Boeing Could Get Harsh Penalty

In a decision that could ground much of Boeing Co.’s rocket business, the Air Force is expected to announce as early as today some of the stiffest penalties ever imposed on a defense contractor.

The penalties -- including the possible barring of Boeing from seeking military rocket contracts -- were being weighed at the Pentagon late Wednesday. They could include requiring Boeing to hand off a third of its Delta IV rocket launch contracts, potentially worth nearly $1 billion, to rival Lockheed Martin Corp., according to people familiar with the discussions among top military officials.

The harshest punishment would be to indefinitely suspend Boeing from contracts for rockets to lift military satellites into orbit, a move that could be financially devastating.

“If Boeing can’t bid on future contracts, then it’s going to have to get out of the business,” said Loren Thompson, a defense analyst for the think tank Lexington Institute. The Air Force is slated to award the next round of rocket contracts, worth billions of dollars, this summer.

Air Force spokeswoman Col. Alvina Mitchell declined to comment Wednesday.

Neither Boeing nor Lockheed would respond to questions about possible penalties. “We’re not going to comment on anything until it gets officially released by the Air Force,” Boeing spokesman Dan Beck said.

The Air Force recently concluded its investigation into allegations that Boeing won a lion’s share of military rocket contracts by using trade secrets illicitly acquired from losing bidder Lockheed in 1998.

The Justice Department is conducting a criminal investigation and has charged two former Boeing employees with stealing Lockheed documents.

Boeing executives concede the employees had the documents, but insist that the two former managers acted alone and that their actions had no bearing on Boeing’s success in winning the contracts.

On Wednesday, Air Force Undersecretary Peter Teets met with Defense Secretary Donald Rumsfeld to discuss possible actions against Boeing, an Air Force official said.

It wasn’t immediately clear if Rumsfeld had signed off on the sanctions recommended by the Air Force. Handing over up to seven rocket contracts to Lockheed would even out the number of launches between the companies at 14 each. The rockets are known as evolved expendable launch vehicles, or EELVs.

Air Force officials are also considering helping Lockheed build a West Coast launch facility at Vandenberg Air Force Base, according to one person with knowledge of the talks. Lockheed had planned to build a launch pad there, but scrubbed that plan in 1998 after it lost the bulk of the rocket contracts to Boeing. The Air Force then canceled two of the launch contracts it had with Lockheed, on grounds that Lockheed lacked a backup launch facility. Most EELVs are blasted into space from Cape Canaveral, Fla.

Severe punishment for Boeing would be a boon for Lockheed. “Bringing Lockheed back to the West Coast launch business and shifting launches from Boeing to Lockheed would be a major windfall for Lockheed, which was severely harmed by the original outcome of the EELV [rocket] competition,” the Lexington Institute’s Thompson said.

James Albaugh, head of Boeing’s space and defense business, raised the prospect Wednesday that severe sanctions could force it to scrap its Delta IV program. The project is based in Huntington Beach, with the rockets manufactured in Decatur, Ala. “If we can’t make money in the long haul, we’re not going to stay in it,” Albaugh said.

The potential of Boeing walking away from rockets could cause the Defense Department to temper its punishment. As a matter of policy, the Air Force wants at least two contractors providing rockets so that the program isn’t grounded if one contractor runs into problems.

The pending resolution of the rocket investigation came as Boeing reported a $192-million loss in the second quarter, mainly due to a $693-million after-tax charge to write down its investment in the commercial rocket and satellite businesses.

Boeing also said for the first time that it may terminate production of its 757 passenger jet, which has seen demand plummet in recent years amid competition from rival Airbus. The one order for a 757 this year was canceled. The company has enough previous orders to keep the line open for about 18 months.

Phil Condit, Boeing’s chairman, said the company was still pursuing several major orders. But if they are not successful, he said Boeing could consider shutting down the line in Everett, Wash.Such a move could result in the company taking a $200-million pretax charge against earnings, he said.

More than 1,000 757s have been built since the plane first flew in 1982, making it one of the more popular single-aisle jetliners. Boeing is considering designing a highly fuel-efficient aircraft that could be seen as a replacement for the 757.

The quarterly loss contrasted with a profit of $779 million, or 96 cents a share, a year earlier. Revenue declined 8% to $12.8 billion.

The quarterly loss was smaller than analysts were expecting after Boeing last week announced it would take the charge related to problems in its commercial space operations. The downturn in Boeing’s commercial businesses, from aircraft to satellites, was offset by continuing gains in its defense business, which saw revenue grow by 7% to $6.6 billion.

“Quarterly results were decent and appear to be better than anticipated,” Byron K. Callan, analyst with Merrill Lynch, said in a report to investors. “Commercial aerospace is bottoming.... Defense operations are solid.”

Callan said he expected a loss of 33 cents a share, compared with an actual loss of 24 cents. A consensus of analysts had expected 43 cents.

As a result, while many defense stocks sank, Boeing shares rose 12 cents to $32.69 on the New York Stock Exchange.

The company said last week it would stop marketing the Delta IV rocket to commercial customers, raising the cost of continuing the production line to make the rocket only for the Pentagon.