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Boeing
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747 Program

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By kingmaddmaxx
March 24, 2003

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Does anyone else think the P/E for Boeing right now is ridiculously low? I was of the mind that some heavy hitter might take the opportunity with Boeing sub 25 dollars a pop to come in and snatch up a fairly high share of the stock, because we're still making money...and making more off of less than ever.

The only problem I have at this point is that while 30,000 of my fellow employees were laid off last year, the bonuses paid to Phil Condit and Alan Mulally managed to rise for that year, as did their salaries. Part of that was attributed (in an article run in today's Seattle Times) to Mullaly managing to keep the commercial side profitable even during the downturn. Yes, but he has managed to do that not through efficiency gains; there's only so much that can be wrung out of the 777 lines, let alone the venerable 747, but by laying off those 30,000 employees, a majority though not all of which were commercial employees.

That allowed a slashing of recurring labor costs, and I believe was just a short-term fix to a long-term problem. Laying off the intellectual and sweat equity of the company, the engineers and machinists, will come back to haunt Boeing when business picks up in the long term, as it has during every wild swing the company handles. Each economic and airline downturn is met by tough medicine, lopping off the company's head and hands, and when business rises a mad dash to hire is begun, followed by the usual influx of contract labor which costs more than direct Boeing employees.

Boeing's response this time, which seems to ignore the history of the situation, is that they will subcontract out more work to partners and thus not need to hire back the bulk of the workforce when times get better. Boeing will be a leaner and meaner company able to turn on a dime, a tall order for a defense/commercial aircraft company with the record of Boeing, heck a tall order for any large company. Sub-contracting out the design, as well as the manufacture, of the parts of the 7E7, Boeings next new plane God-willing, is seen as a way to spread the up-front costs and risks to Boeing among partners. This should allow the Boeing board to sleep better at night, knowing they haven't spent 8 billion dollars on a program but only 4 or 5.... Of course in the long term where does the profit per-airplane then go? Will the companies that shouldered the design and manufacture burden not want to recoup their costs and share more mightily in the profit?

I bet our margins will remain the same but profits will shrink, because we have to pay more outside companies since they have done significantly more work. And what about the non-monetary risks, at least in the short term, to the intellectual property, in patents and people, to Boeing? Will there be a brain drain? Actually, I ask will it continue, since it has begun in earnest from Boeing. In the future, [will it be] akin to the troubles now plaguing NASA? What happens when the first 7E7 built largely beyond Boeing's control crashes (not to be grim but it will happen)? Who is legally responsible and culpable? The people who built the many parts? Or Boeing who just assemble them into the whole? Will Boeing be capable of overseeing these many companies, will the engineering expertise still exist within the company, and will the transition of knowledge give rise to a new airplane manufacturer among former Boeing suppliers? Something to consider for the future, I hope that the current management is considering it as well.


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