Boeing Will Post Largest Loss Ever

Boeing, the world’s premier aircraft maker and Southern California’s largest employer, shocked Wall Street on Wednesday with the disclosure that it would post the largest loss in the corporation’s history, the result of serious production problems at its Seattle plants.

Amid a boom in aircraft orders, Boeing factories should be churning out aircraft and booking massive profits, but the firm instead acknowledged Wednesday that it is struggling with “major inefficiencies.”

Boeing’s problems are affecting the entire aerospace industry, straining several Southern California companies that are key suppliers and complicating the future of Boeing-owned Douglas Aircraft in Long Beach.

The production breakdown forced Boeing on Wednesday to announce that it will post a $1.6-billion charge against profits in the third quarter, leaving the firm with a loss that could be as much as $500 million for July through September.

Moreover, the firm said it could take a $1-billion charge next year because of the continuing problems, which it blamed on parts shortages and its hiring of thousands of inexperienced workers to cope with a massive backlog of orders.

Boeing’s handling of the crisis is raising a red flag over the vaunted firm, the nation’s largest exporter, a key Pentagon supplier and one of the most highly respected management organizations in corporate America.

In one measure of how unhappy investors are over the underperforming company, Boeing shares plummeted $4.13 to close at $49.88 in trading on the New York Stock Exchange--representing a loss of more than $4 billion in market value.

The total $2.6 billion in charges over this year and next year is more than double Wall Street’s expectations and represents a sharp contrast to Boeing’s recent efforts to reassure investors that it is in control of the situation.

“There are still unanswered questions about whether we have gotten to the bottom of this,” said Merrill Lynch aerospace analyst Byron Callan. “It raises a credibility issue.”

The firm’s problems are rippling throughout the aerospace industry, which is struggling to cope with Boeing’s incessant demands to increase output and cut costs.

Northrop Grumman, which builds the 747 fuselage in Hawthorne, has fallen behind schedule because of production strains at both its own plant and those of suppliers, said company spokesman Jim Taft. It expects to recover in early 1998, Taft said.

The strains have affected every model of Boeing aircraft but are particularly hurting the 737 and 747 lines. The firm has halted new production of those aircraft for a month.

Many of Boeing’s losses stem from large amounts of overtime and the inefficiencies that occur as production workers try to build aircraft out of the normal orderly sequence that is supposed to govern an assembly line. In addition, airlines are entitled to monetary penalties for late deliveries, although Boeing has not indicated how much it expects to pay out.

“We experienced more problems than we anticipated and we are in the process of working through them,” said Boeing spokesman Paul Bender.

What is yet unclear is how Boeing’s problems will affect its pending decision on the future of Douglas Aircraft in Long Beach and its 10,000 workers building Douglas commercial jets.

Boeing had indicated that it would decide on Douglas’ future by Nov. 1, but this week the company pushed that decision back to late December or next year. Boeing is widely expected to shut down the MD-80 and MD-90 product lines but continue with production of the MD-11 and development of the new MD-95 aircraft.

The company is also considering whether to move substantial Boeing work into Southern California, either for building major portions of aircraft or for the less likely possibility of assembling entire aircraft. The firm employs more than 40,000 people in California, which includes the former employees of Rockwell International and McDonnell.

“People are squeezed for capacity in the industry, and I don’t see that squeeze ending anytime soon,” said Wolfgang Demisch of BT Securities. “Douglas is a real asset to Boeing, and I am disappointed that Boeing isn’t talking about making a decision now.”

Demisch added that Boeing is sitting on another vexing issue related to Douglas: On its books, it is valuing the assets of Douglas at $2.5 billion, far more than it is actually worth. Demisch said he anticipates that Boeing will have to make a major charge on those assets.

Beyond any future charges, Boeing’s $15-billion acquisition of McDonnell has caused other problems by diverting management attention just when Boeing could least afford it.

“Of course, the merger was a distraction to senior Boeing management,” said aerospace expert Robert Paulson, who recently founded the venture capital firm Aerostar Capital. “You have to achieve synergies or you don’t get the benefit from the merger, and that is a distraction for most senior technical managers.”

But Bender rejected such criticism, saying, “I don’t think that has been an issue.”

Another thorn in Boeing’s side is its growing problems on the international space station program, in which it is the prime contractor for the National Aeronautics and Space Administration. Last month, NASA disclosed that Boeing had incurred an estimated $600 million cost overrun on the project.

NASA Administrator Daniel Goldin told Congress that he had found “management weaknesses” at Boeing, particularly in the firm’s development of the complex software system for running the orbiting outpost.

But for all of Boeing problems, the firm is not in jeopardy of losing market share to Airbus Industrie, the European consortium that is aiming to gain parity with Boeing in the next decade, experts say. Although Airbus would like to win some of Boeing’s business, the firm’s own factories are at capacity and sold out through 1998.

The roots of Boeing’s problems can be traced to a risky bet made several years ago that the firm could slash production costs by 25% and double production output at the same time. The firm booked massive orders at prices that gave it very low profit margins, hoping it could lower its costs. It bet wrong.

“We knew Boeing had problems, but today we learned that they are twice as bad as Wall Street expected,” said Lehman Bros. aerospace analyst Joseph Campbell. “Boeing has admitted that it can not take costs down 25% at the same time they double production.”

Campbell said Boeing’s strategy on the charges is to absorb every bit of bad news it can, so investors will look for a recovery in 1999.

“The Boeing stock has underperformed the stock market for a year by a lot,” he added. “They have a lot of angry investors.”

Callan estimates that the firm will end up with a loss of $500 million in the third quarter, which Boeing expects to announce Friday. Callan also said he lowered his earnings estimates for next year from $3.30 per share to $2.50 per share.

Bender, the Boeing spokesman, said the firm’s last operating loss occurred in 1969, when it posted red ink of $21.4 million. The firm had a $231-million loss relating to an accounting change in the second quarter of 1995.

Of the $1.6 billion in charges this year, the company assigned $900 million to production problems and $700 million to a change in the accounting on the development of the next-generation 737. The accounting change is intended to reduce earnings in the short term and brighten the picture in 1999 and beyond. All of the estimated $1 billion in charges for next year are allocated to production inefficiencies in the plant.