Boeing Co. seems to have hit some turbulence.
Its aggressive pursuit of business has left some wondering whether the Chicago-based aerospace company can keep its promises, and what will happen if it can't.
Take, for example, Boeing's bid of $35 billion to supply the U.S. Air Force with 179 KC-46 air-refueling tankers. Boeing won the contract by coming in some $2 billion less than rival EADS, the European consortium that runs Airbus. But talk has begun of up to $700 million in cost overruns, with the U.S. potentially on the hook for some of it.
"Welcome to the new defense-contracting environment," said Richard Aboulafia, aircraft and aviation analyst with Virginia aerospace market analysis company Teal Group. "Fixed prices in a shrinking pool means aggressive bids and possibly money-losing contracts where the contractor bears the cost and risk."
Aboulafia believes absorbing $700 million could ding Boeing. "From a profitability standpoint, it will certainly hurt (Boeing) if there are more of these," he said.
More of these overruns lie no further than in the commercial arena, however, most prominently with the 787 Dreamliner, the composite wide-body jetliner that is three years behind schedule.
And now there are questions about its workhorse 737. The company, pondering a redesign of the jet, opted to replace its engines with more efficient LEAP-X power plants from CFM International to snag 200 jets in a 460-plane order from American Airlines. Airbus got the rest.
"Airbus has really controlled Boeing's decision," said Aaron Gellman, professor of transportation at the Kellogg School of Management at Northwestern University. "Boeing should have come up with a whole new airplane, which would have trumped Airbus and caused the marketplace to be much more wary of ordering the A320neo aircraft."
Gellman believes Boeing was swayed by large shareholders who are more concerned with short-term profits.
"I think that's a highly risky position to take, given the competitive nature of this business," he said.
"With the right leadership, you could explain the situation to investors, and say, 'Look, we'd love to put the money into dividends, but, frankly, we need to put it in product development. You'll benefit in 5-10 years,'" Aboulafia added.
Still, he backs Boeing's decision not to replace the 737 with a new jet.
"What are you paying for?" Aboulafia said. "Is it enough to justify any kind of new competitiveness? I don't see it."
Neal Dihora, equity analyst at Morningstar, agrees on the 737. He said Boeing could have shown more courage by redesigning a next-generation 737 in tandem with what the airlines want — quicker boarding times. But re-engining the aircraft saved Boeing money, which has made its stock more attractive. It closed Friday at $70.47, down 19 cents.
"In terms of a 15-year future, the decision to re-engine is slightly negative," Dihora said. "But in the short term, it's positive because the re-engine's going to bring orders in, and the way the stock usually reacts is the stronger the order book is, the stronger their earnings. Boeing's stock is going to go up because people are discounting the future."
He says the 787 will play a role too.
"From a long-term perspective, Boeing was willing to take risk and get a new airplane and change the way we fly," Dihora said.
Dihora admits that funding the research and development phase of the 787 has created "massive cash outflow," but by 2012 that will decline and Boeing will begin to deliver the Dreamliner.
"Over the next 18-24 months, we think cash flows are going to increase substantially, bringing Boeing a lot of value," Dihora said.
Source: http://www.chicagotribune.com
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