From the Seattle Times over a year ago....
March 28 2001
The real Boeing story: mortgaging the future
By Scott Hamilton
Special to The Times
The headlines came in a steady stream during the past four years: production problems; unhappy customers; delayed deliveries; quality-control problems; the first annual loss in half a century; Airbus surpasses Boeing in sales; Boeing considers closing the Renton plant and moving production to Everett; Boeing to move corporate headquarters; Boeing moves 757 fuselage production to Wichita.
What's happening at Seattle's most famous company? All the stuff above is only the side show. The real story of what is happening hasn't even been touched on yet. What's happening is that the current management is squandering the future of Boeing for "shareholder value" and short-term profits.
The latest Boeing "10K" annual filing with the Securities and Exchange Commission tells the story, a story that began unfolding with the 1997 acquisition of McDonnell Douglas Corp., a story whose opening chapters were being told in the 10Ks of 1998 and 1999. Only nobody was reading the book.
The story that is revealed is told against the backdrop of the decades-long battle with Airbus Industrie. From the European consortium's inception, Boeing has dismissed the company as a passing fancy. Boeing claimed each plane Airbus produced was a dog.
Boeing spent the past two years dissing the super jumbo A3XX, claiming there is no market for it and Airbus would never build it. Of course, Airbus found a market and it will be built. "It" is now called the A380.
While Boeing has been whining about Airbus subsidies, panning fly-by-wire technology and market forecasts, the A320 and A330 left the 737 and 767 in the dust. Sales on the 757 began drying up and the 747 is selling more freighters than passenger versions, a sure sign of the end-of-the-line for this tired, old design. The 777 is a runaway best seller and the 737 is doing well mainly because Boeing can out-produce Airbus, which doesn't have an A320 delivery position open for years to come.
Boeing has bet its future on derivatives. Derivatives of 737s, 757s, 767s and 777s. If Boeing ever launches a competitor to the brand new A380, that will be a derivative of the 747. All this stuff about a new Blended Wind Body or a Mach 0.95 757-767 replacement may be little more than disinformation. Here's why and here's where we finally get to the meat of our story.
Research and development is the key to new products. The higher the R&D money spent, the more new products are developed. The lower the R&D, the more old products are made over, updated or - the magic word - derivatives are forthcoming. Closely read the 10K. At Boeing, the R&D as a company is down 25 percent, or $483 million, since 1997, the year Boeing and McDonnell Douglas combined. It was down even more in 1999 vs. 1997, 30.3 percent or $583 million.
But that's not the worst of it. At the commercial airplane division, R&D last year was only $574 million compared with slightly more than $1 billion in 1998 (the 1997 figure is not listed in this year's 10K). That's a 44-percent decline.
There's more. Assets of the commercial airplane group declined to $9.8 billion in 2000 from just over $11 billion in 1998, a reduction of 11 percent. Capital expenditures for the same group for the same period declined to a mere $237 million from $754 million, a 68.5-percent reduction. (Don't be fooled, by the way, about references to $2 billion in R&D expenditures in 2000; this includes $557 million in "in-process" R&D spent by companies Boeing acquired.)
Recall that Boeing Chairman Phil Condit said the move of corporate headquarters was for shareholder value. According to the unions, Condit said that six times. Just who are the shareholders?
There are the institutions, of course. Janus Capital Corp. owns nearly 47 million shares, or 5.36 percent of Boeing's stock, according to the proxy statement issued in advance of the April 30 annual meeting. State Street Bank and Trust Co. holds 88.4 million shares, or 10.1 percent, most likely for individual stockholders who shares are typically held in a "street name." John F. McDonnell, the principal shareholder of the old McDonnell Douglas Corp., whose shares converted to Boeing in 1997, has 14.9 million shares of stock and "units" (these also represent holdings for the rest of his family). Harry Stonecipher, president of Boeing and the former president of McDonnell Douglas, has 1.3 million shares. Phil Condit has 555,000 shares and Boeing Chief Financial Officer John Sears has a mere 66,000 shares. Alan Mulally, chief executive of the commercial aircraft group, has more than 263,000 shares. Every dollar the stock price increases boosts the value of their holdings.
There's more. Boeing's top executives are the beneficiaries of what's called Corporate Performance Measure, based on shareholder value. This was something that came over from McDonnell Douglas in the 1997 merger. "An increasing portion of the Performance Shares awarded will be convertible to shares of common stock as the stock price reaches and maintains certain levels. . . . This plan is intended to increase executive management's focus on improving shareholder value," the 10K reports.
How do you increase shareholder value? You build momentum, an expectation that the company is doing things and branching out. How is this accomplished? You buy things. Rockwell International, McDonnell Douglas, Jeppessen (a company that makes flight simulators and maps, of all things), Hughes Electronics and more.
[Pretend to build a Sonic Cruiser?]
How else is shareholder value increased? The good old fashioned way, by increasing profits. How is this accomplished? Cut expenses. Like research and development. According to the 10K, the reductions in R&D were worth 2 percent to the bottom line last year. On revenues of $51.3 billion, that is worth $1 billion in increased profits.
No wonder Boeing doesn't want to build a new plane to compete with the A380. It would cost $12 billion in R&D. That would depress profits, that all-important shareholder value for the McDonnell family, Harry, Phil and the rest, and the Performance Share value for Boeing's qualifying top executives.