Monday, May 19, 2008

Trouble Ahead For Boeing?

As one of the largest defense contractors, Boeing has experienced a series of serious setbacks recently. Can the company survive these setbacks and continue to grow?

In another blow to Boeing Co.'s battered defense business, the U.S. Air Force on Thursday [May 15] tapped rival Lockheed Martin Corp. for a contract potentially worth more than $3.5 billion to build a new generation of global positioning satellites.


The loss of the contract, known as Global Positioning System IIIA, was Boeing's third high-profile defeat in as many months.

The company lost a $35-billion contest to build aerial refueling tankers for the Air Force in February and a $3.74-billion award to build unmanned spy planes for the Navy in April.

Boeing's recent troubles might not have anything to do with this story, from October of last year--but it raises some troubling concerns. Since that time, Boeing has suffered a series of setbacks:

Boeing has fired an employee for speaking to the Seattle Post-Intelligencer after the newspaper published a story in July saying that Boeing couldn't properly protect data in its computer systems from theft, manipulation and fraud. The story also suggested that the company may have misrepresented the security of its data in filings to the Securities and Exchange Commission.

The fired employee says he was trying to save the company but was treated badly after he raised ethical concerns internally about how the company was conducting security audits of its systems. He then spoke with a reporter as well as the SEC about his concerns. Now he says the company is retaliating against him, instead of trying to fix its problems. An anonymous e-mail sent to the Seattle P-I also disclosed that Boeing is spying on other employees to ferret out whistleblowers by videotaping workers and reading their e-mail.

The Seattle P-I's July story about Boeing's alleged security problems revealed that the company had failed repeatedly to comply with the Sarbanes-Oxley Act -- a law that requires companies to prove that they have internal control of their data to prevent anyone from manipulating financial numbers and deceiving stockholders. The law requires companies to, among many other things, implement controls that restrict access to data and computer systems to only those people who need it, and that access and changes to systems -- including code changes -- are well documented.

When your company cannot comply with Sarbanes Oxley, it generally means there is chaos and trouble within. Since that story broke, Boeing's stock has plummeted and it has lost out on some lucrative business.

The details of how Boeing had its biggest loss--the tanker deal--show that the company wasn't really even in the running:

Boeing Co failed to beat Northrop Grumman Corp in any of the key criteria in the $35 billion tanker aircraft competition won by Northrop and its European partner, according to a defense analyst with close ties to the Air Force.

"This was not a close outcome in any sense of the term," the analyst, Loren Thompson of the Lexington Institute, told Reuters. "Northrop won decisively and completely, and Boeing simply was not competitive in the major measures."

Thompson said in a report on Monday that Boeing matched the appeal of the Northrop bid only in the area of proposal risk. And that came only after Air Force reviewers pressed Boeing to stretch out its aggressive development schedule for a new version of its 767 jet, which in turn added cost.

In fact, the Boeing proposal was initially rated as "high-risk" because reviewers were concerned that Boeing's proposal to build a new version of the 767, using parts from other versions, would cost more than expected.

Boeing couldn't compete with Northrup Grumman to build UAVs for the Navy, either:

Northrop’s Global Hawk beat out a highly modified unmanned Gulfstream G550 offered by Boeing and the Predator-based Mariner UAV offered by the Lockheed-General Atomics team.

2008 has been good to Northrop, which in February secured the $35 billion Air Force contract for 179 tankers, along with European partner EADS.

That contract is frozen, thanks to a protest filed by the loser, Boeing, which is not having such a good year in its defense efforts. In March, the Chicago-based firm lost the $766 million Joint Tactical Radio System’s Airborne Maritime Fixed Station program to Lockheed Martin. It failed to persuade the Air Force to sign a contract for more C-17 cargo lifters, and is fighting to hold on to the $15 billion-plus combat search-and-rescue helo contract it won in November 2006.

