Archive for Sunday, February 22, 2004

Boeing battling to land U.S. Navy contract

Contract would help save jobs at Wichita plant

February 22, 2004


— At a time when airliner orders are scarce, Boeing Co.'s commercial jet operation could soon find that one of its largest customers is a very familiar business: the company's own defense division.

Boeing is in fierce competition with rival Lockheed Martin for a U.S. Navy contract to build between 115 and 150 marine-patrol planes. Boeing's entry is based on a conversion of the company's popular 737 commercial jet for military use.

That decision, which may not be made until early summer, comes as Boeing is waiting to hear whether it will be able to move forward with its deal to supply 100 airborne tankers to the U.S. Air Force, based on a conversion of its 767 passenger jet. Taken together, this could mean billions of dollars for Boeing, at a time when its commercial airplane division badly needs the business.

These aren't the first instances of Boeing using its commercial planes for military purposes. Throughout its history, Boeing has "militarized" its commercial designs for everything from bombers to tankers, radar planes to Air Force One.

But Boeing's defense operation says winning the Navy contract would be an important step toward what could be a big shift: Making Boeing's defense unit one of Boeing Commercial Airplanes' largest customers.

"Certainly, if you look at the potential going forward and what the military has expressed interest in, we're easily talking more than 200 airplanes," said Boeing spokesman Randy Harrison.

That symbiotic relationship would provide a boost for the commercial side, which has suffered considerably amid hard times for airlines. Boeing received orders for 250 airplanes total in 2003, according to its Web site. Before the downturn, Boeing received 600 airplane orders in 2000.

"Any order Boeing gets would be a good thing for the company," said Scott Hamilton, an airline analyst based in suburban Seattle.

Another big win for defense also would further Boeing's plan of diversifying itself beyond making passenger jets, once the cash cow of its operations.

Diversifying its planes

Boeing made diversification a goal when it announced plans to move its headquarters from Seattle to Chicago in 2001. Days after the move was completed, the Sept. 11 terrorist attacks devastated airlines and the commercial aircraft industry, forcing Boeing to lay off tens of thousands of employees as some of its best customers fought to survive.

Its success in expanding into other businesses has been bittersweet. Revenue for Boeing's defense unit surpassed its commercial unit in 2003, growing 10 percent to nearly $27.4 billion. Revenue from its commercial airplane division fell 21 percent that year, to $22.4 billion.

Analysts stress that neither Boeing's commercial nor its defense unit would be badly hurt if the company doesn't get the Navy contract based on the 737s.

"It's a lost opportunity," said aerospace analyst Richard Aboulafia of the Teal Group. But, he noted, "the 737 will still be in great shape and defense will be in great shape."

Contract key to Wichita

Losing the 767 tanker contract, which would provide a significant amount of work for Boeing's Wichita plant, could have much greater consequences. Through the end of January, Boeing had a backlog of 824 orders for its 737s, but only 25 pending orders for 767s.

"There's very little demand in the commercial market for that aircraft, and the likelihood is that (the 767) line would have to close without the government contract," said Paul Nisbet, an analyst with JSA Research.

With the contract, the 767 line would run another 20 years, he said.

The Pentagon has held up the 767 contract, valued at more than $20 billion, pending a probe into possible ethical misconduct by former Boeing executives. The investigation has to do with whether Boeing improperly received pricing information about its European rival, Airbus, to win the tanker deal. The ethics scandal led to the firing of two top executives and the resignation of former chief executive Phil Condit.

Boeing learned earlier this month that the investigation will be prolonged at least three more months.

Lockheed vies for deal

Boeing's proposal for a Multi-Mission Maritime Aircraft based on the company's 737-700 is by no means a slam dunk.

Lockheed's proposal calls for a new aircraft based on its P-3 Orion, a propeller plane that has been used by the Navy since the 1960s. It argues that its system is both cost-effective and time-proven.

Nisbet calls Boeing the "dark horse" in this race. He believes the Navy may be leaning toward Lockheed, contending that its airplane can fly lower and slower than the 737 and therefore may serve the Navy's surveillance needs better.

"A 737 is not typically the plane you want for loitering low over the ocean, so it's a bold interpretation of what the Navy might need," he said.

Boeing has tried hard to dispel that notion, even taking its plane on the road late last fall to show Navy crews its performance ability.

For Boeing, winning this contract would represent more than just a good business deal, Hamilton said. It also would indicate that the government believes Boeing has addressed the ethical concerns that jeopardized the tanker deal.

"If they win this competition -- of which Lockheed is the prime competitor -- it certainly would send a strong message that Boeing is back on track," he said.

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