Schumpeter – Loin des gros titres, la défense est le prochain problème de Boeing | Entreprise

A MID THE 737 MAX crisis it’s easy to forget that there’s more to Boeing than passenger planes. Its Minuteman intercontinental ballistic missiles, which John F. Kennedy called America’s « ace in the hole » during the Cuban Missile Crisis, and the B- 52 bombers (« Big Ugly Fat Fellas ») that invaded the Vietnam is not only part of 20th century American iconography. These pieces of military equipment are still used today. Boeing’s space business, which helped put Americans on the Moon, is trying again to fly them into orbit. With its massive commercial aviation division in disarray, it should fall to Boeing’s venerable defense, space and security division (known as BDS ) to shore up revenue and morale. Yet it too seems to be suffering from neglect: sub-scale, long in the tooth and in slow relative decline.

For most military contractors, except Boeing, it’s boom time in America. Defense budgets have increased since the start of Donald Trump’s presidency in 2017. Stock prices are buoyant. Last year, revenues at Lockheed Martin, Northrop Grumman and Raytheon rose more than 10 percent on average, driven largely by contracts for sleek fighter jets and missiles. At BDS they fell by 1%.

The reasons for BDS The weakness of MAX -in relation. They reflect a combination of factors, including the end of sales of C -17 transport planes and Boeing’s costly failure just before Christmas to dock its Starliner spacecraft with the International Space Station. Revenues have also been invested in Boeing’s relatively new services arm. Few analysts were concerned about it. Like Ken Herbert of Canaccord Genuity, a financial company, MAX The crisis has diverted everyone’s attention from other areas of the business. Still, deep-seated BDS problems could further weigh on Boeing’s profitability and reputation, even once MAX’s crisis is behind it. As if he didn’t already have enough on his plate, David Calhoun, the new boss of Boeing, faces a strategic dilemma.

Boeing has long proclaimed the merits of defense and space alongside its commercial aircraft business. Although the commercial aspect is more important, their relative weight fluctuates in the event of difficulty. Last year, for example, following the MAX grounding, commercial aviation’s share of group revenue fell from 57% to 42%. BDS” s share rose to 34% from 26%. While the trading arm suffered a huge loss, BDS made a decent profit. This shows how structure can help smooth income. The company says BDS has proven itself in 2018 by winning hotly contested defense contracts, such as a program to provide training aircraft to the Air Force and aerial refueling drones to the Navy, which could be very lucrative. Additionally, the fifty-year-old F -15 fighter jet, one of its profitable workhorses, has been given a new lease of life. Late last month, the Air Force announced it would buy its first F -15 EX s from Boeing.

This account hides problems. Some were long neglected while its passenger plane business boomed. First, BDS is subscale. Last year, its revenue was less than half that of Lockheed and a little less than that of Northrop and Raytheon. Its capital expenditures were one-sixth of the average of the three. It’s been decades since Boeing won the Pentagon’s most coveted type of contract, to design and build a new military aircraft from scratch. BDS has no role in the Lockheed-led F -35 Joint Strike Fighter, nor in Northrop’s long-range stealth bomber. Both could reap huge profits for their creators. Its lack of commitment to bold innovation recalls Boeing’s fateful decision to modify the aging 737, which ultimately contributed to the MAX’s tragic technical failures, due to pressure to keep up with Airbus, its biggest jet rival. line.

Second, it fails to complete the projects it wins. This is a growing financial risk as the Pentagon offers fewer cost-price contracts, where it pays contractors an agreed-upon premium over a project’s expenses. These are being replaced by fixed-price agreements in which gunsmiths bear more risk. Shortly after winning the jet trainer and drone contracts in 2018, Boeing posted a loss of nearly $700 million, suggesting it had underestimated development costs. It also recorded losses of more than $3.7 billion on a long-awaited contract, potentially worth $44 billion, to supply airborne tankers to refuel planes. The Air Force has criticized Boeing’s performance on the nine-year-old project.

Third, the MAX crisis compounds BDS Problems . Defense contracts are lumpy, requiring high upfront spending for a big long-term gain. As Boeing burns cash with the MAX , its ability to bid big on defense contracts is limited. Last year, the company withdrew from a competition worth at least $62 billion to replace the Minuteman series missiles, the kind of contract that was its bread and butter. Boeing insists its withdrawal has nothing to do with the MAX crisis. Analysts have speculated that the cash commitment required to win this ground-based strategic deterrent contract could nevertheless have played a role in his decision.

Defenseless?

If the MAX Seth Seifman of JPMorgan Chase, a bank, indicates Seth Seifman of JPMorgan Chase, the return to the sky next, as Boeing wishes. One option is a breakup, but if nothing else, the bigger the Boeing, the less likely it will be allowed to fail. BDS The main customer of America’s Defense Department, which is concerned about insufficient competition, would oppose any weakening of BDS . So would many Boeing investors, who hope that defense and space budgets will continue to rise if Mr. Trump is re-elected. Still, Boeing may need to consider selective defense and space divestments, perhaps combined with targeted acquisitions. It’s increasingly clear to everyone, arguably including Mr. Calhoun, that Boeing’s problems go beyond MAX . The company has misfired on several cylinders. The Big Ugly Fat Fella, a nice nickname for a B -52, seems less appealing when applied to Boeing itself.

This article appeared in the Business section of the print edition under the headline « Far from the headlines, defense is Boeing’s next problem »

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