Jet Lag
Suffering through one of the worst production crunches in its history, Boeing Co. disclosed Friday that it will not start making any new 747 or 737-700 jetliners for at least the next month.
Boeing was forced into the drastic action by a breakdown in its ambitious effort to more than double aircraft production rates to satisfy a rush of worldwide orders.
The embarrassing setback is a reflection of both Boeing’s healthy backlog of aircraft orders and the firm’s vulnerability to a boom-and-bust cycle that has been the bane of the aerospace industry for decades.
The entire U.S. aerospace supplier industry is struggling to meet the firm’s massive demands, analysts said, even though the military aircraft sector remains in a prolonged slump.
Boeing blames the production snafus on shortages of structural and electronic parts, as well as fasteners. The firm also said it is facing technical problems on its next-generation small jet, the 737-700.
As a result of the production problems, Boeing’s aircraft deliveries will be pushed back by a month or more, and the delays will continue until mid-1998.
In the last 18 months, Boeing has increased its overall aircraft production rate from about 18 airplanes a month to 40 aircraft per month, and it plans to further boost the rate to 43 aircraft per month by next year. Meanwhile, the firm has hired 32,000 new employees since the beginning of 1996, bulging its Puget Sound employment to 100,000.
The Seattle-based aircraft giant declined to say how much financial damage the problems will cause, but aerospace analysts said the firm stands to lose as much as $300 million in profit this year. A portion of those losses are likely to be recouped next year, however.
“It is pretty severe,” said aerospace analyst Wolfgang Demisch of BT Securities. “To shut a line down for a month just to get caught up is a big deal.”
At least some of the delayed aircraft deliveries will trigger monetary penalties for Boeing, the firm acknowledged. Paul Nisbet, analyst at JSA Research, estimates Boeing will sustain costs of 10 cents per share, or $100 million, which it cannot recoup.
Nonetheless, Boeing stock closed at $52, down just 50 cents per share in New York Stock Exchange trading Friday.
Boeing will not start any new 737-700 production for 25 working days--which translates into roughly five weeks--or any new 747 jets for 20 working days--roughly four weeks, according to company spokesman Brian Ames.
“We have never had a squeeze like this,” Ames said.
The firm hopes the respite will permit it to restore order on the assembly lines and give suppliers a chance to catch up.
At Boeing’s massive Everett, Wash., assembly plant, the firm has been short 13,000 items for the 747 alone. Normally, the factory would be short 400 parts, Boeing officials said.
Parts shortages force work to be done out of the normal production sequence, a costly and disruptive problem that drove Boeing to order the shutdown.
“We have determined that the most effective recovery measure for the 747 is to immediately stop the production line,” said Bob Dryden, executive vice president for airplane production. “This will allow us to complete those jobs that have fallen behind schedule.”
In a conference call to securities analysts, Boeing said it is falling back on overtime to help meet schedules. In some areas, overtime is making up 20% of the work, the firm said.
Northrop Grumman, which supplies the 747 fuselage, said it too is facing parts shortages that are causing “certain stresses,” but those are not responsible for Boeing’s overall problems.
“It goes all up and down the food chain,” Northrop spokesman Jim Taft said. “We are continuing to meet Boeing’s requirements.”
Indeed, analyst Byron Callan of Merrill Lynch said Boeing’s problems are rippling across the nation, causing “the whole aerospace supply base to groan under this.”
Boeing also blamed some problems on the design of the 737-700. The firm is redesigning the aircraft’s horizontal stabilizer because of vibration problems in flight tests.
Ames said the first delivery of the new jet, which is going to Southwest Airlines, is now about a month behind schedule.
Ron Woodard, Boeing commercial airplane president, called the company’s problems “growing pains,” but added that its factory shutdown is just the “kick-start” the company needs.
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Production Impediments
Boeing Co. is trying to increase its production from 18 planes a month to a record 43 by mid-1998. On Friday, it announced that a parts shortage is forcing it to temporarily freeze production of its 747 and 737 jetliners. Boeing jet deliveries:
1998: 480*
* Estimates
Source: Boeing
