1. December 2001
Boeing’s diversification strategy
By Jeff Meredith
Since moving its corporate headquarters to Chicago in September, Boeing has
weathered one difficulty after another. A downturn in the aviation industry took a turn
for the worse with September's terrorist attacks. The company announced its plans to
lay off 30,000 commercial jet workers; the company's 2001 delivery projection of 538
aircraft for Boeing Commercial Airplanes was reduced to 500 and 2002 could see
deliveries in the low 400s. In mid-November, Boeing Co. CEO Phil Condit estimated it
would take 28 to 42 months for airline traffic to recover from 9/11, a span in which
Boeing should lose production of more than 1,000 airplanes.
The hard luck didn't end there, though. The company cut its 2002 sales forecast by $1
billion after the Pentagon awarded the largest military contract in history, $200 billion
for the Joint Strike Fighter, to Lockheed Martin Corp.
"It was a huge setback emotionally, we don't like to lose and this was like losing a
Super Bowl, not only for the people who worked on the program but for all the people
who supported them," said David Swain, senior vice president and CTO for Boeing.
Additionally, South Korea has delayed the award of its $3.2 billion jet fighter contract
until at least next March, dashing Boeing's hopes for a late-year boost. Seoul was
scheduled to choose in November between Boeing's F-15 and France's Dassault-made
Rafale, Russia's Sukhoi-35 and Eurofighter's Typhoon jet. Orders for Boeing's F-15 are
becoming less frequent with age and the company acknowledges that it needs
international orders to keep the production line going.
The news for shareholders hasn't been too cheerful either. Boeing's stock (NYSE: BA)
approached $71 last December; lately it's hovered in the mid-30s after bottoming out
at $27.60 on September 21.
There must be a silver lining? Yes, analysts say, and that's the company's commitment
to diversifying. Condit has tried to steer Boeing away from the peaks and valleys of
commercial aviation and focus more on defense and satellite businesses. Acquisitions,
such as the 2000 purchase of Hughes' space and communications business ($3.75
billion) and 1997 buy of McDonnell Douglas Corp. ($18 billion), the largest
manufacturer of fighter jets, offer hope for the future and could insulate the world's
largest airplane manufacturer against passenger anxiety and airline capacity
reductions.
"They've had considerable success in diversifying so far. It really started with the
acquisition of McDonnell Douglas, which immediately made Boeing the second largest
supplier to the defense department behind Lockheed," said Paul Nisbet, an aerospace

2. analyst at JSA Research Inc. in Newport, Rhode Island. "They added to that the
defense operations of Rockwell International. They've still gone further with Hughes
Electronics' satellite operations."
Nisbet estimates Boeing has $4 billion in revenues coming from the commercial aircraft
aftermarket. In the past, the company focused on the $70 billion a year new plane
market while rarely dipping into this even bigger market for maintenance and services;
that's about to change though as Boeing Airplane Services looks to grow aggressively.
Boeing has also made a number of solid niche acquisitions, says Nisbet, pointing to the
$1.5 billion purchase of Jeppesen Sanderson Inc., a source of flight information
services, aviation weather services, maintenance information and aviation training
systems. Boeing purchased Jeppesen from Chicago-based Tribune Company in August
2000, the Tribune having gained Jeppesen through its merger with the Times Mirror
Company.
"They are moving on all fronts and placing considerable emphasis on these aftermarket
and diversification maneuvers," said Nisbet.
Branching out from within
Some emerging areas for Boeing will also play a role in the company's success. The
Boeing Capital Corporation is one of the few new business units to immediately make
money, providing financing and leasing solutions for commercial aircraft and executive
aircraft to global industries. Connexion, providing high-speed, two-way Internet and
television services for aircraft in flight, has been put somewhat on the backburner in
the commercial space, but installations will soon begin in government planes including
Airforce One. Air Traffic Management is a new Boeing division that looks to develop
solutions to congestion problems, leveraging satellite communications and global
navigation systems to provide passengers with safer, more reliable and affordable air
travel.
"Airline pilots select optimum routes of travel based on wind, weather conditions," said
Michel Merluzeau, a senior aerospace analyst with San Jose-based Frost & Sullivan. "If
you can save three to four minutes over a three and a half hour flight, this translates
into a plane cost and fuel cost. If you do this everyday, you save millions of dollars in
fuel costs, so that's what Boeing's going to try to work on. I think it's a very promising
area."
Merluzeau believes Boeing made a smart move by placing its world headquarters in
Chicago. Several cities, including Denver and Dallas, courted the company with tax
breaks and other sweeteners, but Chicago's estimated $53 million in state and local
incentives was too much to pass up. The move certainly sent a message to Seattle.
"It's more and more difficult for a company like Boeing to maintain an operation in
some of these areas," said Merluzeau. "The transportation infrastructure, delivery costs
are such that Boeing is seeing a rising cost of doing business in Washington state and a
diminishing market" for commercial aircraft.