In the chess match that is the business of building jetliners, James McNerney is about to make the biggest move of his career, one that could set the course for Boeing Co. for decades.
He must choose between replacing Chicago-based Boeing's best-selling 737, hoping he can line up buyers and get the plane in the air before the current order book dries up, or play for time with a less risky and cheaper upgrade of the existing aircraft.
Pressure is building on Mr. McNerney to deliver. In December, Boeing archrival Airbus S.A.S. said it would upgrade its popular A-320 with a new engine,
racking up more than 1,000 orders since then. At last month's Paris Air Show, Airbus lapped Boeing, announcing orders for 730 planes worth $72 billion, including 600 orders for the new A-320, called Neo, shorthand for new-engine option. Boeing received orders for 142 planes worth an estimated $22 billion.
“Boeing has a tough decision to make, but they need to do something,” says David Rowlett, a senior analyst at Baltimore-based mutual fund T. Rowe Price Group Inc., which owns 20.4 million Boeing shares. “Airbus made a good move. It's not a checkmate move, but the Neo is obviously selling very well.”
TRADEOFF
Building a new plane could allow Boeing to extend the dominance it enjoys in larger, long-range aircraft to the smaller, single-aisle planes that are the domestic workhorses of most airlines. But a new plane could cost billions with an uncertain return, giving Mr. McNerney reason to think hard about the choice.
“Of course he wants to be the innovative leader and stay ahead of the curve,” Mr. Rowlett says. “Is he willing to give up share in the meantime?”
Analysts expect Boeing's earnings to slip 8% this year from 2010, according to Thomson First Call data. While the stock is up 22% in the past year, it lags the S&P 500, which has improved 30% overall.
Boeing CEO James McNerney
Boeing estimates the market for narrowbodies like the 737 will be worth $2 trillion over the next 20 years. But Boeing, which shares the market with Airbus, will face new competitors such as Commercial Aircraft Corp. of China, Russia's United Aircraft Building Corp., Brazil's Embraer S.A. and Canada's Bombardier Inc.
“The dynamics are changing in this chess match—there are now four or five levels,” says Jonathan Richton, an analyst at Los Angeles-based Imperial Capital LLC. “Now it's becoming more like a brawl.”
Boeing, which declined to make executives available for comment, has said it will decide the future of the 737 late this year or early next year and won't be rushed by Airbus, a unit of Toulouse, France-based European Aeronautic Defence & Space Co. N.V.
Developing a new plane could cost $5 billion to $10 billion, and it will take years of sales to recoup those costs. The existing 737 is a cash cow, with its development costs paid for long ago.
Mr. McNerney has plenty on his plate. The 787, a new mid-sized plane that will be used primarily for longer flights, is expected to be delivered to its first customer in the third quarter, three years behind schedule. And a new version of the 747 is due by yearend. Both projects have experienced delays that helped double Boeing's annual R&D costs from a decade ago to $4.1 billion last year. Meanwhile, the military business that makes up half of Boeing's $64.30 billion in revenue faces government cutbacks.
Many analysts are betting that Mr. McNerney will opt for a new plane. Several customers contemplating big orders, such as Ireland's RyanAir and Los Angeles-based Air Lease Corp., have said they'd like one.
BOEING BACKLOG
Consolidation, such as the merger of United and Continental airlines, has reduced the number of Boeing-only customers. One of the few that remain, Fort Worth, Texas-based American Airlines, reportedly is considering the Neo as it prepares to order 250 aircraft.
Boeing has a backlog of 2,100 orders for the 737, enough to keep assembly lines running through 2015. But the plane, which launched in 1967 and underwent a major overhaul in 1997, is showing its age. Boeing could upgrade engines, allowing it to match and likely beat the 15% improvement the Neo promises, analysts say.' If (McNerney) wants to be a big dog . . . he'll build a new airplane.'— Gordon Bethune, former Continental CEO
But a new plane could put Boeing far ahead of Airbus in both the market for widebody aircraft like the 787, the most lucrative part of the industry, and the smaller planes that are the mainstay of domestic aviation. Boeing piled up 835 orders for the 787, its most successful launch ever.
“They could build a composite airplane and jump ahead of (Airbus),” says Gordon Bethune, a former Boeing vice-president and later CEO of Houston-based Continental, a major customer. “It's not like they don't have a full order book. If you could ever afford to take the time, this would be it. The timing is right.
“If (McNerney) wants to be a big dog and mark the hydrant, he'll build a new airplane,” Mr. Bethune says.
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