Boeing's loss of the Global Positioning System (GPS) deal was due in part to its inability to meet current expectations:

The new generation of satellites will be able to locate objects with 9 inch accuracy, a substantial improvement over the current satellite constellation. That improved accuracy is scheduled to come online in 2019. In the meantime, Boeing appears to be struggling to fulfill its current GPS contract. "Boeing has yet to launch a single satellite under its most recent GPS contract from April 1996, and in 2006 the company forfeited $21.4 million and replaced the program's managers after delays and cost overruns," Bloomberg reports.

Boeing has successfully deployed satellites for the Air Force, most notably the WGS-1

Boeing today [May 12] announced that the U.S. Air Force has placed the first Wideband Global SATCOM (WGS) satellite into operation over the Pacific region. The Boeing-built satellite transitioned to operations on April 16, following extensive satellite and ground system tests conducted by the government with support from Boeing engineers.

"The successful launch, checkout and handover of WGS-1 went smoothly and is a testament to the great work of the combined government and contractor team," said Brig. Gen. Susan Mashiko, commander of the Military Satellite Communications Systems Wing at the Air Force's Space and Missile Systems Center in Los Angeles. "The performance of this first WGS satellite is nothing short of exceptional."

WGS is the first operational SATCOM system supporting the government's transformational communications architecture. Each satellite has the capacity to transmit information at rates of more than three gigabits per second. This is more than 10 times the capacity of the government's Defense Satellite Communications System, known as DSCS.

There's also trouble with Boeing's 787 as well:

Customers of the much-anticipated but late-to-the-gate 787 Dreamliner are waiting for Boeing to make official what they strongly suspect -- that delivery of the first plane will be delayed into the second half of 2009 or beyond.

Deliveries of the Dreamliner are already 10 months behind schedule and glitches along Boeing's complex global supply chain slowed production and forced the company to redesign its wing box. Asked on Apr. 3 about the possibility of yet another delay, Boeing spokeswoman Yvonne Leach simply acknowledged that an announcement of a revised schedule is coming soon.

How best to explain Boeing's troubles? Is there simply too much competition for contracts? Are they too many companies vying for an ever-shrinking pile of money from the defense and aviation sectors of an economy being strained by escalating fuel costs?

For starters, Boeing's stock has begun to recover from a disastrous performance in March.

Boeing is also deploying an aircraft that can fire lasers:

After years and years of development, Boeing's Advanced Tactical Laser, a modified C-130H turboprop plane, last week fired its chemically-powered ray gun "in ground tests for the first time," the company says in a statement.

The plane is supposed to be a prototype for a flying laser blaster that can "destroy, damage or disable targets with little to no collateral damage, supporting missions on the battlefield and in urban operations."

If "it performs to spec," Lew Page at the Register notes, the ATL could "take out targets such as individual vehicles or cellphone towers, silently and from as far as 18-20 kilometers. People in the vicinity of an ATL strike might not realize what had happened until well after the event, if at all. This could be especially handy for Boeing's initial customer - the US military's secretive Special Operations Command."

In this weird economy, bad news is sometimes good for business:

Bad news, but, apparently, it's also good news. Boeing shares have risen nearly 5% since the news. Why investors view a halving of previous delivery estimates, and another six-month delay in production, as "good news," I've got two theories:

Investors thought the delay would be longer than six months, or perhaps worse ...They feared the delay might be shorter. Had Boeing pushed the envelope and targeted another three-month extension on the 787, then failed to meet its deadline once again, investors' faith in management would almost certainly have broken. As it is, Boeing is building in two months more than even it thinks are needed to wrap this project up, the idea being to give itself a "safety margin" in case unexpected problems crop up during testing and certification of the 787.

So in retrospect, perhaps it was also good news when Boeing lost the KC-X Tanker contract to Northrop Grumman last month. Now Boeing can use all that free time to get things right on the commercial side of its business.

As Boeing goes, so goes the nation? Is there more trouble ahead?

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