| BUSINESSWEEK ONLINE : MAY 3, 1999 ISSUE | ||||||||
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| COVER STORY
Boeing Breathes Easier But profits won't be so forthcoming in the future One cheer for Boeing? Profits for the first three months of 1999 were $469 million--nearly 10 times what Boeing earned that quarter last year. At 50 cents a share, Boeing beat analysts' estimates by 7 cents. It's a sign that the world's largest jet manufacturer is finally dealing with its production problems. And on Apr. 15, when Boeing announced results, investors bid up the stock $4, to $41.69. It closed on Apr. 21 at 40 3/8. That's the good news. The bad news: Boeing and its beleaguered commercial-airplane division, which accounts for 60% of revenues, will be hard-pressed to repeat the star turn in the coming quarters. Why? Partially because of the cyclical nature of the aircraft business. Boeing may be finally meeting delivery dates on its accelerated production schedule. But by 2000, those production numbers are expected to nosedive to 480 planes from a record 620 this year. Commercial revenues will stall in 2000, slipping to $28 billion from $38 billion in 1999. According to analysts, orders probably won't increase again until close to 2003 when the next aircraft-ordering cycle heats up. ''RICH MIX.'' Price is another problem. While many of the planes shipped this quarter didn't carry discount prices, the same cannot be said for the coming quarters. Those planes are expected to be part of the lowball deals Boeing made as it slugged it out with rival Airbus Industrie. For example, Boeing is expected to deliver 282 Next-Generation 737s this year. The jets were discounted and sold for an average of $31.7 million, according to JSA Research Inc. What's worse, many of the orders for the second, third, and fourth quarters do not include a large number of profitable 747s, which will mean margins for the company may drop. ''Our first quarter had a very rich mix of products,'' admits Boeing CFO Debby Hopkins, ''and the deals involved few concessions.'' There is one way to beat the cycle: Raise margins. In the first quarter, the commercial division was able to increase its profit margin to 3.9%--the highest in the past seven quarters. If Boeing can raise operating margins by just 1%, earnings would be stable next year. So, executives are focusing on cost-cutting. During the first three months of 1999, overtime came down 10% and 10,000 jobs were cut. But more layoffs may be necessary, and the company may be forced to outsource more work. ''They have to make the corrections fast enough to compensate for the downturn in 2000,'' says Lehman Brothers Inc. analyst Joseph F. Campbell Jr. But that may not be so easy. This summer, new labor talks come up. And Bill Johnson, president of a Boeing machinists local, believes workers may have the upper hand, since the company can't afford a strike particularly after the production problems of 1997 and 1998 that cost it as much as $4 billion in write-downs. Meanwhile, Airbus is bringing new pressure, threatening to develop a rival to the 747 and contemplating a 100-seater jet to take on the slow-selling 717. Boeing realizes its challenges. ''We have made some improvement, but we have a long ways to go,'' says CEO Phil Condit. If the company isn't ready for the next boom, this one cheer could be the last one for a while. By Seanna Browder in Seattle _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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 A Wiser Bull? COVER IMAGE: A Wiser Bull? TABLE: The Market Turns From Glamour To Grit CHART: Cyclicals Trump the S&P 500...Industry Comes Back...As Do Financials and Small Caps The Highfliers: From Vertigo to ``Only Very Volatile'' CHART: The Wild Ride for Net Stocks Commentary: Consider This: A Tech Slump May Spark a Hard Landing Boeing Breathes Easier TABLE: Forecast for Boeing: Partly Sunny TABLE: Profit Woes? Not This Time ONLINE ORIGINAL: How a Market Shift Could Realign the Mutual-Fund Stars INTERACT E-Mail to Business Week Online | |||
