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NEWS ANALYSIS

Brighter Skies for a New Boeing

Aerospace: As the turbulence in commercial aircraft continues, the firm is cutting costs and fueling its growth through military and space contracts.

July 18, 1999|JAMES FLANIGAN and LESLIE HELM | TIMES STAFF WRITERS

SEATTLE — If Boeing Co. can harness all of the potential in its commercial and military aircraft, space and missile businesses, it will emerge in the next five years as one of the world's most powerful, profitable and impressive companies.

That's far from the conventional description of Boeing today. Analysts and commentators have been highly critical of management after years of troubles in commercial aircraft, where mighty Boeing has been humbled by Airbus Industrie, the European consortium. The recent loss of an order for one fighter plane and government criticism of another, plus launch failures in Boeing's Delta rocket program, have further damaged its reputation and stock price.

But views on Boeing are beginning to change, thanks to improved earnings at the Seattle-based company. Second-quarter net income reported last week totals $520 million, excluding a one-time gain from a tax settlement. That was a 55% rise

from operating earnings a year earlier, on a 13% increase in revenue, a clear indication that the company has brought its jetliner production back from the chaos of a few years ago. Boeing stock has recovered from a three-year low of $29.50 a share in October to $46 on Friday.

And Boeing management is aiming higher. On Thursday, Chairman Philip Condit and Chief Financial Officer Deborah Hopkins announced a new set of targets for cutting overhead, inventories and time to market, with the goal of more than doubling profit margins to better than 10% in the next three to five years.

To be sure, Boeing is not a quick or a guaranteed turnaround story. The world market for airplanes is in a severe downturn as recession-bound countries in Asia and Latin America cancel orders and airlines everywhere watch their pennies.

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Whereas Boeing had orders for 563 new planes last year, the number is likely to be closer to 400 this year, down almost 30%. Reflecting weaker orders particularly in Asia, Boeing expects its revenue to drop by $10 billion next year to $48 billion. The slack times are likely to continue until 2003, analysts say.

Even if Boeing can regain its footing, Airbus has ended the Seattle-based company's total dominance of the commercial plane business. Airbus captured almost as many orders as Boeing last year. With the two in furious competition since 1995, Airbus has forced Boeing to cut prices heavily on many planes. The result is that neither plane maker sees good profits in planes now being delivered. Airbus, in fact, lost money last year, and Boeing made only a slim profit on commercial aircraft.

Yet so much else has changed for Boeing that focusing only on civil aircraft misses the point that this is a new company. Because of the 1997 acquisitions of Rockwell International and McDonnell Douglas, Boeing now is the largest producer of space systems and the second-largest military contractor in the U.S.

The military and space businesses have changed the nature of Boeing's finances, accounting for more than 97% of the company's pretax profit of $1.5 billion last year on only 36% of its total revenue of $56 billion. Those divisions, which do almost all their business with the U.S. government, may well be a financial mainstay for Boeing in the next few years as the commercial aircraft group works through difficult times.

But beyond revenue and earnings, the Rockwell and McDonnell additions have brought Boeing a new generation of management and new prospects. The real story at Boeing today, say analysts, no longer lies with Condit or his second in command, President Harry Stonecipher, the former chief executive of McDonnell Douglas. Rather, the company's plans and hopes rest with the managers of its three main divisions:

* Jim Albaugh, 49, who holds degrees in math and physics as well as an MBA, heads the Space & Communications Group. This division, based in Seal Beach, is charged with providing revenue growth for Boeing.

* Michael Sears, 52, who holds electrical engineering and management degrees, heads the Military Aircraft & Missile Systems Group, based in St. Louis. This division provided most of Boeing's profit last year, earning $1.3 billion on $12.9 billion in revenue.

* Alan Mulally, 54, the aeronautical engineer who headed the design team for the successful Boeing 777, is in charge of the Commercial Airplanes Group, the traditional heart of Boeing. This Seattle-based division, where Mulally took command last fall, eked out a $63-million profit on $36 billion in revenue in 1998, after having a loss of $1.8 billion for 1997. Mulally's challenge is to cut Boeing's production costs and restore its reputation with customers.

The segments provide Boeing with a hedge classic in the aerospace business: the improbability that all three businesses will hit a downdraft simultaneously. Already it appears that Boeing's space and military businesses are poised to grow while commercial aircraft sales face several lean years.

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