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Boeing - Bloomberg

Old 18th Oct 2001, 13:43
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Post Boeing - Bloomberg

10/18 01:12
Boeing's Condit to Face Test of Strategy as Decline Approaches
By Peter Robison

Chicago, Oct. 18 (Bloomberg) -- Boeing Co. Chief Executive Officer Phil Condit brushed aside questions about mounting financial losses at U.S. airlines as he opened the plane maker's new headquarters in Chicago on Sept. 5.

A "much broader'' Boeing, with businesses in satellites, missiles, launch vehicles and military aircraft, may even boost earnings as the airline industry slumps, he said.

Less than a week later, the terrorist attacks plunged airlines into crisis, forcing many to shelve plans to buy planes. Condit said late last month that Boeing may still have higher profit next year. Some investors doubt that's possible.

"I'm surprised he would make that kind of statement,'' said Brian James, an analyst with Loomis Sayles & Co., which owns Boeing shares. "The commercial aviation business has been thrown into a depression.''

"Not in my model,'' said Rich Turgeon, an analyst with Victory Capital Management, another owner of Boeing shares.

Boeing plans to report third-quarter earnings later today.

With many aircraft deliveries completed before the attacks, third-quarter profit may have risen to 87 cents a share from 70 cents a year earlier, based on the average estimate of analysts polled by Thomson Financial/First Call. Analysts expect earnings to drop to about $3 next year from $3.58 this year.


Before the attacks, Condit, 60, was given much of the credit for last year's rise in jetliner sales that helped the aircraft unit lift profit margins to their highest in at least a decade.

Boeing shares rose 59 percent last year, the second-largest increase for a Dow Jones Industrial Average member. Condit's compensation quadrupled to $18.7 million from a year prior.

The shares fell $1.42 to $33.70 yesterday. They have dropped 22 percent since the Sept. 11 attacks and 49 percent this year, the largest decline of the Dow's 30 stocks.

Airlines have been delaying aircraft deliveries since the attacks, and Boeing has said it may have to extend financing to help cash-strapped carriers take some planes.

Boeing delivered 120 planes in the third quarter -- up from 117 a year earlier, but 19 short of its expectations. The company will cut production to 400 planes next year from 500 this year, a decline worth an estimated $6 billion in sales. The company has said deliveries in 2003 will be lower.

Even those forecasts may be too high. "I don't know who

would want those 400 airplanes right now,'' James said.

The decline would bring Boeing more in line with rival Airbus SAS, which plans to produce as few as 300 planes next year, down from 320 this year.

Boeing got 61 percent of its $51.3 billion in sales last year from commercial airplanes, 24 percent from military aircraft and missiles and 15 percent from space and communications.

A `New Boeing'

Condit has said he's building a "new Boeing'' that is less reliant on swings in aircraft sales.

He has spent more than $25 billion since he became CEO in 1996 to acquire companies such as defense contractor McDonnell Douglas Corp. and Hughes Electronics Corp.'s satellite- manufacturing arm. Last year, he established units to develop in- flight Internet services, air-traffic management and financing.

"One of the reasons we built Boeing the way we have,'' he said last month, "is situations exactly like this.''

Condit pointed out that contributions from the space and defense unit could offset the decline in jetliners. He also said the military may want more C-17 cargo planes, a program inherited from McDonnell Douglas.

Analysts cite other ways Boeing may benefit.

The U.S. Congress authorized $3 billion in additional spending on missile defense for fiscal 2002, and Boeing is the biggest contractor for the planned system of mainland defense. The military may want more aerial refueling aircraft, as well as a classified system of spy satellites that Boeing is building.

"There are some nice programs coming down the pipe,'' said Peter Jacobs, an analyst with Wells Fargo Van Kasper, who has a "strong buy'' on Boeing's stock.

He said Boeing could get 30 percent to 50 percent of the extra spending on missile defense. Military programs typically generate profit margins of as much as 15 percent.

Even with the increases, Jacobs said he's forecasting a "modest decline'' in earnings over the next two years.

Jetliner Unit

Much will depend on Boeing's jetliner unit, which has been reducing factory space, simplifying assembly processes and sending more work to outside companies to lower costs. The company also is cutting as many as 30,000 jobs.

Less research and development spending may also help, analysts said. Boeing suspended development of the long-range 777- 200LR jetliner for 18 months and slowed spending, although the company said it's committed to the high-speed "sonic cruiser.''

"It helps cushion the downturn -- they can flex R&D down as the business goes down,'' James said.

Turgeon said Boeing stock has been tied to expectations of airline seat capacity, which will drop until at least 2003 as carriers retire planes. While he credits Condit with broadening the company, he doesn't believe there is a "new Boeing'' yet.

"Honestly, I never thought of the company that way,'' Turgeon said. "If that was the marketing from management, I would say they have a long way to go.''
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