Boeing on Welfare

Is the aircraft manufacturer taking too many government handouts?

The stock of Boeing—the largest commercial aviation company—has held up comparatively well through the worst crisis in commercial aviation history. There is a good reason for this. While airlines seeking post-9/11 aid have had to pay a steep price for government-backed loan guarantees, Boeing is benefiting from what amounts to a stealth government bailout.

Boeing is both the world’s largest commercial jet manufacturer and the second-largest U.S. defense contractor. But in the past few years the company has come to rely far more on the taxpayer-funded work. In 1999, when the company delivered 620 commercial planes, these jets accounted for two-thirds of Boeing’s $58 billion in revenues. Military Aircraft and Missiles Systems, and Space and Communications—the two divisions now united as Integrated Defense Systems—accounted for the other third.

But thanks to the recession, the 9/11 attacks, and the ensuing airline bankruptcies, Boeing delivered just 381 jets in 2002—its worst total since 1996. Commercial jets provided $28.4 billion, or 52 percent of total revenues. The future doesn’t look particularly bright for the commercial unit, which has reduced its workforce by one-third and expects to deliver only 280 planes this year. It also recently scrapped plans for the next-generation Sonic Cruiser. Boeing will soon forfeit its commercial jet lead to Airbus, which plans to deliver 300 planes in 2003.

Instead, Boeing is counting on Uncle Sam. Boeing’s defense unit’s sales rose 9.4 percent to $25 billion in 2002—or 46 percent of total revenues. Sales of military aircraft and missile systems jumped 12 percent on higher deliveries of, for example, the C-17 cargo plane and the F-15 fighter. (Data on Boeing’s business mix can be found here.)

And Boeing’s biggest defense customer by far is the U.S. military. The value of Pentagon contracts awarded to Boeing has risen from $11.57 billion in 1999 to $16.6 billion last year—up 25 percent in 2002 alone. Boeing is now challenging Lockheed-Martin (2002 contracts: $17 billion) for the title of largest U.S. defense contractor. Defense may supply more than half of Boeing’s total revenues in 2003 and virtually all of its short-term growth.

Boeing’s tilt from the private sector to the public makes sense. The Pentagon has increasingly deep pockets and is run by managers eager to spend more on Boeing’s products, while the airline business is in sad financial straits and is run by managers who are obsessively focused on slashing costs. But Boeing’s defense boom may reflect more than the post-9/11 security climate. The company may also profit from home-state politics and industrial policy.

In December 2001, at the behest of Washington state lawmakers and Vice President Dick Cheney, the proposed Pentagon budget included an item to lease modified 767 jets that could serve as in-flight refuelers for military aircraft. The $27 billion proposal raised the ire of both Office of Management and Budget Director Mitchell Daniels and Sen. John McCain. After all, the military typically doesn’t lease airplanes, especially ones that can last a few decades. And it would plainly be cheaper to improve existing tankers. The fact that Washington legislators trumpeted the move as a jobs program for formerly home-state Boeing (it moved its headquarters to Chicago in 2001) didn’t help matters. “This has nothing to do with national defense and everything to do with taking care of Boeing,” McCain said last spring.

In December, the Pentagon delayed a decision on a revised version of the deal, which would have had the Air Force lease about 100 planes for $17 billion. But the plan is by no means dead.

Boeing is also expecting some form of government aid for its satellite business. With the telecom crash, the demand for commercial satellite launches and services has dried up. But with satellite technology slated to play an ever more important role in the weapons of today (smart bombs) and the defensive missive shield of tomorrow, the Pentagon seeks to maintain private-sector satellite capabilities. Last week, according to Dow Jones, James Albaugh, the head of Boeing’s defense unit, said Boeing is counting on “some investments in our infrastructure.” As Dow Jones put it, Albaugh believes that the United States “wants two separate healthy launch systems to provide assured access to space over the long term, and will likely provide some sort of financial assistance to Boeing and Lockheed toward that end.”

There’s nothing mutually exclusive about being a leading commercial aviation company and a leading military contractor. And there’s no doubt that the shifting of Boeing’s center of gravity helps shareholders in the short term.

But the long-term implications are more troubling. After all, military contracting isn’t a globally competitive market the way commercial aviation is—the Pentagon is highly unlikely to award jet-fighter contracts to Airbus, regardless of issues like price and performance. And with assured profits from Pentagon contracts, Boeing has little incentive to gamble heavily on the future of its commercial business.

A generation of conservative writers and public-policy-makers have taught that people who depend on government payouts tend quickly to become ambitionless and unproductive. Over the next few years, Boeing’s shareholders and customers will learn if the same dynamic applies to dependent companies.