Financial Crisis Means Rougher Flying for Boeing

More customers may cancel orders or turn to the aerospace company for financing, says the company already buffeted by "Dreamliner" delays and a mac...
Roy HarrisSeptember 25, 2008

Running Boeing Co. these days must seem like managing air-traffic control at O’Hare on a stormy day full of delays and re-routings. And like an overworked controller, CEO Jim McNerney tries to sound calm when asked whether credit-strapped airline customers may be forced into canceling orders, or at least turning to Boeing for financing.

On the financing question, airlines tend to approach Boeing as “a lender of last resort,” McNerney told the Chief Executives’ Club of Boston on Wednesday. “We have seen somewhat greater requests, but actually taking us up on it, there is not any great upturn yet.”

And yes, he acknowledged that the backlog of commercial orders could take a hit. “In past economic downturns like we are experiencing now, it tends to be that the risk is in the 5 to 10 percent range” for backlog reductions. “It could be a little worse, could be better than that,” he said, according to a Bloomberg News report. “We’ll have to monitor the situation to see.”

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Of course, there’s so much more to monitor than in previous economic downturns. That goes especially for Boeing, which begins the current financial upheaval with a record commercial backlog of $275 billion — 9 in 10 of those dollars representing non-U.S. orders.

First, no one can yet predict how devastating the economic impact of Wall Street’s tsunami will be — in reduced air travel, in the airlines’ ability to take the planes they have ordered, or even in the nation’s ability to buy weapons systems. (About half of Boeing’s business is in military or other non-commercial sales.) And second, several of the squalls now facing Boeing are internal ones.

McNerney also is still having to answer questions about the 787 “Dreamliner,” the bet-the-company new commercial aircraft that has faced several delays in the projected date for entering commercial service, which is now said to be in next year’s third quarter. And then there’s the little question of the strike by 27,000 Machinist union members, now entering its fourth week.

On many of the questions Boeing is answering these days, CFO James Bell seems to set the stage, with McNerney then answering the broader questions.

The Bloomberg account of the Chief Executives’ Club talk noted that Bell had commented in late July that Boeing hasn’t financed planes for customers in the “last several years.” But that was July. “Airplanes have historically been among the most attractive assets [for companies] to finance,” McNerney said yesterday, in noting that Boeing is now seeing greater interest from customers in getting manufacturer financing.

And speaking of financing, one of Boeing’s biggest airliner customers is the International Lease Finance Corp. unit of bailed-out American International Group — another wild card in the current situation, because ILFC is widely expected to be sold as a part of AIG’s reorganization. ILFC was a strong company before AIG owned it, and has remained strong leading up to AIG’s own crisis, according to the Boeing CEO. It has 102 Boeing planes on order, and has said it is borrowing $6.5 billion in emergency funding to get through the 2009 first quarter.

As an interesting feature of the current relationship, Edward Liddy, newly named head of AIG, is also on Boeing’s board, serving on its compensation committee and its governance, organization, and nominating Committee.

Boeing CFO Bell has been watching the Machinist strike carefully, and just after it started he predicted that it would last at least a month, possibly leading to further delays in the 787’s introduction.

McNerney yesterday elaborated on the Dreamliner situation in the current crisis environment. “As soon as we know how long the strike will be, we’ll be able to specifically know what additional delays could accrue to the 787. It’s basically a day-for-day delay,” he said, according to the Bloomberg account.

In its reading of the strike situation, the Wall Street Journal is now seeing the possibility of a long standoff. It notes that only now are striking employees about to miss their second paycheck, with strike pay set to be distributed by the union on Saturday.

The Journal points out that many parts suppliers continue to churn out components for Boeing assembly lines, so that aircraft plants might not be horribly behind when when the strike does end.