Boeing's Defense Chief Looks Beyond Fighters
June 10 2016 - 10:10AM
Dow Jones News
When the new head of defense at Boeing Co. laid out her
priorities for the business in April, making jet fighters didn't
make the cut.
Leanne Caret has made waves inside and outside the company with
the stark admission that a company which has produced fighters for
decades won't be making them beyond the early 2020s.
Orders for its F-15 and F/A-18 jets have been drying up for
years and production has been slowed, but Ms. Caret is the first
Boeing executive where a future without fighter production is a
centerpiece of their strategy.
"I'm very much a realist," said the 28-year Boeing veteran in
her first media interview since taking over in March as president
of its Defense, Space & Security business following the
surprise retirement of Chris Chadwick after just three years in the
position.
Her plan is to replace sales from making jets with more work
repairing and upgrading the hundreds already flying. Profit margins
for the services business Ms. Caret used to head were 13.4% last
year, compared with 9.8% for the military aircraft unit, which
includes helicopters.
"We're not getting out of the fighter business," she said.
"We're just evolving what the fighter business means to us."
Stabilizing sales at the defense business is crucial for
Boeing's wider investment case as it funnels more cash back to
shareholders via stock buybacks and higher dividends, just as
doubts emerge about the profitability of its big commercial
jetliner programs. The military unit, which also makes Apache
helicopters, surveillance aircraft and satellites, contributed 42%
of Boeing's operating profit last year.
Boeing's defense sales have averaged $30 billion over the past
decade and profit margins top those of its best-selling passenger
jetliners.
Ms. Caret hopes to maintain Boeing's technical prowess by
converting its focus to supporting more plane upgrades and
maintenance while leaving the expertise in place for future
combat-jet opportunities.
That is a tough message for Boeing engineers weaned on
developing combat jets, but Ms. Caret said the technical challenges
of upgrading existing planes are as onerous as developing new
ones.
Ms. Caret also wants to sell more military versions of its
passenger jets. It has sold more than 100 of its 737 jets filled
with surveillance equipment rather than seats to the U.S., India
and Australia. It also hopes to sell as many as 400 of its larger
767s converted as aerial tankers.
Ms. Caret said she is committed to halting the drop in revenue
and restoring growth. She is targeting leading market positions in
services, autonomous vehicles such as a new underwater drone,
manned spacecraft and satellites, as well as helicopters.
Ms. Caret said she won't allow defense revenue to shrink to $25
billion, but analysts are skeptical about whether sales can be
sustained, much less grown without fighter production. The defense
business saw its sales last year dip 2% to $30.4 billion.
"It's feasible to increase the revenues via militarized
jetliners and services, but they will have to push hard for years,"
said Loren Thompson at the Lexington Institute, a think tank
part-funded by Boeing and other defense companies.
Richard Aboulafia at the Teal Group consultancy, said: "You
can't fill that gap" left by sales of fighters, noting that
helicopter sales—another of Ms. Caret's priority areas—are also set
to shrink in the near term.
After the bruising loss to Northrop Grumman Corp. on a contract
to build a new Air Force bomber, Ms. Caret is more cautious about
Boeing's prospects with other big contracts to be awarded in the
next few years.
She calls as "can wins" coming contests for a new Air Force
training jet, surveillance planes, Navy drone and replacing
Boeing-made Minutemen ballistic missiles. Boeing executives
previously talked about winning "their share" of the big
programs.
The new Air Force tanker remains her biggest challenge. The Air
Force and Boeing announced last month that the company would be
late with its first batch of 18 planes, having already taken $1.5
billion in charges, with analysts expecting more to come when it
reports earnings in July. The announcement came just three weeks
after Boeing executives said the program was on track.
"There's a lot of second guessing going on about what we knew
and what we didn't know," said Ms. Caret. A fix to the software
that controls the boom from the KC-46 refueling plane—derived from
its 767 passenger jet—failed to solve lingering problems, forcing
Boeing and its suppliers to do redesign work.
Still, the military business is in better shape than Boeing's
jetliners after reducing annualized costs by $6 billion over the
past five years. Ray Conner, head of Boeing's commercial business,
earlier this year accelerated cost-cutting efforts because of
concerns it was becoming less competitive with rival Airbus Group
SE.
"We've already had our 'yikes' moment," said Ms. Caret of costs
at the defense business, though she's looking to cut bureaucracy at
the unit.
Write to Doug Cameron at doug.cameron@wsj.com
(END) Dow Jones Newswires
June 10, 2016 09:55 ET (13:55 GMT)
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