Boeing slump differs from others

EVERETT -- At The Boeing Co.'s huge widebody airplane factory here, machinists recently completed work on the 852nd 767 to roll down the assembly line, a jetliner that was supposed to be delivered to United Airlines.

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Boeing downturns and upswings
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But since the 767-300 was painted in United's colors early this month, it has gone nowhere but the Paine Field flight line, a casualty of the Sept. 11 attacks that saw terrorists fly two other 767s, including one operated by United, into the twin towers of New York's World Trade Center.

With many airlines struggling to survive in the wake of the deadly attacks and an unprecedented industry downturn, some have asked Boeing to delay delivery of jetliners. United's No. 852 joined a growing number of new and used jets whose next home may be the California desert until airlines can afford to take them.

"This is going to be much worse than the last time," said a Boeing machinist who worked on plane No. 852.

The "last time" was the industry downturn that came after the 1991 Gulf War, when Boeing slashed production and laid off thousands.

Boeing executives, industry analysts and aviation experts say this downturn could be much worse. Some believe Boeing's commercial business is facing its most daunting challenges since the Boeing Bust of the early 1970s.

"It will be a significant challenge," said Robert Toomey, an analyst with Dain Rauscher. "It's fair to say this is a much different downturn than any they have ever been through."

That's because the bottom fell out of the industry with a swiftness never seen before.

And the eventual rebound could prove to be equally challenging for Boeing's airplane business.

After the current slump is over and airlines begin buying planes again, Boeing must avoid the mistakes of the past when it begins to increase production and rehire thousands of workers.

When Boeing did that the last time, in 1996 and 1997, after the Gulf War downturn, its assembly lines became so snarled that the company lost money for the first time in nearly a half century.

A clearer picture of what may be in store for the commercial business will emerge Thursday, when Boeing announces third-quarter earnings and for the first time provides more specifics about airplane deliveries in 2003. Boeing has said it hopes to deliver about 500 planes this year and around 400 next year, though those numbers could change. Boeing has not made any predictions about 2003. But many analysts are forecasting that Boeing will deliver only about 300 planes that year, perhaps fewer.

Last week, Boeing began notifying the first 9,000 of what could be as many as 30,000 workers who will likely lose their jobs by the end of 2002 because of the current downturn. Many of those laid off work in the Puget Sound region.

During the last downturn, Boeing's employment fell steadily for five years, from 161,000 to 105,000 by the end of 1995.

Commercial orders plummeted from 448 in 1990 to only 112 in 1994, when for the first time ever Airbus won more orders than Boeing, though by only by a handful.

Boeing's airplane deliveries fell from 446 in 1992 to a low of 219 in 1996. Boeing delivered 321 planes in 1997 and 509 in 1998.

Some analysts are forecasting that under a worst-case scenario, Boeing's deliveries could fall to about 200 planes in 2004.

But to reach those kinds of numbers, a prolonged economic downtown would have to be combined with a sustained drop in passenger airline traffic.

There are some encouraging signs that won't happen.

Last week, David Swierenga, chief economist for the Air Transport Association, said at a conference that passengers are returning at a faster pace than had been anticipated.

Airlines had expected passenger loads to still be running at 40 percent below normal levels for October, he said. Instead, traffic is off this month by about 25 percent.

Joseph Campbell, an analyst with Lehman Brothers who closely follows Boeing, said there are three key questions about the current downturn that will determine how bad it will be for Boeing: When does airline travel return to normal levels, how bad does it get, and can subsequent growth make up for the current shortfalls.

"Even optimistic answers leave the aerospace industry with a painful and unprecedented downturn," Campbell wrote in a recent report for clients.

"We all know it will be very bad," he wrote, but "the airline industry and key suppliers such as Boeing and Airbus will survive and return to prosperity at some point. The key ingredients to recovery are getting passengers back on airplanes and returning the airlines to profitability."

But no one really knows what will happen, he noted.

That's because this downturn has no parallel in the history of modern aviation.

The only other time air travel declined precipitously was during the Gulf War, when there was a 3 percent decline in 1991.

Boeing Chairman Phil Condit has said the decline in airline passenger traffic this time could be five to 10 times worse.

"The real key for Boeing is how long it takes the airlines to recover," agreed Peter Jacobs of Seattle-based Ragen MacKenzie.

