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BA AT A GLANCE

P/E ► -1K   EV/EBITDA ► 34.6 HIGH ROA ► 0.6% AVG ROE ► -1.1% AVG Debt to Equity ► -58.1   Current Ratio ► 0.943 VERY LOW Interest Coverage Ratio ► 0.663 AVG

 

 

 

 

 

 

Boeing Company (NYSE:BA) is the world's largest aerospace and defense company. In 1997, it merged with McDonnell Douglas. The company operates in over 90 countries and claims the title of America's largest exporter. Its has three divisions: commercial airplanes (46.4% of revenue), Integrated Defense Systems (IDS) (52.6%), and Boeing Capital Corporation (BCC) (1.15%). In 2008, the firm generated $60.9 billion in revenue and $2.7 billion in net income.^[1]

Of the three divisions, the most prominent is the commercial airplane section. This division faces intense competition from EADS NV (EADSY) and its Airbus line of planes. However, the introduction of the 787 Dreamliner may tip the scales in Boeing's favor. This new plane has a lightweight composite material design which Boeing claims will give it a 20% increase in fuel efficiency.^[2] This is particularly attractive to airlines that are struggling with record high oil prices. For example, in 1Q08) United attributed an average of nearly 60% of total operating expenses to fuel. Given the soaring price of oil futures over $130 a barrel, the airline industry must increase its focus on cutting costs as it operates under historically low margins. Boeing's order book for the Dreamliner has seen its backlog rise to unprecedented levels: $349 billion.^[3]

Boeing's less visible Integrated Defense Systems (IDS) division has shown significant growth recently and now earns just over half of the company's revenues. Boeing's innovation in this sector has allowed it to win numerous orders from defense programs. However, IDS still receives a hefty 80% of its earnings from the US Department of Defense^[4]. This reliance exposes it to the Department's variable budget and spending patterns. The Iraq War has caused a boom on this side of Boeing's operations, but a change in foreign policy may cause a slowdown in defense spending. In addition, Boeing faces competition from other firms in this sector - in February 2007, the U.S. Air Force awarded a controversial $35 billion air refueling tanker contract to rival EADS NV (EADSY) that was widely expected to go to Boeing. In response, Boeing filed a formal appeal against the deal with the Government Accountability Office that could delay production by over a year.^[5]

Business Overview

Now headquartered in Chicago, Illinois, Boeing was originally founded in the 1910s in Seattle, Washington. After a series of mergers and splits (in which today's United Airlines was spun out, among others), Boeing emerged in the fifties as the premier US aircraft manufacturer, participating heavily in government air defense projects. It was not until 1958 that Boeing began delivery of its first commercial airplanes, the segment for which it is most commonly recognized today. Although Boeing is today perceived primarily a maker of commercial planes, for much of its history, the company's involvement in space and defense programs has actually overshadowed its commercial airplanes manufacturing.

Boeing NASA Systems, based in Houston, is a major contributor to the space program. Boeing is responsible for building a lot of robotic equipment and hardware that NASA has used in its space shuttle and International space station.

Business and Financial Metrics

Despite Boeing's 2008 revenue decline of 8.25% to $60.9 billion, the company nonetheless has increased its revenue by a CAGR of 3.45% since 2004. In particular, revenue in the Commercial Airline division fell by 15.34%, as a strike by the International Association of Machinists (IAM) in 2008 resulted in 104 fewer airplane deliveries than planned.^[6] Furthermore, net income fell 34% to $2.67 billion and contractual backlog expanded to a record level of $279 billion.^[7]

However, Boeing improved its financial performance in 1Q09, as its revenue of $16.5 billion was 3.2% higher than in 1Q08, when it was $16 billion.^[8] The company maintained profitability; yet, both operating income and net income fell in 1Q09 as compared to 1Q08, to $1.025 billion and $610 million, respectively, a 43.02% and 49.63% decline.^[8]

