Boeing: Finally Flying Right?


By Stanley Holmes Boeing's defense business overcame recent scandal, turmoil, and archrival Lockheed Martin (LMT) on June 14 when it won a $3.9 billion development contract to supply the U.S. Navy with the next generation of submarine-hunting airplane. While the contract -- one of the Pentagon's largest this year -- represents a huge financial win for Boeing (BA), it could also signal that the defense contractor is back on track.

The first delivery of the so-called Multi-Mission Maritime Aircraft program (MMA) isn't expected until 2009, with full production revving up in 2013. And If the Navy takes all 109 modified 737 jets as planned, it will mean $15 billion in sales for the Chicago aerospace giant. In the meantime, however, the contract award will boost morale at Boeing's $27 billion Integrated Defense Systems. And it will help top gun James Albaugh quiet his critics. Many have questioned whether the 54-year-old CEO's ability to clean up Boeing's biggest business unit, boost profits, and restore its credibility.

SURPRISE VICTORY. It hasn't been an easy year. For every new and potentially lucrative defense program Boeing has secured -- such as the multibillion Future Combat Systems contract -- it has seen one of its other defense units, such as its satellite division, underperform. Although the worst may be over for Boeing's myriad satellite businesses, quality glitches, overly optimistic market estimates, and poor execution have cost the company more than a billion dollars in write-offs over the last several years.

Plus, Boeing is still trying to step out of the shadow of several colossal defense scandals of its own making. The Pentagon has shelved a multibillion Air Force contract that would have had Boeing build aerial refueling tankers, and Boeing fired its CFO last year for improperly negotiating a job with a former Air Force official. Earlier, the Pentagon fined Boeing $1 billion and suspended it from bidding on future Air Force rocket launchers after the company admitted to possessing nearly 40,000 pages of proprietary documents from Lockheed.

The MMA contract, however, could signal that the worst is over. "The win should help dispel the notion that Boeing remains in the penalty box," Jim Higgins, Credit Suisse First Boston aerospace analyst, wrote in a report.

VENUS AND MARS? Indeed, this crucial victory could erase all of those unpleasant memories and prove to be the turning point for Boeing's much-maligned defense businesses. It certainly surprised Wall Street and Beltway insiders. They had predicted that Lockheed's cheaper solution of upgrading its existing P-3 propeller planes would prevail. Now, Boeing's 737 will replace Lockheed's turboprop P-3 Orion, which has served as the Navy's antisubmarine and reconnaissance plane for about 40 years. "MMA is a game-changing win -- both strategically and financially," reported Heidi Wood, aerospace analyst for Morgan Stanley.

Boeing secured the MMA contract with a bold plan that leverages its defense and commercial expertise. Surprising as it may seem, the MMA may be the first program that truly justifies Boeing's controversial 1997 merger with McDonnell-Douglas. Until now, the two groups were about as similar as Venus and Mars. Boeing would build a commercial jet and fly it to its Wichita modification center for conversion into a military jet -- at a huge additional cost.

This time, defense and commercial teams worked together to redraw how they would produce a modified 737 submarine hunter. Boeing will produce the military version from the ground up, saving time and money. "Without the power of bringing these heritage companies together, we wouldn't have had this win," Albaugh told journalists.

Boeing's unexpected success proves that when this company of military and commercial airplane fanatics focuses on what it does best -- design and build airplanes -- even the taint of scandal can't hold it back. Stanley Holmes is a correspondent in BusinessWeek's Seattle bureau


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