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Problems Just Keep Piling Up For Boeing

This was to be Boeing's summer of triumph.

Dozens of its groundbreaking 787 Dreamliners were supposed to be in commercial airline service around the world by now, changing the nature of global air travel.

A family of ultra-high-tech spy satellites made by Boeing was to be in the heavens, reading the license plate numbers of the USA's vilest enemies from 150 miles up.

Profits from regular launches of commercial satellites from a floating launch pad on the equator were supposed to be rolling in.

The Air Force was to take delivery of a fleet of new air-to-air refueling tankers based on the Boeing 767.

But none of that is happening this summer. And some likely never will.

"Every aircraft, and every defense program Boeing is involved in is having problems," says Scott Hamilton, an independent aircraft manufacturing and sales analyst and consultant. "Boeing is, quite simply, a mess right now. And I say that as an unhappy shareholder."

This is quite a turnaround for Boeing, which is America's largest exporter. Barely a year ago, the company was doing well. Or so it seemed.

Its stock traded at a 52-week high of $68.75. It boasted an unprecedented backlog of firm orders for jetliners worth well over $350 billion,@ including more than 900 for Dreamliners, the fastest-selling plane in history. It was coming off two straight years of sales victories over Europe's Airbus. Both the revolutionary 787 and the 747-8 extension of the venerable Boeing 747 jumbo jet were moving toward their first flights. Its defense and space business seemed to be booming.

Then came last fall's costly 58-day strike by production workers at Boeing's Commercial Airplane division that delayed delivery of dozens of planes. That was followed by a fourth major setback for the 787 and rapid deterioration of the economy that destabilized Boeing's airline customers worldwide.

A growing number of less-publicized setbacks took place in the company's defense and space business. Some were related to changing program priorities and shrinking budgets under a new president and Congress. Others resulted from Boeing's failure to perform to expectations.

787 becomes 'Nightmareliner'

The Chicago-based company still managed to report a modest first-quarter profit this year, then a large $998 million second-quarter profit, up 17% from the second quarter of 2008. But industry analysts are fretting about bloated inventory costs, sagging cash flow, increased borrowing and mounting cancellations of orders. They also worry about defense contracts that have been scaled down, lost or threatened because of Boeing's inability to deliver on its promises.

Take, for instance, Boeing's role as systems integrator of the Army's ambitious Future Combat Systems program, the Pentagon's second-biggest weapons development program. It has been scaled back partly because of poor performance.

Analysts also are expecting Boeing to swallow a charge against earnings of up to $500 million related to the June 22 Chapter 11 bankruptcy filing of the Sea Launch commercial satellite launch joint venture. Boeing owns 40% of heavily indebted Sea Launch. Companies in Norway, Russia and Ukraine own the rest.

On June 23, Boeing delivered its most disquieting news yet. Ground testing of the 787 Dreamliner had revealed a structural failure in the world's first jetliner made mostly of composite materials rather than aluminum and steel. The discovery of 36 tiny weak points where the wings join the fuselage forced a last-minute scuttling of the 787's first flight. It was the fifth time in two years that Boeing had to tear up its 787 test and delivery schedules. Worse, officials still can't say for sure when the project will get back on track, though they hope the plane will fly by year's end.

Industry analysts were particularly peeved that this latest delay came less than a week after Boeing executives had assured them at the Paris Air Show that the 787's first flight would be before the end of June. Wags, who'd already been calling the Dreamliner the "7-LATE-7," came up with an even more scathing nickname: The "Nightmareliner."

So when Boeing executives hosted a conference call on July 22 to talk about the company's better-than-expected second-quarter profit, the tone of the conversation was anything but celebratory. Investors instantly picked up on the analysts' concerns. Boeing's shares, which already had fallen 35% since last August, dropped another 2.4% to $42 that day and another nickel the day after that. Wednesday the stock closed at $44.03.

Analyst Brent Miller, who follows Boeing for Gradient Analytics in Scottsdale, Ariz., says the tone of the call "was very negative, and the market's response was very tepid" because "management is starting to lose credibility."

Trying to turn a corner

That's damning criticism for any company, but especially for Boeing, which had recently appeared to have its act together after years of costly failures and misdeeds.

Veteran industry analyst Richard Aboulafia of the Teal Group says that in the years following Boeing's 1997 merger with old rival McDonnell Douglas, the company developed a habit of failing to deliver on grand promises to win big defense contracts.

At the same time, Boeing's name was dragged through the mud by a series of embarrassing ethical lapses by key executives. The list of improprieties was long. But most notably, former CFO Michael Sears ended up in prison for trying to win the Air Force tanker contract by offering a high-paying job to the Pentagon decision-maker. Two former chairmen were shown the door in 2003 and 2005, the latter, Harry Stonecipher, for a national headline-grabbing extramarital affair with another Boeing officer.

Jim McNerney, a former 3M CEO and onetime head of General Electric's successful jet engine division, was hired in mid-2005 to clean up Boeing's mess. And, seemingly, he did.

The straight-arrow McNerney got high marks in his first three years at Boeing's helm for changing the company's culture, streamlining its organization and cutting costs. The share price's run to record levels was viewed as evidence McNerney had Boeing back and headed for a long run of big profits.

But McNerney also was riding on the back of the promised riches of the Dreamliner. The feather-light plane made of strong composites is billed as 20% more fuel-efficient and 30% less expensive to maintain than its metal-skinned ancestors. For travelers, Boeing says, it will be the most comfortable ride ever.

Its promise created a near-stampede by airlines scampering to Seattle, home of Boeing Commercial Airplanes, to place orders. By last fall, Boeing had more than 900 orders worth $135 billion to $160 billion in revenue over the next decade.

The number of orders is now down to 850, as airlines, upset by the delays or unsure whether they can afford the planes, have begun canceling. Although that's still a record number of orders for an airplane that hasn't been certified to fly, the financial damage is an estimated $9 billion to $10 billion. And the question isn't whether there'll be more cancellations, but how many?

Reaction to the latest bad news on the 787 has been disappointment and consternation.

"Management not knowing about these problems until the last minute is horrible because it means engineering information isn't flowing upward through the organization. That's scary," Miller of Gradient Analytics says. "But what's more scary is management knowing, and not telling. I just don't know which it is."

Several analysts, including at Barclays, Oppenheimer, Credit Suisse and Gradient, have downgraded their ratings of Boeing's securities or target stock prices.

Even McNerney acknowledges Boeing blundered by putting sales of the 787 ahead of engineering. "Clearly the initial plan outran our ability to execute it," he told analysts in the July 22 conference call. "We've learned a hard lesson here."

But the chief source of Boeing's summer of discontent, the Dreamliner, also represents the company's path to success - if it can get the plane flying.

Carol Levenson, a bond analyst at GimmeCredit in New York, says Boeing has time to get the Dreamliner fixed. "Their credit quality is still pretty good," she says, "so they can borrow money to make up the damage this is doing to their industrial balance sheet."

And Barclays Capital's Joseph Campbell, one of the analysts who has lowered his Boeing ratings, nevertheless says the 787 will be a big winner for Boeing once it gets airborne.

"When . . . the 787 is being produced at 120 a year," he wrote in a new assessment, "(it) has the potential to be the most profitable aircraft Boeing has ever had."

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