Credit Crunch Could Prove Costly for Boeing

(page 2 of 2)

Fears have been stoked by uncertainties over the prospects for such big buyers as the International Lease Finance Corp. (ILFC). The outfit, which buys planes and leases them to carriers, has more than 100 Boeing planes on order and owns more than 1,000 planes of all sorts. But it faces an uncertain future as a subsidiary of American International Group (AIG), the giant insurer recently taken over by the U.S. government. A spokesman for AIG declines comment on plans for ILFC, though the leasing unit is widely expected to be sold to raise cash for the parent company. Recently appointed AIG Chief Executive Edward M. Liddy could tip his hand on plans for International Lease Finance on Friday, Oct. 3, when he is slated to provide an update to investors.

787 Delays

The bigger threat for Boeing is that a prolonged strike in Washington State further delays delivery of its new 787 Dreamliner and forces Boeing to compensate carriers for those delays (BusinessWeek.com 8/29/08). Hopes are fast fading that Boeing will be able to roll out its 787 by yearend. The jet has been delayed three times so far, by more than a year, in part because of problems with parts furnished to Boeing by suppliers across the globe. Boeing executives insist on the right to outsource globally, saying that can help smooth the way toward aircraft sales.

No bargaining sessions are slated between the company and the 27,000-member International Association of Machinists & Aerospace Workers (IAM), which hit Boeing with a labor strike on Sept. 6. The IAM, believing it has leverage now because of Boeing's relatively good financial health and big order book, argues the planemaker's recent hefty profits should have led to better terms for workers in a three-year contract, not "givebacks" in health care and other programs. The union and Boeing are also far apart on how much work Boeing should be able to outsource.

The financial crunch is going to last longer than Boeing's strike. But it, too, is probably a short-term problem. The demand for planes, however, stretches through economic cycles. Unless it is hit with cancellations, Boeing's order backlog could take it well into the middle of the next decade. And so far, cancellations are minuscule: Azerbaijan Airlines, for instance, shelved an order for a new 787.

"The aviation market is a long-term-cycle business. The orders aren't for delivery tomorrow," says Jon B. Kutler, who runs Admiralty Partners, a private equity firm that invests in aerospace and defense companies. "The latest changes to the global economy and financing are reasonably new."

Joseph Weber is BusinessWeek's chief of correspondents, based in Chicago.