Although net income declined by 22.1% over the first half of fiscal year 2009, in 2Q09, net income was 17.1% higher than the comparable figure in 2Q08.^[9] While the launch of the 787 Dreamliner has continued to be plagued by delays--two new flaws with the aircraft were discovered in June 2009 and announced in August 2009^[10]--the company has been able to increase operating revenue and decrease operating expense from 2Q08 to 2Q09, by 1.13% and 0.97%, respectively.^[9] The Commercial Airline division's slight decline in revenue--by 0.97%--was compensated for by a 9.02% increase in revenue related to the company's Integrated Defense Systems division.^[9] This revenue growth was due in part to international sales, as Boeing delivered three tankers to Japan as well as continued work on programs with Australia and Turkey, among other nations.^[9]

Although operating revenue increased by over 9% between 3Q09 and 3Q08, Boeing reported a $1.564 billion net loss in 3Q09, though net income YTD is $44 million.^[11] Despite further set-backs with the 787 Dreamliner, the company's commercial airplanes segment did report a 13.5% increase in revenue, with the company reporting a 9.1% improvement in revenue overall, to $16.688 billion.^[11] Boeing completed 113 commercial jet deliveries in 3Q09, including 90 pertaining to 737 planes, which reflects a 34.5% increase over 3Q08.^[11] Operating margins in the Integrated Defense Systems segment remained at 10.1% for 3Q09, though revenues increased slightly from $8.497 billion to $8.744 billion in 3Q09 as compared to 3Q08.^[11]

Business Segments

Commercial Airplanes

Commercial airplane sales account for 46.4% of company revenues - $28.263 billion in 2008. Here is a glimpse at the actual selling and order book as of December 31, 2008:

The 787 Dreamliner

The 787 has had the most successful launch of any new commercial airplane in Boeing history. Boeing just reported having 892 firm orders from 57 different customers.^[16] The Dreamliner's popularity is largely due to its cost efficiency: by replacing traditional materials with carbon-fiber-reinforced plastic (which is stronger than steel and lighter than aluminum), Boeing has created an aircraft that will consume 20% less fuel than predecessor 767. But despite the promise of the 787, challenges still exist. Production delays are common in commercial airplane manufacturing, especially when a large portion of component parts are outsourced. With 75% of the 787's development and production outsourced, costly delays are a high risk. This heavy outsourcing led to a strike of about 27,000 Boeing engineers in September 2008, many of whom were involved in the manufacturing of the 787.^[17] As a result, the company has stated it will do more of the production of the next 787 model "in-house" in Seattle rather than outsourcing as part of the contract settlement with its engineers that was ratified on November 1, 2008.^[17]

Boeing has delayed the launch of the Dreamliner three times. According to the 1Q08 Earnings report, the first flight will be in fourth quarter 2008 and deliveries will begin in third quarter 2009.^[18] Boeing continues to address challenges associated with assembly of the first airplanes, including completion of out-of-sequence production work, software integration and parts availability. In a rare piece of good news for the 787 development, GE's custom engine for the Dreamliner has been given an airworthiness certification by the Federal Aviation Association. On December 11, 2008, Boeing announced yet another delay for its Dreamliner, pushing the Dreamliner's first flight to Q2 2009 back from the originally planned launch in Q4 2008.^[19] This marks Boeing's fourth delay, which it attributes to its two month machinists' strike in 2008.^[19] With the new planned launch date, Boeing's Dreamliner is about two years delayed in total.^[19]

Integrated Defense Systems

IDS sales account for 53% of company revenues - $32 billion in 2008. Here is a glimpse at the breakdown between segments for 2008:

Notable IDS products include:

• Fighter Jets (E/A -18G, F/A- 18E/F, F – 15E, F-22A)
• Rotocraft (CH-64D Apache, CH-47 Chinook, V-22 Osprey)
• Large Aircraft (C-17, C-32, C-40, KC-767, P-8A
• Missiles/Bombs (e.g., Harpoon)
• Satellites
• Communication Systems (Joint Tactical Radio Station)
• Space Systems (space shuttles, including Apollo series)
• Launch Systems (sea and land based launches of satellites into orbit)

Boeing Capital Corporation

BCC operations only account for 1.2% of company revenues - $703 million for 2008. This segment is a provider of financial solutions for commercial and government airline customers. Basically, BCC owns planes and structures leases for customers to borrow their planes. BCC manages a $6.5 billion portfolio of approximately 350 airplanes.^[22] This part of Boeing has seen significant decline because of the amount of older planes being taken out of the airways to make room for newer, more fuel efficient planes.

