Boeing: Breaking the Line


Boeing (BA) is expected to send out notices to suppliers on Friday telling them to stop producing certain parts for the C-17, the big-bellied Air Force transporter that hauls troops, tanks, and supplies to hot spots around the globe, BusinessWeek has learned. Notices would go first to those suppliers who make the parts with the longest lead times, such as landing gear. This would mark the first step to a permanent shutdown of the assembly line and tens of thousands of lost jobs.

Known as "breaking the line," Boeing officials have been warning the Air Force and Congress this day would come if new funding couldn't be found to keep the line open. And it appears no new funding is going to be earmarked for the C-17, making it a casualty of the Pentagon's shifting budgetary priorities. The Air Force has decided it can't afford to spend its money on any more of the $200 million airplanes, especially with war-time demands stretching its operational budget. The plane is its highest priority purchase, among those without funding (see BusinessWeek.com, 4/27/06, "Boeing's New Pentagon Play").

SCHWARZENEGGER PROTEST. The development comes as Boeing is trying to put its scandal-plagued past behind it and win new business from the Pentagon, in the face of declining defense budgets. The Chicago aerospace giant agreed to pay a record $615 million settlement to the U.S. government over egregious ethics charges and is now preparing to battle rival European aerospace giant EADS for a lucrative $25 billion contract to build 100 aerial refueling tankers. Boeing's commercial jet business is booming, a key reason its stock is up 16%, at about $77, over the past 12 months (see BusinessWeek.com, 4/27/06, "Boeing Does the 'Right Thing'").

Yet the company's defense unit is scrambling to save some of its most profitable programs from the budget ax. The fate of the C-17 program represents the most vivid symbol of the coming lean times for defense contractors. If no new money is secured for the C-17, Boeing will shut down its Long Beach (Calif.) assembly line in 2008 when it completes its contract with the Air Force for 180 C-17 airlifters. That would put about 7,000 people in Long Beach out of work, as well as the 18,000 workers employed by the 700 suppliers in 41 states who have a stake in the aircraft program. It's also the last big aircraft being built in California.

The end of the C-17 would be the end of the state's long and storied history in military and commercial aviation. Gov. Arnold Schwarzenegger sent a letter of protest to President George Bush. "I urge you to reconsider your decision to discontinue the production of the C-17 Globemaster III program as you build your budget request for FY 2008," he wrote. " I am writing not only because production of the C-17 affects thousands of California workers and has a multi-billion dollar impact on the local economy, but because the C-17 plays an essential role in military operations and the Global War on Terror."

FRIDAY DEADLINE. Certainly, the thought of losing high-paying, high-skilled manufacturing jobs has prompted endless congressional speeches, committee hearings, and deft budgetary maneuvers to try to come up with enough money to keep the line going. So far, Congress seems to have lost the budgetary battle with Donald Rumsfeld's Defense Dept. The Defense Dept., which has cut back to 180 airplanes from the original demand for 220, wants to spend its money on higher-priority equipment. Members of Congress would like to keep as many jobs in their districts as possible. Congresswoman Stephanie Tubbs Jones recently penned a letter in which she noted that the Goodrich Landing Gear Division, used in the C-17, is located in her Northeast Ohio District. "The C-17 is critical to Ohio's economy, generating $150 million in revenue each year. I urge Congress to fully fund production of the C-17 cargo plane."

Boeing has been able stretch the line to the end of 2008. The Chicago aerospace giant has shelled out about $100 million of its own money to secure the long-lead parts, such as landing gear and materials for an additional 22 C-17s, say Boeing officials. Of those 22, Boeing has found homes for 12 of the airplanes. The Australian and Canadian governments are buying four each, the United Kingdom is buying an additional one to bring its total to five C-17s, and the U.S. Congress has secured funding for three additional transporters.

That leaves Boeing with 10 C-17s that it would like the Air Force to commit to, so it could continue production through 2009. Boeing's aim is to persuade the Air Force and Congress to find about $6 billion to build the additional airplanes—planes that Boeing and military experts say the Air Force will need in the future. But unless Air Force commits to the planes, Boeing officials concede the company will have to take the first steps to shutting down the line permanently this Friday.


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