says CEO W. James McNerney Jr.
Boeing on Jan. 28 reported surprisingly bleak results, even as its top executives forecast a modest rebound in sales this year. McNerney, citing "challenging economic times," doubled the number of jobs he plans to cut this year. Whereas Boeing on Jan. 9 said it would lop some 4,500 jobs from its commercial plane unit, McNerney hiked the figure to 10,000 on Jan. 28 and said the cuts would be spread all across Boeing's global operations, most of them in places other than the company's Seattle-area commercial-plane facilities. Such steps, amounting to a 6% trim in Boeing's workforce, are needed to preserve the company's financial strength, McNerney maintained.
For now, Boeing is sticking with plans to put its new 787 Dreamliner commercial jet into the air by June. After nearly two years of delays, the 787 remains on target, the company said. So far, only one customer has backed off on orders for the new plane, and its orders were scheduled for delivery late in the next decade. Boeing has some 895 orders on the new jet from 58 customers.Impact of Machinists' Strike
Clearly, McNerney feels he must move aggressively to preserve the company's profit margins as tougher times loom. The company blamed most of its fourth-quarter loss on the 57-day machinists' strike that brought plane deliveries to a halt. The stoppage cut revenues 27% from the closing quarter of 2007, to just $12.7 billion, and trimmed operating earnings by some $1.2 billion.
In addition, Boeing had to charge off about $685 million because of costs in a delay-plagued update to its line of 747 superjumbo jets, including a freighter now due out late next year and a passenger version of the old plane planned for mid-2011. The red ink also included a reserve Boeing has set aside for litigation over faulty satellites.
The problems drove down full-year 2008 net income by 34%, to $2.7 billion, while revenues fell 8%, to $60.9 billion.
McNerney expects that sales will come back. With some 480 to 485 commercial planes on target for delivery this year—up sharply from the strike-shortened tally of 2008—he's predicting that sales will climb to between $68 billion and $69 billion for 2009. Still, this will be up modestly from 2007, when revenues came in at $66.4 billion.
But the CEO is pointedly not making any predictions for 2010 yet. Boeing managers believe they can forecast sales gains for this year because planes ordered long ago will only now be delivered. (The company records sales on the delivery of its planes.) But McNerney did say he expects some orders to slip for planes due out later, as airlines—especially those outside of North America—retrench in the global slowdown.Cuts in Support and Administrative Staff
Even as the company makes plans to downsize, it is expecting to keep engineers and assembly-line staff on the job. The cuts in the commercial plane unit are expected to fall largely on support and administrative staff. Boeing already is feeling a strain from reduced labor in some of its production areas. In explaining delays in producing the new versions of its 747 plane, Boeing cited "limited availability of engineering resources inside the company." The planemaker also faulted design changes in the plane.
Unsurprisingly, the plans for job cuts are getting a cold reception from union leaders. Charging that delays in the production of the Dreamliner was a result of "poor management decisions" and "a business model that failed miserably," International Association of Machinists & Aerospace Workers District President Tom Wroblewksi said Boeing should cut contractors before axing employees. Boeing has not yet said how many—if any—production workers will be trimmed, but the union chief vowed that "subcontractors remaining on the property while our members receive layoffs are totally unacceptable and will be challenged."
Even amid all the problems, some analysts believe Boeing will do well at least this year. Aviation analyst Paul Nisbet of JSA Research argues that the company is still blessed with a 3,700-plane order backlog and that any cancellations or deferrals of orders by hard-pressed airlines will be offset by demands from other carriers in better financial shape. Nisbet adds that production for most of Boeing's jets is humming along at or near capacity. Moreover, he says the long-delayed 787 should soon take wing. "You look at all these factors together and it's a brighter picture for this year than many analysts and investors were anticipating," Nisbet says.
But for 2010, the analyst shares CEO McNerney's uncertainty. "That depends very heavily on the economy and what happens to oil prices and what happens to airlines in general," Nisbet says. "Who knows?"