Bloomberg News

Boeing Joins Supplier Rockwell Collins in Cost Cuts

November 08, 2012

Boeing Co. (BA:US) plans to almost double a $2.2 billion cost-saving program as Pentagon spending declines, while supplier Rockwell Collins Inc. (COL:US) said it will revise its health-care benefits next week, adding to job losses.

Boeing Co.’s defense unit (BA:US), the second-largest military contractor in the U.S., is looking for another $1.6 billion in savings through 2015, division chief Dennis Muilenburg told employees in a memo yesterday. The company plans to sell buildings, consolidate management and internal organizations, and press suppliers for savings, among other measures.

Chief Executive Officer Jim McNerney and Chicago-based Boeing’s executive council approved the decision on Nov. 5, and it’s not a response to this week’s U.S. presidential elections, said Todd Blecher, a spokesman. Likewise, Rockwell Collins CEO Clay Jones said reductions were planned before the vote and could change, depending on presidential or congressional action.

The Pentagon’s top weapons buyer said this week that the military is preparing for $1.2 trillion in automatic budget cuts, known as sequestration, set for early next year. Half of that is to come from national security, in addition to a $487 billion reduction in the Pentagon’s budget over the next decade. Republican nominee Mitt Romney, who lost the race for president to Democrat Barack Obama, pledged to stop the cuts if elected.

Automatic Reduction

The plan Boeing announced yesterday “would have happened even if sequestration didn’t exist as an issue,” Blecher said. He declined to say if additional cuts will be needed should the automatic deficit reduction occur.

“We have no way of knowing or projecting at this point what the impact would be on us, because we don’t know how it would be implemented,” he said of sequestration.

Shares of defense contractors fell yesterday. Lockheed Martin Corp. (LMT:US), the biggest in the industry, dropped 3.9 percent to $91.15 at the New York close. Boeing declined 2.7 percent to $70.11. Rockwell Collins, with about 55 percent of revenue from military-equipment sales, slipped 2.7 percent to $53.86.

Under Boeing’s plan, some buildings in California will be sold or demolished, adding to the 10 percent reduction in facilities space since 2010 that included the closing of operations in Wichita, Kansas, Blecher said. Employees will be relocated to other buildings in Huntington Beach, California.

Boeing Defense, Space & Security already has cut its executive ranks by 20 percent since 2010 and has another 10 percent to go by year-end, Muilenburg said in his memo. The ratio of employees to managers will rise to 12.5 to 1, from 9.7 to 1, by the end of 2013. He’s also simplifying the company’s infrastructure, reducing the number of divisions to 10 from 13.

Employee Transfers

More layoffs (BA:US) are to be expected, though Blecher declined to give a figure and said many employees will transfer to other units. Boeing has hired more than 20,000 people in the past two years for its commercial operations, where it’s boosting production more than 60 percent. The defense business, which contributed about 46 percent of Boeing’s $68.7 billion in revenue in 2011, has cut about 6,300 jobs in that same period.

Defense contractors have been firing employees and restructuring their operations for the past couple of years in response to the slowdown in military budget growth that began in 2009.

About 600 Lockheed Martin executives took early retirement in 2011. Last year the company, which makes the F-35 Joint Strike Fighter, also offered voluntary retirement packages to 6,500 salaried employees. That followed 1,500 job cuts at its aeronautics unit, which makes the F-35 jet. Raytheon Co. (RTN:US), the world’s largest missile maker, has said it had a net reduction of 3,000 employees this year because of changes to the company’s programs.

Competitive Position

“All of our industry is looking at that same uncertainty,” Muilenburg wrote to employees. “I like Boeing’s competitive position and our approach -- facing into it aggressively and with a sense of productive urgency -- and not ‘hunkering down.’”

The cuts have hit suppliers equally hard, including Cedar Rapids, Iowa-based Rockwell Collins, which makes equipment including cockpits and radios. The company may have to fire as many as 1,250 workers in the fiscal year through September, more than 6 percent of a workforce of 19,500, Jones said. He’s also restructuring European operations.

“We have no idea within the realm of 10 percent what the defense budget of the U.S. is going to be,” he said yesterday in an interview. “I am planning for the worst.”

Pentagon constraints aren’t the only issue having an effect on the workforce. Jones said he’ll let employees know next week about changes to their health-care plans over the next two years as health-care reform legislation is enacted.

“It would be a misinterpretation to say we’re going to slash benefits,” Jones said. “We’re going to move in the direction this legislation requires us to do and manage the cost to remain competitive. It’s a dramatic change.”

To contact the reporter on this story: Susanna Ray in Seattle at sray7@bloomberg.net

To contact the editor responsible for this story: Ed Dufner at edufner@bloomberg.net


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Companies Mentioned

  • BA
    (Boeing Co/The)
    • $122.29 USD
    • -0.03
    • -0.02%
  • COL
    (Rockwell Collins Inc)
    • $74.01 USD
    • -0.21
    • -0.28%
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