Trends and Forces

US Air Force plans $11 billion investment in Transformational Communications Satellite system

In an effort to restructure its military communications satellite system, the US Air Force hopes to award an $11 billion contract to develop a "Transformational Communications Satellite system" (or "TSAT").^[24] Boeing has already done preliminary development work for the space segment of the project in a joint effort with Lockheed Martin and Northrop Grumman.^[24] The TSAT system is designed to ultimately replace the military's Milstar and AEHF satellite systems and, although Boeing and its partners have already started working on the project, the Air Force will issue a final request for proposals in April 2009 to encourage competition for the contract and cut government costs.^[24]

Dependence on US defense budget

Boeing’s Integrated Defense Systems (IDS) revenues are largely dependent on the US Department of Defense's budget spending, and on Boeing’s ability to win new business from the Department. (Past Defense business Boeing has obtained include technology development for US Secure Border Initiative, new orders for the Apache and Chinook helicopter programs, and the Future Combat System program.)

The IDS division receives 84% of its revenue from the US Department of Defense, and due to strong congressional support for the Defense budget because of the war in Iraq, IDS saw record revenues in 2006. Defense aircraft spending may remain high as well--the average age of an Air Force aircraft is almost 25 years, so demand and support for defense aircraft replacement is hot. This bodes well for Boeing, since the company produces many different kinds of fighter jets (F/A -18, F-15, F-22), tankers (KC-767) and transports (C-17, C-32A) for the US military. However, the Department of Defense's budget does vary according to perceived threat to the US, so reduced levels of global threat could have a negative effect on the budget.

Downsizing From Loss of U.S. Air Force Contract

After Boeing lost a major GPS satellite contract to Lockheed Martin (LMT) on 12 May 2008, it moved towards downsizing its satellite assembly and integration business. On 21 May, the company announced it would lay off 750 workers at its southern California satellite plants.^[25] Boeing blamed the longer duration of these government contracts as a major factor for the downsizing. This means that the risk/reward profile of competing for these contracts is becoming further skewed, and the loss of a contract will have major long term implications on Boeing's operations.

Risk from shift to Fixed Cost Development

Fixed cost development contracts allocate companies like Boeing a limited amount of money for defense product development that is not subject to change. Since defense companies often spend more money on projects than was initially agreed upon, this puts pressure on the companies. If fixed cost development contracts are indeed adopted by the US Department of Defense, Boeing could suffer.

China conflict: higher defense spending

With air traffic growth rates of 10% a year, China and its airline companies will obviously be important buyers of Boeing aircraft. But China helps Boeing's profits in another way, too--a major driver of the US Defense budget is the perceived military threat from China. Recent production of the F-22, DDG-1000 destroyer, and the Virginia class submarine has been primarily attributed to the Chinese threat. And should the arms race heat up to a full-blown conflict, Boeing could be sure to reap financial benefits from a clash anticipated to be more expensive than any other.

But with US-China relations normalizing, esclating tensions are not assured. The 2008 presidential election will have much to reveal about the new direction of US foreign policy.

Exposure to airline industry's overall health

The airline industry is historically cyclical, with periodic downturns and upturns. Terrorist attacks like 9/11 and disease outbreaks like SARS can both have very negative impacts on airline travel, sparking an industry downturn that hurts airlines and manufacturers alike. Furthermore, Boeing depends heavily on international markets, primarily developing countries like China to maintain a steady demand for new aircraft. About two thirds of commercial airplane sales and backlogged orders come from international markets, where Boeing receives 37% of its revenue. (US$ 13.3 billion comes from Asia alone.)

