Miscalculations Cast Boeing as Its Own Worst Enemy

The massive layoffs announced by Boeing Co. this week reflect the fallout from a series of high-stakes gambles by managers in recent years that have badly misfired and darkened prospects at the giant aerospace firm.

As Asia’s economic crisis has dragged on, the impact on Boeing has been exacerbated by the Seattle company’s own miscalculations, which have left it lurching between hiring and then shortly thereafter firing thousands of new employees, analysts said.

The firm has lost market share to archrival Airbus Industrie, suffered a deep erosion in its profitability and faces a potential failure in its efforts to sell the new 717 commercial jetliner being built in Long Beach.

“They’ve clearly lost control, and the blame has to fall at the feet of the management,” said Cai von Rumohr, an analyst with SG Cowen. “These are not issues that they haven’t handled before.”

Facing slack demand from key Asian customers in 2000 and beyond, Boeing said Tuesday that it will slash production rates for its lucrative 747 jet and several others. The company also said it will cut as many as 53,000 jobs during the next two years.

The change has already begun rippling through the ranks of the company’s vast supplier base.

Los Angeles-based Northrop Grumman, one of Boeing’s largest subcontractors, said Wednesday that it expects to lay off workers and lose about $150 million in sales next year because of the cutbacks at Boeing.

Northrop’s plant in Hawthorne produces fuselages for the 747, the program hardest hit by Boeing’s production slowdown.

Many of Boeing’s current difficulties can be traced to the depths of the last aircraft slump, in the early 1990s, when the company began an ambitious plan to sharply reduce its future production costs. It then sold hundreds of aircraft at discount prices to compete against Airbus.

But the firm ran into production problems at its Seattle plants that it is still struggling to resolve. It was forced to hire thousands of additional workers and order overtime to deal with the backlog.

Nonetheless, the firm has been late in delivering commercial jets during most of this year and anticipates more difficulties well into 1999, putting a tarnish on its reputation with airlines that could last for years.

Now, it is taking another major gamble: that it can improve profitability by laying off a swath of employees and still manage to increase deliveries of aircraft next year.

“It’s not going to be easy,” said Keith Patriquin, an analyst at Loomis Sayles & Co., which owns 1.5 million shares of Boeing’s stock. “They are still planning to produce more planes next year and, at the same time, they’re laying off thousands of employees. Gee, that’s a neat trick.”

Boeing executives say more efficient assembly methods will keep the company on track despite the job cuts. But many analysts have lost confidence in Boeing’s predictions.

“Management has lost credibility on Wall Street,” said Bill Fiala, an aerospace analyst at Edward Jones & Co. in St. Louis. “There’s very little room for further mistakes.”

On Wednesday, shares of Boeing plunged $6.69 to close at $33.69 on the New York Stock Exchange--their worst drop of the year.

The decline reflects doubts about Boeing’s recovery plan, which calls for the delivery of a record number of airplanes in 1999--620, up from the 550 jets this year--at the same time it is laying off tens of thousands of workers.

Boeing’s announcement on Tuesday will reduce production rates in late 1999 and early 2000.

“The real key here is that we did not handle the production increases well,” Boeing Chairman Phil Condit said Wednesday. “We got into a situation where the production efficiency was down significantly, and then [compounding] that was the Asian economic situation.”

Now, Condit said, Boeing has few options.

“Obviously, we’re going to try to get employment as stable as we can,” he said. “But we can’t just sort of hold on to people and hope that things get better.”

Boeing officials acknowledge that its plants still suffer from lingering production glitches, causing the work force to take 20% to 30% longer to build a plane than it did several years ago. Sinking employee morale and potentially contentious labor union contract talks could also derail Boeing’s ambitious production plans for next year.

Boeing has made that mistake before--during the last industry shift in the mid-1990s.

“They laid off too many employees right before the most recent upturn,” Von Rumohr said. “And then they decided to go with a younger, less experienced work force. That was the risk they took.”

Boeing subsequently embarked on its fastest production increase ever, a move that strained the work force, outstripped parts supplies and created costly delivery delays.

Those miscalculations led to Boeing in 1997 posting its first yearly loss in decades.

Things could still get worse. If the Asian crisis spreads further, Boeing could face still another production hit.

And the company--which has been criticized for its slow response to the worsening conditions in Asia--needs to prove it is ready for any further challenges.

“They’re late in making this announcement,” Von Rumohr said. “To say that Asia is worse than it was a few months ago--hello? Where have you been?”

Condit said the company responded as soon as customers asked for changes in their orders and deliveries.

“This is a business that changes with economic conditions,” he said. “If you could predict economic conditions perfectly, you could make a lot of money in a lot of places.”

Loomis Sayles’ Patriquin said Boeing was not alone in underestimating the economic punch of the Asian market troubles. But he remains impatient with the company, which he said should have been pocketing hefty profit instead of losses during the recent jet production peak.

“It’s discouraging,” Patriquin said of Boeing’s ongoing struggles. “The question is, why do they keep finding more skeletons in the closet?”

* HITTING HOME: The Seattle region could get up to 90% of Boeing’s layoffs. C1