Boeing Shoots for the Stars
Boeing Co. has assembled a business empire at its Seal Beach space and communications division and now has a strategy for an even bolder expansion.
The aerospace giant has spent more than $20 billion over the last 3 1/2 years gobbling space businesses, primarily in Southern California, and is expected to soon close its acquisition of Hughes Electronic Corp.’s El Segundo satellite division.
That deal would pull Boeing, already the National Aeronautics and Space Administration’s largest contractor and California’s largest private employer, ahead of Lockheed Martin Corp. to become the world’s largest space company by revenue.
These purchases have left many investors puzzled about Boeing’s strategic focus. “The underlying direction of their space business is still a little fuzzy,” said Bill Fiala, aerospace analyst at Edward Jones in St. Louis. “Where they will go with it is a little uncertain. They have their hands in so many different pots.”
The senior vice president who rules over all this, James Albaugh, envisions that the real growth is yet to come. With the addition of the Hughes space-based communication workers, his division will employ about 46,000 by year’s end. Such a legion of technology talent will win major orders for communications and defense systems that Boeing will design, assemble and operate for both government and commercial customers, Albaugh said.
Underscoring Boeing’s new clout in space is its contract award last fall to build Uncle Sam’s next generation of spy satellites. The secret project, considered among the most prestigious in the military space sector, promises to bring thousands of jobs to Southern California.
Albaugh wants even more. He aims to accumulate $1 billion of cash for future investments by 2001 and to double sales in his division by 2005, a goal outlined a year ago to division managers. Boeing’s ability to meet these ambitious goals could have wide-ranging effects on the region’s economy.
Ironically, Boeing’s newfangled interest in what Albaugh, during an extensive interview last month, called “asset-light, intangible-heavy” businesses comes after a cascade of heavy acquisitions of technology and production facilities.
Boeing agreed to acquire the Hughes satellite-building division for about $3.8 billion in January, a deal that could close this month. Approval is still required from antitrust regulators in the U.S. and from the European Union. The purchase comes even as the company continues to assimilate the businesses it acquired in 1996 from Rockwell International Corp. for $860 million in stock and McDonnell Douglas Corp. for $13.3 billion in stock.
Into the Boeing empire, long focused on its signature commercial airplanes, the expansion has brought a variety of space products: main engines for the space shuttle produced by Boeing division Rocketdyne in Canoga Park, Delta rockets in Huntington Beach and missile defense programs in Anaheim.
The space division had 1999 revenue of $6.8 billion, down from $6.9 billion the year before. But operating earnings in 1999 jumped to $415 million from $248 million. One indication of the importance of Albaugh’s operation to Boeing is his own income: His 1999 salary and bonus totaled $860,262, up nearly 70% from a year earlier, according to Securities and Exchange Commission filings.
Tig Krekel, president of the Hughes division that Boeing is buying, said in an interview that Hughes itself has over the last three years taken on increasingly ambitious satellite systems projects. These include a $1-billion space-based mobile phone and data transmission system financed by Thuraya Satellite Telecommunications Co. of the United Arab Emirates. After the merger, Hughes and Boeing teams will take on even more sophisticated projects, Krekel said.
But in aerospace, bigger isn’t always better. Lockheed Martin has spent the last year trying to sell some of its divisions and pay down heavy debts. Boeing has suffered indigestion in bulking up on space businesses. Some plants have been closed and manufacturing positions lost, including, most recently, about 900 jobs at Huntington Beach as operations were transferred to Colorado and Alabama. Boeing’s unions have promised to contest cutbacks, especially those that might threaten jobs in Seattle.
And some investors are confused about the company’s long-term plan. The space division still accounts for less than 20% of Boeing’s nearly $60 billion in annual sales. So its influence on how Wall Street values the company remains small, said Merrill Lynch’s aerospace industry analyst in New York, Byron Callan. “Boeing is still viewed as a commercial airplane company,” he said.
The company’s investment in intellectual assets could change all that. The ability to draw on engineering talent from Rockwell and McDonnell Douglas, called the heritage companies, lies behind Boeing’s recent contract successes and a proposed commercial venture, Albaugh said. “They actually feed on each other with their diverse thoughts to come up with architectures or approaches that I don’t think any of those heritage companies would have come up with on their own,” said the 50-year-old executive, who began his career as a Rockwell engineer in the 1970s.