However, the International Air Transport Association (IATA) warned in December 2008 that it expects the global airline industry to weaken significantly in 2009 because of an impending global recession and resulting drops in consumer demand for travel.^[26] The IATA predicts that airline losses in 2008 will total to near $5 billion and will lose an additional $2.5 billion in 2009.^[26] Furthermore, the IATA believes that weakened consumer travel will cause global airline traffic to fall by 3% in 2009.^[26] Because of the decline in traffic and revenue, global airlines are expected to drastically cut new aircraft orders for 2009. For example, China's Civil Aviation Administration also announced in December 2008 that it was urging its airlines to cancel or postpone its new aircraft orders for 2009 because of slumping consumer demand for travel.^[26]

Rising fuel costs reduce airline purchasing power

Fuel expenses are by far the largest operating expenses in the airline industry, representing about 30% of an airline's annual operating expenses on average.^[27] As a result, elevating fuel costs reduce profits for airline companies, who may cut down on airplane orders to make ends meet. In 2007, for example, Southwest Airlines Company (LUV)'s fuel expenses increased 10.4% because of higher fuel costs.^[28] Additionally, according to the Air Transport Association, airline industry fuel costs are expected to reach $61.2 billion in 2008, a near 50% increase caused by higher fuel prices.^[29] Because of higher fuel prices, many airlines have reduced plans for capacity or Available Seat Miles (ASM) expansion, and thus have cut back on purchases of new aircraft. Therefore, Boeing expects its 2009 and 2010 earnings to slow due to declines in new aircraft demand.^[30] However, increases in fuel prices have also led to an increase in demand for Boeing's new fuel-efficient Dreamliner.

Labor Problems Hurt Operations

Boeing has about 154,000 employees in its company, of whom about 37% (almost 60,000) are unionized in various forms. If Boeing does not meet union contracted union specifications about certain employee wages, hours, and working conditions, or if workers decide to raise demands, then massive strikes could result, creating serious problems for Boeing in the future, as it has in the past. This situation has come to a boil in recent weeks as nearly 27,000 machinists voted on Boeing's proposed contract on September 3rd. Boeing is offering the unionized group additional increases of 2-2.5% over the next three years- the union was seeking 9-13%.^[31] After two days of emergency sessions, no agreement was reached and the machinists went on strike. This has caused an immediate halt to all production of the 737, 747, 767 and 777. ^[32] This strike has caused additional delays in the 787 Dreamliner project. Boeing announced on September 30 that they will be delaying delivery to All Nippon Airways and Japan Airlines Corp by 14 and 15 months, respectively. ^[33]

After nearly 57 days off of the job, union leaders reached an agreement with Boeing on November 1, 2008.^[3] The new contract protects more than 5,000 factory jobs and ensures that employees will not contribute any additional capital towards their health care plans, while promising pay raises of 15% over the next four years.^[3] This number is even greater than the 9-13% union leaders had been seeking. As a result of the settlement, Boeing agreed to produce more of its next model of the 787 in-house.^[17] This contract ends a strike that was costing Boeing nearly $100 million in revenues per day.^[3] As the global economy slows and airline industry profits evaporate, it is yet to be seen how strong Boeing's order book truly is and how much new business the company will be able to attract. The increased labor costs may put a significant strain on future profitability. Immediately following this settlement, negotiations began with 20,300 unionized engineers whose contract ended on December 1st.^[34] In a positive development for Boeing, the Society of Professional Engineering Employees in Aerospace voted to accept Boeing's offer. Similar to the machinists, this agreement is for four years rather than the standard three and will give Boeing a clearer picture of its labor costs going forward. The engineers were able to secure annual pay increases of 5%, higher pension benefits, increased overtime wages, and a "more input" regarding outsourcing decisions.^[35]

Competitors

In the commercial airline business, Boeing operates in a duopoly with Airbus. Airbus has been the largest producer of large commercial jetliners for many years, but Boeing has been gaining ground since recent problems at Airbus, especially the 2005-6 massive production delay for the A380. The delay gave Boeing a large advantage in the market for wide body aircrafts, which include Boeing's successful 747, 777, and 787 models. Although the Boeing has pushed back the first flight and delivery of the 787, the Airbus 380 delays have been far more substantial.

