30 January 2004
Biggest engine driver for Boeing now defense
By David Bowermaster
Seattle Times aerospace reporter


An unidentified guest walks past the massive engine of a new Boeing 777-200ER yesterday following a ceremony at Boeing Field to deliver the plane to Pakistan International Airlines.

Ethical lapses that battered Boeing's reputation last year didn't damage the company's finances, as Boeing yesterday reported a fourth-quarter profit of $1.1 billion aided by a tax refund.

For 2003, profit jumped 42 percent to $698 million even though sales fell 6 percent to $50.5 billion.

Chief Financial Officer James Bell solidified the outlook for Boeing's Puget Sound-area commercial-airplane business, which delivered 281 jets in 2003.

Boeing will deliver 285 jets in 2004, Bell said, and a similar number is expected for 2005, with 90 percent of the delivery schedule already sold.

Consistent production should mean consistent employment at local Boeing factories after more than two years of unrelenting declines.

"We expect the employment overall to be relatively stable this year," said Todd Blecher, a spokesman for the commercial-airplanes unit based in Renton.

Deliveries are not expected to increase until 2006, as the world's airlines continue to struggle.

Still, Chief Executive Harry Stonecipher said one of his top priorities remains "dealing with this perception that we're a bunch of crooks."

Stonecipher is continuing to meet with Boeing critics at the Department of Defense and in Congress, including Sen. John McCain, R-Ariz., who opposes a plan for the Air Force to buy and lease 100 767 refueling tankers from Boeing.

"I ... told (Sen. McCain), 'I want to talk with you about how we get Boeing and myself out of the penalty box,' " Stonecipher said. He added he believes the tanker deal will go ahead, but not before an investigation by the Pentagon inspector general is over.

Cai von Rumohr, an analyst with S.G. Cowen Securities, said Boeing must tread carefully because the 767 tanker program is crucial to both Boeing's military and commercial aircraft businesses.

"It's still a little bit early to tell ... where Congress might take that issue," he said.

Secretary of Defense Donald Rumsfeld put the tanker deal on hold in December after Boeing fired ex-CFO Mike Sears, and CEO Phil Condit resigned as CEO after an internal investigation uncovered ethical improprieties tied to the tanker deal.

Stonecipher and Bell said better-than-expected results in Boeing's defense businesses helped offset 100 fewer commercial-airplane deliveries in 2003 as well as ongoing losses in the satellite, launch and Connexion by Boeing divisions.

The Integrated Defense Systems division accounted for $27.4 billion of sales last year versus $22.4 billion from commercial airplanes, making 2003 the first year commercial jets were not Boeing's biggest business.

Looking ahead, Boeing's ground-based missile defense and its biggest program, the Army's Future Combat System (FCS), are boosted in the Pentagon's fiscal 2005 budget, with missile defense increasing $1.5 billion, or 19 percent, over what Congress approved for this year, according to budget documents obtained by Bloomberg News.

The Pentagon asks $9.2 billion for missile-defense programs, while the Army asks $3.2 billion for FCS, $1.5 billion more than this year. The program is the Pentagon's second-most costly.

The requests vindicate Boeing's increased focus on defense programs, an analyst said. "Boeing has done a stunningly effective job of positioning itself in the military marketplace," said Loren Thompson, a defense analyst for the Lexington Institute, a Washington research institute.

Stonecipher lavished praise on the commercial-airplanes team for cutting costs and remaining profitable during the prolonged airline industry downturn.

"I'm truly impressed at the strides they've taken to change the paradigm at commercial airplanes," Stonecipher said.

Byron Callan, an aerospace analyst for Merrill Lynch, said Boeing's performance is even better than the numbers suggest because of the large amount of cash the company spent to fund its pension obligations, mostly for commercial-airplane workers.

Boeing made $1.7 billion of discretionary pension contributions in 2003 and plans to add $500 million more in 2004.

Stonecipher said he expects commercial airplanes to continue increasing productivity at a rate of 5 percent per year.

With employment stable, the gains will come from continually increased efficiency across the operation, said Blecher, including non-manufacturing areas like public relations to budgeting.

Connexion by Boeing, the broadband satellite service, and Air Traffic Management continue to post large losses.

The two units lost $449 million in 2003 after losing $432 million in 2002, and the worst is not over.

"It's beyond '05 before you see anything good out of Connexion," Stonecipher said. But he cited progress signing up customers such as Japan Airlines, All Nippon Airways and Lufthansa, which is due to launch commercial service in March.

Boeing's cash balance soared to $4.6 billion at the close of 2003, double the $2.3 billion the company had in the bank at the end of 2002.

Companies often use such war chests to make acquisitions, but Stonecipher said Boeing has no such plans.

"Investing in our internal performance and becoming more efficient at what we're doing is the only focus we have at the moment," he said.

Information from Bloomberg News is contained in this report.

David Bowermaster: 206-464-2724 or dbowermaster@seattletimes.com


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