Contract caps bad month for Boeing
WASHINGTON – Boeing did not need an extra day of February to know the month was showing it no love. But the leap year’s supplement delivered the cruelest news: the loss of a $35 billion Air Force contract.
Before that stomach punch connected, Boeing Co. had heard this from Washington in February: Three of its military contracts cost $3 billion more than projected and its work on a virtual fence along the U.S.-Mexico border failed to meet expectations.
Boeing’s sheer size enables it to withstand a month of high-profile setbacks, but Wall Street and industry analysts say the nation’s largest aerospace company is paying for its decision to move beyond aircraft making.
In 2003, Boeing established itself as a player in the government technology arena when it teamed with SAIC Inc. and won a multibillion-dollar contract to overhaul the Army’s combat and communications systems, said Ray Bjorklund, chief knowledge officer at market research firm Federal Sources Inc. The Future Combat Systems modernization deal, which involves revamping the Army’s command, control, communications, computers, intelligence, surveillance and reconnaissance – or C4ISR – capabilities, also has had its share of delays and cost concerns, but appears to be doing better lately.
“I don’t think a company of that stature and that size … is going to step out of the C4ISR business,” Bjorklund said. “February was an unfortunate congruence of the stars.”
March’s stars have yet to realign.
Boeing shares fell $2.12 Monday to close at $80.67 after losing the Air Force tanker contract, which was announced after markets closed Friday.
Boeing, which last year reported an 8 percent increase in revenue to $66.4 billion, can handle the financial hit of losing the tanker deal, but “the bigger loss is to prestige and the hit to ego,” said Scott Hamilton, an aviation industry consultant based outside of Seattle.
Stockholders are still smarting from February’s finale: On Friday, the Air Force awarded Northrop Grumman Corp. and European Aeronautic Defence and Space Co., the maker of Airbus planes, a $35 billion contract to build airborne refueling planes.
The selection surprised industry analysts and dropped jaws in Congress and statehouses, where constituents were counting on plane-building jobs. Boeing had been supplying refueling tankers to the Air Force for nearly 50 years and did not expect to lose that monopoly to EADS, its top foreign rival in the commercial aircraft market.
“This is another big competitor on their home turf and that hurts,” said Richard Aboulafia, an analyst with the aerospace consulting firm Teal Group. The timing didn’t feel good either: Boeing’s defense business lost a major Pentagon expenditure, as military spending begins to level off following years of increases tied to the war in Iraq.
Boeing spokesman Dan Beck countered that the company’s defense business will remain part of its core.
“There is no need for doom and gloom with regards to Boeing’s defense business,” Beck said. “We have a very extensive and very diverse portfolio.”
Boeing said it hasn’t decided if it will protest the contract. Analysts say the decision will be hard to overturn because the Air Force, stung by a previous Boeing-tanker scandal, made its selection process more rigorous. In 2004, Boeing lost the tanker leasing contract after an investigation uncovered illegal dealings between a top company executive and a chief Air Force weapons buyer that landed both in prison.