"If they are able to recover over the next year, they might begin thinking about adding capacity (new planes) in 2003 or early 2004. But if the downturn stretches out two years, that naturally puts off the time frame when airlines will want to add capacity."

Jacobs is forecasting that Boeing will deliver 380 planes next year, 302 in 2003 and 312 in 2004.

"That's the time frame when we might see a turn for the positive on production rates," Jacobs said.

But he and other analysts really do not know. They say Boeing probably doesn't know either.

"It's difficult to know," said Toomey. "You stick your finger in the wind and try and get a good feel. But everybody is in the same place right now. I'm hopeful that passengers will return and there will not be a real dire scenario of say Boeing going down in production to 200 or even 100 airplanes. This is still very much up in the air. We just don't know."

And no one is sure how long it might be before the industry begins to rebound, which will mean new airplane orders for Boeing and increased production. And thousands of new jobs.

"Even the financially healthy airlines don't want to take new planes now," said Richard Aboulafia, senior aviation analyst with the Teal Group.

"The good news is that this is so much worse than ever before that the government is helping the airlines." That financial help, he said, will help cushion the blow and keep some of the carriers from going out of business.

Aboulafia believes the industry's recovery, and Boeing's, could begin in earnest in 2005.

"That assumes this (the Sept. 11 violence) ends now," he said. "Assuming about six months for airline traffic to return to normal, give another six months to a year before airlines feel healthy enough to start ordering planes again. Then it will be another year or two after that before Boeing's deliveries really begin to pick up."

But when the industry does turn around, don't look for Boeing to rehire workers as fast as it did the last time.

In 1996, Boeing boosted its employment by about 20,000 workers. About 15,000 of those were hired for the company's commercial factories in the Puget Sound area.

They were needed to build what was a record number of new orders that year -- 727 planes, including orders for McDonnell Douglas jets.

Boeing had encouraged early retirement for veteran employees after it began reducing its work force after the Gulf War. When it came time to hire new workers, many were inexperienced. The dramatic increase in production was also coupled with the introduction of several new models. It all made for one big production mess that in 1998 cost commercial boss Ron Woodard his job.

Woodard was replaced by Alan Mulally, now president and chief executive of commercial operations.

Under Mulally, Boeing's commercial profits have soared to record, double-digit levels.

But analysts say Mulally, often mentioned as the possible successor to Condit, now faces his toughest challenge.

The cost of putting the brakes on production is very high, both financially and in human terms, said Campbell, the analyst for Lehman Brothers.

"The ironic and frustrating problem ... is that no sooner are the production and delivery rates cut to the bone than they need to be nearly doubled ..." he said.

That becomes a very inefficient process.

One of the main risks to earnings is the company's ability to change production rates up or down.

"Boeing can make good money producing 250 planes a year or 350 planes a year or 600 planes a year," said Jacobs. "Where they have struggled in the past is going from 600 planes a year to 400 planes a year or from 300 planes a year to 600 planes a year. That change in production rates results in inefficiency on production lines."

But since the last downturn, Boeing has learned a lot about what it must do to run airplane plants efficiently, about the communications between sales and production, and about the company working together, said Toomey.

"Mulally has done a good job of pulling all that together," he said.

As a result, the commercial business may fare better than expected during the downturn, said Paul Nisbet, analyst with JSA Research.

"I think commercial margins will come down only modestly," he said. "They will still be up enough that there will not be a lot of difference between the percent decrease in revenues and the percent decrease in earnings (profits)."

Since 1996, Boeing's non-commercial business has grown significantly with the acquisition of Rockwell's space business and the merger with defense giant McDonnell Douglas.

Boeing executives have long said the acquisitions will help Boeing weather the next downturn because revenues from a healthy defense and space business can cushion the blow that the commercial jet division will take.

That strategy will now be put to the test.

Despite the deferred deliveries of 19 planes in the third quarter, Boeing should post a good quarter when it announces earnings Thursday, analysts said.

Jacobs is looking for companywide earnings to come in at about 84 cents a share, which is up about 17 percent from what Boeing reported in the third quarter of last year.

"The real test is what earnings will look like in 2002 and 2003 as the company drastically dials down production," he said.

P-I reporter James Wallace can be reached at 206-448-8040 or jameswallace@seattlepi.com

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