Boeing (NYSE: BA) has had its share of troubles in the last year. It suffered from a two month strike of its 27,000 worker machinists union which cost it an estimated $10 million a day in lost profit, it delayed its 900-backlog 787 Dreamliner several times and it's now two years behind schedule; new orders fell to about 662 planes in 2008, just over half the 1,413 ordered in 2007; and it laid off 800 workers, or 27% of its 3,000-worker Wichita, KS defense unit anticipating lower orders due to the government's focus on the financial crisis.
That's not to say that all is terrible at Boeing. After all, it has a 3,714 aircraft backlog and assuming it can make about 400 aircraft a year -- that means Boeing needs to produce over nine years worth of aircraft. And that doesn't take into account the possibility that Boeing could win a $35 billion airborne refueling tanker project that could be put out for bid in 2009. Not only that, Boeing's finances are pretty good -- it has $65.7 billion in revenues and $3.8 billion in net profit over the last 12 months.
So why did Boeing announce Friday that it plans to cut 6.7% of its Washington state-based Commercial Aircraft unit's workforce beginning in February? Boeing expects a slowdown in commercial aircraft demand that it believes requires it to cut 4,500 jobs. That could be because with the economy contracting and financing tough for just about everything -- including multimillion dollar aircraft -- there could be a serious order slowdown in 2009 and 2010, order deferrals -- potentially between 30% and 70% of the total, and some cancellations as well.
Boeing's CEO Jim McNerney is schooled in productivity improvement techniques which could help him to cut away jobs that are off the critical path. The last thing Boeing needs to do is cut people who are designing and building the aircraft that comprise its 3,714 unit backlog. So I think it's wise of Boeing to be looking to cut people from overhead functions not directly associated with aircraft production. It plans to achieve the cuts through attrition and by firing contractors. Boeing will also cut costs by reducing discretionary spending, such as travel.
But what impact will these cuts have on 2009 earnings? With its stock trading at a price/earnings ratio of 8.8, investors seem to be suggesting that the consensus 2009 earnings per share (EPS) estimate of $5.87 is way too high -- that number would imply 30% earnings growth in 2009. Perhaps with the cost of severance and the revenue slowdown Boeing anticipates, its current P/E suggests that investors think that Boeing will be lucky if its earnings grow 9% to $4.93 in 2009.
With its stock trading 58% below its September 28, 2007 high of $105, it looks like Boeing is at least a year into a lengthy demand trough. But its efforts to cut costs ahead of that downturn seem prudent for assuring Boeing's long-term financial health.
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College. Portfolio published his eighth book, You Can't Order Change: Lessons From Jim McNerney's Turnaround at Boeing on December 26, 2008. He has no financial interest in Boeing securities.
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