Boeing, Despite Scrutiny, Sees Growth Ahead
As the nation’s second-biggest defense contractor, Boeing Co. makes a host of missile systems and warplanes. But this year, it has been the one caught in the crosshairs.
Southern California’s largest private employer, with about 36,000 workers in the region, has found itself in the midst of the worst Pentagon ethics scandal in decades.
In October, former Air Force acquisition official Darleen Druyun admitted to favoring the company on several multibillion-dollar contracts while also talking to Boeing about jobs for herself and family members. Soon after, Boeing’s former chief financial officer, Michael Sears, pleaded guilty to improperly offering Druyun a senior executive post at the Chicago-based firm.
As a result, the Pentagon is reviewing all major Boeing contracts handled by Druyun.
This week, James F. Albaugh, the president of Boeing’s Integrated Defense Systems -- its military unit -- sat down at the company’s Seal Beach offices to talk about Boeing’s prospects in the wake of the scandal.
Question: How was business in 2004?
Answer: We’ve had a lot of outside distractions and issues, but despite all those things we stayed focused on meeting customer expectations and delivering. Over the past two years, we’ve had $80 billion in orders. In the third quarter, we had $90 billion in backlog. Integrated Defense Systems now accounts for 60% of Boeing’s entire revenues [up from 40% in 2001], and operating margins are in double digits. A lot of good things happened.
Q: President Bush wants to cut the budget deficit. Does this mean the boom in defense spending is over?
A: I think so. Between 2001 and 2004, [the Pentagon’s] procurement budget went up by 19%, and the development budget went up by 60%. But the 2004-2005 procurement budget is actually going down and the development budget is going up just a couple of billion dollars.
Q: Don’t the ongoing problems in Iraq also play a role here?
A: You’ve got a new Congress that is more [fiscally] conservative. My guess is that they’ll focus on balancing the budget. You’ve got the need for a supplemental [appropriation this year to pay for military operations in Iraq of] anywhere from $70 billion to $100 billion. We’re wearing out equipment in Iraq, and so the question is what is it going to cost to reset the equipment that’s over there.... All of that will be sorted out over the next few months.
Q: How will it affect Boeing’s financial outlook?
A: We thought we could grow at a pretty good clip even without capturing new programs, just because of the programs we’ve already won. Look at the C-17 [military transport jet being built in Long Beach], for instance. We have a contract on that through 2008. The F/A-18 E/F fighter jet, that goes through 2009. In the near term, we can continue to grow just based on programs we won.
Q: How will the Pentagon deal with these likely financial restraints?
A: We don’t see a lot of new competitions [open for bidding] like we saw in the early years of this decade. We really don’t. New starts are going to be few and far between over the next several years.
Q: What effect will the slowdown in defense spending have on your operations in Southern California?
A: Spending is going to go up in some areas and down in others. I think intelligence spending will continue. I think support for transformational programs like FCS [the Army’s Future Combat Systems] will continue. I think they’re going to take a hard look at force structure -- ships, planes and tanks.
You saw the Air Force talk about reducing the number of wings they have. You’ve seen commentary about potentially reducing the number of ships. But I think out here, we’re pretty well-positioned. We’re getting full [employment] in Huntington Beach. Anaheim is full, Seal Beach is full and Long Beach is full. I don’t see much contraction here as we expand the programs we have already won.
Q: Boeing added about 2,000 jobs in Southern California this year. Is your hiring binge over?
A: If you look at our forecast over the next five years, we don’t see our headcount going up very much at all.
Q: The Pentagon is reviewing contracts overseen by Darleen Druyun. Are any Boeing programs in jeopardy because of the new scrutiny?
A: Based on everything we know, we do not have any evidence that those [contracts] were tainted in any way. We’re working closely with the Air Force, and others, as those programs are looked into. In the event that something untoward did occur, we’ll work with our customers to address it. We don’t have any evidence or any reason to lead us to believe there is a problem.
Q: Yet the scandal has clearly sullied Boeing’s reputation. How will you rebuild it?
A: We’ve done a lot of self-examination and put in place an ethics program that ... I would stack up against any other company’s. But in terms of what Boeing can do, we’ll deliver on the promises we’ve made to our customers and as new issues come forward -- and they will, since we’re a big company -- we’ll address them quickly and consistently. Over time, we can rebuild our reputation. Every day is another day closer to having our reputation being rebuilt.
