Boeing Company (BA)

High fuel costs may decrease orders for commercial airplanes. In 2008, for example, the Air Transport Association expects fuel costs for the airline industry to increase by over 50%, totaling $61.2 billion. Because of these higher fuel expenses, many airlines have reduced their capacity or Available Seat Miles (ASMs) and thus have reduced their new aircraft purchases.

January 20, 2009

Now that Barack Obama has taken the oath of office, it is very likely that his policies will have a negative impact on Boeing. First of all, Boeing produces the F-22 fighter jet with Lockheed Martin, Pratt & Whitney, and the US Air Force;^[1] Obama is currently deciding whether or not to cut funding for the jet.^[2] Because Obama has stated his intention to review the federal budget on a line-by-line basis,^[3] it seems very likely that he will decide to cut the F-22 budget or shift to more competitively-priced alternatives. In light of his history of questioning the competitiveness of existing Boeing contracts,^[4] this outcome seems especially likely. Other unforeseen defense-related budget cuts that will hurt Boeing seem likely, as well - Jim Albaugh, chief of Boeing Co.'s Integrated Defense Systems unit, believes the federal defense budget will dwindle because of economic pressures.^[5]

In late February 2009, Obama claimed that the United States' spending on helicopter projects had "run amok" and made clear his intentions to slash budgeting for Lockheed Martin projects;^[6] the president vowed to combat the "excesses of procurement,"^[6] which will surely hurt BA's bottom line and does not bode well for the fate of the F-22. As predicted, Obama released his 2010 FY budget on February 26, 2009, and, while the finer details of defense spending were kept classified, it did ensure that growth in government expenditures headed towards companies like Boeing will be strictly limited and scrutinized.^[7] On March 4, 2009, President Obama reaffirmed his dedication to cutting the defense budget and was quoted saying, "The days of giving defense contractors a blank check are over."^[8] On March 24, 2009, he announced that his administration had already identified $40 billion in potential savings through "obvious procurement reforms," but gave no specifics^[9] - the likelihood of these expenditure cuts hurting Boeing is incredibly high.

On March 30, the Government Accountability Office reported that the military's 96 biggest defense contracts (worth $1.6 trillion) were overrun by 25% or $296 billion.^[10] The report is just one more reason for the Obama administration to cut expenditures that would otherwise prove lucrative for Boeing.

From Q4 2007 to Q4 2008, Boeing's cash and cash equivalents dropped more than 50%.^[1] During the same period, its pension liabilities shot from $1.2 billion to $8.4 billion^[1] and the company's tangible equity dropped a cumulative $9.5 billion from $2.7 billion to $6.8 billion in the red.^[1] In the midst of general economic turmoil, Boeing will not be able to perform well as sorting out its $7 billion debt and staggering pension liabilities take priority over actually getting the long-awaited 787 Dreamliner in the air.

Because of the impending global recession, airlines worldwide are cutting new aircraft orders because of lower demand for travel. For example, in December 2008, China's Civil Aviation Administration announced that it was urging its airlines to cancel or postpone new aircraft orders for 2009. During the first two months of 2009, BA had a net total of minus ten new orders - thirty-two orders for 787 jets were canceled during the month of February alone.^[1]

If Boeing decides to withdraw itself from the tanker race, it could prove embarrassing to the Air Force, which has gone to great pains to ensure a fair and open proposal process after the Government Accountability Office (GAO) backed a petition brought by Boeing that the U.S. Air Force altered the auction for a $35 billion aerial-tanker contract in the initial bid that was awarded to the Northrop Grumman/EADS joint venture in February.

But Boeing supporters were critical of the revised bid, which was released last week, claiming it favored the larger tanker model originally proposed by its rivals. Some members of Congress have been quite vocal about the U.S. defense contract going to a European firm.

The new criteria “appear to favor a tanker larger than any real-world scenarios would require,” said Rep. Norm Dicks, a Washington state Democrat, Reuters reported, implying that the new requirements give the edge to Northrop Grumman and EADS.

California-based Northrop feels the new bid process is more than fair.

“We are reviewing the draft RFP with an eye toward ensuring that it addresses the issues raised by the GAO in a way that facilitates a fair and non-political evaluation of the competing bids,” said Northrop vice president Randy Belote, AFP reported.

Intense competition from Airbus could continue to take profits from Boeing.