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Boeing Company (BA)Stock (Transportation Industry, Aircraft Manufacturers Industry, Aerospace & Defense Industry, Manufacturing Industry)
 Boeing Company (NYSE:BA) is the world's largest aerospace and defense company. The company operates in over 90 countries and claims the title of America's largest exporter. Its has three divisions: commercial airplanes (50.3% of revenue), integrated defense systems (48.3%), and a small aircraft leasing subsidiary (1.2%). In 2007, the firm generated $66.4 billion in revenue and $4.1 billion in net income. 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.[1] 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: $346 billion.[2] Boeing's less visible Integrated Defense Systems (IDS) division has shown significant growth recently and now earns just under 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 84% of its earnings from the US Department of Defense. 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.[3]  [edit] Business and History 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's 2007 revenues rose 8 percent to $66.4 billion on higher commercial airplane deliveries and defense business growth. Furthermore, net income grew 84 percent to $4.1 billion and backlog expanded to a record level of $346 billion. Net Income is growing even faster than revenue as management has cut costs in 2007 and 1st quarter 2008. [edit] Divisions[edit] Commercial AirplanesCommercial airplane sales account for 50.3% of company revenues - $33.4 billion in 2007. Here is a glimpse at the actual selling and order book as of December 31, 2007:
[edit] 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.[5] 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. 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.[6] 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 June 9th, Boeing announced that the April schedule is being followed and the first flight of the 787 will be in the fourth quarter of 2008.[7]
[edit] Integrated Defense SystemsIDS sales account for 48.3% of company revenues - $32.1 billion in 2007. Although revenue slowed down in this sector - and this can primarily be attributed to the unpredictability of government contracts - margins improved. This is a credit to management's targeted cost cutting withing IDS. Here is a glimpse at the breakdown between segments for 2007:
Notable IDS products include: 
[edit] Boeing Capital CorporationBCC operations only account for 1.2% of company revenues - $815 million for 2007. 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 $6.5 billion portfolio of approximately 350 airplanes.[10] This part of Boeing has seen significant decline because of the amount of older planes being taken out of the airways to make room for newer, more fuel efficient planes.
[edit] Trends and Forces[edit] Increased risks from heavy outsourcingBoeing has increased outsourcing from 50% to 70% for many of its products, most notably in production of the 787 (see above). While outsourcing allows Boeing to reduce costs, it also increases the risk of losing production control and intellectual capital. For the 787, this may mean more production delays and mistakes, especially given the use of new materials, manufacturing processes, and the accelerated completion schedule. Still, major problems are far from guaranteed--major 787 producer Spirit Aerosytems has reported that building with the new materials is easier than expected and has run into minimal problems so far. Boeing has also taken several steps of its own to mitigate the risks of outsourcing, reducing the number of suppliers and stationing employees at supplier factories to supervise and to expedite problem-solving, should the need arise. [edit] Reliance on parts from external sourcesProduction outsourcing aside, Boeing is also reliant on external companies for parts sourcing--for example, it receives engines from General Electric Company (GE) and Rolls Royce. Technological advances from these source companies can greatly enhance the profitability and efficiency of Boeing's planes, but a mistake on their parts could translate the burden to Boeing, too. This fear was slightly assuaged as the FAA approved the new GE engine for the 787 Dreamliner on April 1, 2008. [12] [edit] Efficiency initiativesIn order to increase profitability, Boeing has been aggressively trimming excess. Its 2006 Internal Services Productivity initiative saved US$ 500 million dollars by changing internal operations, ranging from how the company bought office equipment to how it ran plane production. The company's restructuring efforts have also reduced facility square footage, employee number, and supplier number by more than 50%. This was especially apparent in the all important operating margins: 2007 8.7% vs. 2006 6.6%.[13] This shows an increase of almost 1/3 in profitability. [edit] Dependence on US defense budgetBoeing’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. [edit] Downsizing From Loss of U.S. Air Force ContractAfter 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.[14] 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. [edit] Risk from shift to Fixed Cost DevelopmentFixed 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. [edit] China conflict: higher defense spendingWith 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. [edit] Rising fuel costs reduce airline purchasing powerElevating fuel costs reduce profits for airline companies, who may cut down on airplane orders to make ends meet. (Fuel now accounts for about 25% of airline operating costs.) However, fuel pricing pressure has also increased demand for fuel-efficient aircrafts, a trend Boeing hopes to address with its 787. So far, the strategy seems to be successful. [edit] Exposure to airline industry's overall healthThe 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. The airline industry's recent strength has given Boeing a huge commercial airplane backlog (US $174,276 million), exposing it to the dangers of overbuilding before a downturn. But the industry may also remain strong. In any case, recent performance has been rosy: for the second year in a row, Boeing has set a new company-wide record for the most new commercial airplane orders received in a year, with 2006's 1044 orders. A strong need to replace aging fleets, growing airline activity from Asia, and high expectations for the 787 have combined to buoy demand. [edit] Increasing international demand About two thirds of commercial airplane sales and backlogged orders come from international markets, where Boeing receives 37% of its revenue. (US$ 13.3 billion comes from Asia alone.) Revenues may increase greatly if Boeing can capitalize on these growing international markets, especially in Asia. In particular demand there is Boeing’s 737 jet, the world’s most popular commercial jet and the aircraft of choice for shorter point-to-point routes. With countries like China and Japan experiencing a spike in demands for domestic flights, the 737 could continue to soar. [edit] Labor problems riskBoeing 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. [edit] Exposure to materials pricesThe most common materials used in Boeing products are plastics, aluminum, titanium, steel, and composites. Traditional commercial airplanes use aluminum as the main building material, but for the 787, nearly the entire frame is being built with composites. The majority of other materials in the 787 are accounted for in the landing gear, engines, wiring, and systems. The price of these materials has a large impact on Boeing's profit margin.  [edit] CompetitorsIn 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 EADS NV that was widely expected to go to Boeing. As of mid-march 2007, Boeing had filed a formal appeal against the deal with the Government Accountability Office that could delay production by over a year.
NOTE: Airbus numbers converted from Euros to Dollars at Dec 31, 2007 Exchange Rate (1.458 $/E)
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