Boeing Scales Back Big Plans for Its Delta IV
Facing intense overseas competition in the weakest satellite market in decades, Boeing Co. said Tuesday that it would take a $1.1-billion second-quarter charge and stop seeking commercial buyers for its new Delta IV rocket.
European consortium Arianespace has bid aggressively to win customers, giving it about half the global commercial launch business, while China and Japan also look for launch contracts. And worldwide, the number of commercial satellite launches is expected to fall to 28 this year, down from 106 in 1998.
“We don’t see a recovery even by the beginning of the decade,” said James Albaugh, head of Boeing’s defense and space business. The downturn “will be long and protracted.”
Analysts said the charge could wipe out Boeing’s second-quarter profit. It will report earnings July 23.
Although the announcement Tuesday wasn’t entirely unexpected, the company’s shares fell $1.14 to $33.14 on the New York Stock Exchange.
Boeing said it would continue to produce Delta IV rockets for the Defense Department. But it won’t market them to commercial customers for at least five years. The company will carry on with two commercial rocket programs: Delta II and Sea Launch, a Long Beach-based joint venture with a Russian aerospace firm, Energia.
The Delta IV, which can carry a payload of up to 29,000 pounds, was designed to launch military satellites, but Boeing hoped to leverage the technology to win additional contracts in what in the late 1990s seemed to be a booming market for telecommunications satellites. The company expanded its satellite business in 2000 by paying $3.8 billion to buy the satellite manufacturing operations of Hughes Electronics Corp., a unit of General Motors Corp.
The timing was poor. Demand dropped after the collapse of elaborate satellite communication systems planned by Teledesic and Iridium. Last year, Boeing launched only five commercial satellites, down from 15 in 1998.
“The business is not growing as they thought it would,” said Marco A. Caceras, a senior space analyst for aerospace research firm Teal Group Inc. Boeing is giving up on the Delta IV for the rest of this decade, and “they’re not going to market it and actively look for customers because there aren’t any.”
In last year’s second quarter, Boeing posted a net income of $779 million, or 97 cents a share. Analysts had anticipated that Boeing would report net income of 46 cents a share in this year’s second quarter.
The company has a contract from the Pentagon for 19 Delta IV launches. But Boeing said it spent “in excess of $1 billion” to develop the rocket, intended to be a lower-cost, more-reliable alternative to the current generation of launch vehicles.
About $835 million of the pretax charge reflects the lower launch forecast. Boeing slashed 30 potential commercial launches over the next decade from its forecast.
An additional $265 million reflects losses at the Satellites Systems unit in El Segundo, where several production problems have delayed delivery of four satellites -- three commercial and one military. The satellites cost as much as $250 million and can take 18 months to build.
The charges aren’t expected to lead to job cuts in El Segundo, where Boeing makes commercial satellites, or in Huntington Beach, where about 1,300 engineers oversee the rocket program. The rockets themselves are built in Decatur, Ala.
Boeing’s Southern California operations have already undergone major cost reductions. Its El Segundo facility, for instance, has slashed its workforce by nearly half to about 5,000 over the last two years.
Chicago-based Boeing is the world’s largest commercial aircraft maker and the nation’s third-largest defense contractor, with about 35,000 employees in Southern California.
Boeing executives said the charge reflected a better understanding of the telecommunication industry downturn, which has hammered both satellite and rocket launch businesses.
The fallout has been dramatic. As Boeing was delivering its pessimistic outlook Tuesday, Loral Space & Communications Ltd. was filing for Chapter 11 bankruptcy protection.
New York-based Loral made the filing as part of an agreement to sell six of its telecommunications satellites to Intelsat Ltd. for $1.1 billion in cash. The proceeds will be used to pay down debt Loral built up while trying to survive the satellite downturn. Loral said it would continue to operate five satellites and keep its satellite-making facilities in Palo Alto.
Boeing also said it would make additional management changes at the rocket and satellite businesses as it refocused to gain more military work. Boeing’s mainstay commercial aircraft business has been facing a big slowdown in orders since the Sept. 11 terrorist attacks.
The Justice Department and the Air Force are investigating allegations that Boeing may have stolen trade secrets from rival Lockheed Martin Corp. to win the military contract for the Delta IV program. If found guilty of wrongdoing, Boeing could be barred from doing business with the Pentagon or may face handing over some of the 19 military launches it won to its rival.
Boeing Chairman Philip Condit asserted Tuesday that the company was doing well thanks to a surge in defense-related work. Boeing expects for the first time in decades to generate more revenue this year from its defense business than from its namesake commercial aircraft making business.
“Boeing today has an integrated defense business, which, with one exception, is operating very well,” Condit said.