When a frustrated FedEx canceled A380 orders in 2006 and bought Boeing 777 freighters instead, Boeing found that its market share in long-haul freighters increased significantly. Dominance of the freighter industry is key, since it is growing faster than passenger travel. Boeing received 148 freighter orders between 2005 and 2006--many times Airbus' meager 17 orders.

Still, even with Airbus' problems, the race is far from over, and competition remains intense between the two companies. In February 2007, the U.S. Air Force awarded a controversial $35 billion air refueling tanker contract to rival Northrop Grumman (NOC) that was widely expected to go to Boeing. During March of 2007, Boeing had filed a formal appeal against the deal with the Government Accountability Office. In June of 2008, the GAO sustained Boeing's appeal against the Air Force, and effectively reopened the contract for bidding.^[36] As of August, Boeing is currently requesting an extension past the October 1st deadline in order to alter its design to meet the government's new specifications.^[37]

                        NOTE: Airbus numbers converted from Euros to Dollars at Dec 31, 2007 Exchange Rate (1.458 $/E)

References

1. ↑ BA 2008 10-K, Item 6
2. ↑ Forbes
3. ↑ ^{3.0 3.1 3.2 3.3} "Machinists ratify Boeing pact, set to resume work" MercuryNews.com 11/2/2008
4. ↑ BA 2008 10-K, Item 1
5. ↑ http://www.komotv.com/news/boeing/16456831.html
6. ↑ BA 2008 10-K, Item 7
7. ↑ BA 2008 10-K, Item 6
8. ↑ ^{8.0 8.1} BA 2009 1Q 10-Q, Item 1
9. ↑ ^{9.0 9.1 9.2 9.3} BA 2Q09 10-Q
10. ↑ Boeing Plays Down Latest Flaw With 787. Wall Street Journal.
11. ↑ ^{11.0 11.1 11.2 11.3} BA 2009 3Q 10-Q
12. ↑ ^{12.0 12.1 12.2 12.3} BA January 2009 8-K pg. 1  
13. ↑ ^{13.0 13.1 13.2} BA 2008 10-K pg. 19  
14. ↑ BA January 2009 8-K pg. 10  
15. ↑ Boeing 2007 10K
16. ↑ Boeing 1st Quarter 08 Earnings Announcement
17. ↑ ^{17.0 17.1 17.2} "Boeing to boost in-house 787-9 work" seattlepi.com 10/31/2008
18. ↑ Boeing 1st Quarter 08 Earnings Announcement
19. ↑ ^{19.0 19.1 19.2} "UPDATE 4-Boeing delays 787 again, no financial outlook" Forbes.com 12/11/2008
20. ↑ [1]
21. ↑ BA 2008 10-K pg. 32  
22. ↑ Boeing 2007 10K
23. ↑ BA 2008 10-K pg. 40  
24. ↑ ^{24.0 24.1 24.2} Jim Wolf (January 16, 2009). US Air Force plans $11 bln satellite competition.
25. ↑ Reuters
26. ↑ ^{26.0 26.1 26.2 26.3} "Boeing likely will suffer from global airline industry slump" SeattlePi.com 12/9/2008
27. ↑ Air Transport Association
28. ↑ LUV 2007 10-K, Item 7, pg. 20
29. ↑ "Fuel costs could 'devastate' airlines" CnnMoney.com 6/25/2008
30. ↑ "Boeing shares decline on analyst's profit comments" Forbes.com 11/18/2008
31. ↑ http://www.bloomberg.com/apps/news?pid=20601087&sid=a1R0FW2SiolU&refer=home%20--
32. ↑ Reuters
33. ↑ Reuters
34. ↑ http://www.bloomberg.com/apps/news?pid=20601087&sid=a0yuyGsP3q74&refer=home
35. ↑ Bloomberg
36. ↑ http://www.gao.gov/decisions/bidpro/311344.pdf
37. ↑ http://seekingalpha.com/article/92271-boeing-drags-its-heels-on-air-force-bid?source=feed
38. ↑ Airbus 2007 Results
39. ↑ EADS 1st Quarter 2008 Earnings
40. ↑ http://en.wikipedia.org/wiki/Competition_between_Airbus_and_Boeing