Boeing is now seeking to add Hughes’ know-how in space-based communications to its own engineering base, Albaugh said.
That talent pool allowed Boeing to win the national missile defense contract in 1998, which is already worth $1.6 billion, and possibly much more if the government decides to deploy the controversial network of radars and weapons designed to defend the U.S. against ballistic missiles.
The company also won a contract to develop the nation’s new spy satellites for the National Reconnaissance Office, unseating long-standing veteran Lockheed Martin. Subcontractors will include the Hughes satellite division that Boeing is purchasing, Eastman Kodak Co. and Raytheon Co. Boeing will act as system integrator. Previous reports have pegged the value of this classified project, called the Future Imagery Architecture, at $4.5 billion.
But John Pike, director of space policy for the Federation of American Scientists in Washington, said that based on historical budget allocations to the reconnaissance office, the contract could generate around $8 billion in revenue for Boeing over the life of the program and create about 8,000 jobs.
“Entire generations of schoolchildren of company employees will be sent to college with that money,” Pike quipped.
Albaugh declined to comment on details of the contract, citing its classification.
“It’s going to mean jobs in Seal Beach; it’s going to mean jobs down in El Segundo,” Albaugh said. “It’s going to create a lot of jobs because it is a big program, no question about it.”
Indeed, Boeing has quietly begun hiring Future Imagery Architecture workers. Recent “help-wanted” postings on the company’s Web page feature positions based in Building 90 of the Seal Beach campus.
Although these projects are allowing Boeing to enter new areas, it’s hard to depend on the government for long-term business growth, with space and defense budgets expected to remain roughly flat over the next decade, Albaugh said. Federal work also can be less than lucrative. Indeed, in February, NASA’s inspector general indicated that the company stands to forfeit most of its profit on the International Space Station because of nearly $1 billion in cost overruns.
Growth certainly won’t be easy on the launch-services side, where Boeing offers the Delta rocket line. With recent problems with satellite telephone systems, such as the failure of Motorola Inc.’s Iridium system, demand for launching satellites into low Earth orbit is much weaker than previously believed.
From Lockheed Martin to Europe’s Arianespace, Boeing has many rivals that have been willing to exploit its recent technical problems. Two expensive failures of the Delta III embarrassed Boeing into spending at least $34 million to put a dummy payload into orbit this fall.
But Albaugh said the company’s next line of rockets, the Delta IV, will pull ahead of other offerings. “We have reduced the cost of going to space by about 50% with the Delta IV offering,” Albaugh said. The first launch is scheduled for late next year.
Another commercial offering the company began touting this spring is the Connexion system, which would beam broadband Internet services to passengers on airplanes and serve as a kind of “America Online at 30,000 feet.” The service is another example of strong systems integration work by the company, Albaugh said.
Boeing faces heated competition from several joint ventures backed by big players in aerospace and wireless technology. But if Connexion sells, the program could generate jobs for Orange County. Boeing is looking to relocate the 100 or so Connexion employees in Anaheim to new, larger facilities in Irvine, where it would hire more technicians, a spokeswoman said.
On the horizon, Albaugh believes, are a range of satellite-based data services in which Boeing could become the main trafficker.
Putting together signals from different espionage sources in orbit and on the ground for government intelligence agencies, or signals from drilling platforms for oil companies, is a potential market for Boeing’s systems integration work, Albaugh said.
To replace the current ground-based system of air traffic control, the company believes foreign governments and even the U.S. will gradually turn to orbiting satellites to help guide jetliners. By 2009, Boeing expects to pull in $4 billion in revenue from systems integration work in this area, for which Albaugh said communications know-how from Hughes engineers would be useful.
Boeing’s grand strategy, of course, will face obstacles every day. A prominent test failure of the national missile defense program, which Boeing leads as the systems integrator, last month demonstrated that sophisticated engineering concepts rarely make a smooth transition to working reality.
In the July 7 test, the Pentagon said, a “kill” vehicle didn’t separate from its booster rocket and missed the dummy warhead it was supposed to hit. Boeing is held accountable for all the project’s elements, even those built by other contractors.
Albaugh said prior tests have shown the interceptor’s software and basic technology can meet the goals set out by the Defense Department. “But be that as it may, it was a failure,” he said. “And what we need to do is understand how the thing failed and move on.”
