Space and Communications
"Space and Communications -- Expanding the Limits"
Southern California Management Assn.
April 15, 1999
It's great to be here tonight and see friends from our Southern California locations where I've worked over the last 12 years.
I've attended many of these leadership nights and listened to discussions about the wonderful products we build. Tonight, I'd like to talk about how we make our business decisions. A big part of evaluating a new venture is making sure people have all the information they need to make wise decisions. I hope I can give you relevant information tonight.
There are some 40,000 of us in California. While we are the leading private employer in the state of California, we have yet to make our weight felt in this state. I think it's incumbent on all of us on the leadership team, and I include everyone in this room, to ensure that we make our presence known with our community leaders, with our legislators and certainly with our congressmen. The Boeing Company is already engaged in this activity.
If you watched the Tournament of Roses Parade last January 1st, you saw there was a Space Shuttle float, an Apollo Saturn V and a number of airplanes. I kept thinking to myself... why are other companies sponsoring floats with our products? As most of you probably know already, we will have a float next New Year's Day and people are already asking how they can get involved. The work is going to start about two months before January. We will need many volunteers, so anybody who wants to participate should look for information on the web at: http://sms.bna.boeing.com/sms/rose_parade/
We have several Southern California Management Association groups here tonight, and I want to thank them for giving me the opportunity to come here and talk with you. The Management Association serves a great purpose for The Boeing Company. They give us a chance to get together in a relaxed setting like this and renew old acquaintances. They also give us an opportunity to communicate things that are important to the business. They do a wonderful job in the community and they support the training needs of The Boeing Company. I'd like to thank each of the groups for the work they're doing and for their support to Boeing.
In past top management nights, we've always had a significant number of retirees in attendence. This year, we're missing two retirees, Lee Atwood and Art Raymond. As most of you know, Lee Atwood and Art Raymond were two of the early pioneers of North American and Douglas. With both of them gone now it truly is the end of an era for many of us.
As I mentioned, Lee often came to these events and it was here that I had my first opportunity to meet him. He was President and CEO of North American Aviation, which was then part of Rockwell. He had a 42-year career, which started with wooden-frame aircraft and wound up putting people on the moon. He was the spearhead of designing the P-51 Mustang, with which we shot down more enemy planes than any other in WWII. He was involved in B-25, F-100, the X-15 and the B-1. His crowning achievement was putting together a 300,000-person enterprise that spanned the entire country and many, many companies in building the Apollo program and landing people on the moon. He certainly will be missed.
I think many of you knew Arthur Raymond personally. He had a 35-year career with Douglas Aircraft. He was the designer of the DC-3 in the '30s, which was the first reliable passenger airplane. When Raymond designed the DC-3, he said it was "an airplane built in a time when product life was designed to be indefinite." Here we are, 60 years later and, of the 11,000 DC-3s that were built, 2,000 of those airplanes are still flying. Raymond was very involved early on with the development of the Ajax, Thor and Nike missiles. Thor led to the Delta family of rockets that we're still flying today, and we've progressed all the way to Delta IV as a result of his great leadership. He helped found the RAND Corporation in 1946, and he retired as the Vice President of Engineering for Douglas. We're going to miss those two great pioneers.
It wouldn't be appropriate to continue without talking about the passing of "T" Wilson who was a past CEO of The Boeing Company. He led us through the bust and boom times of the '70s. He passed away last Sunday. He was responsible for having the courage to go forward in a very depressed airplane market with the 757 and 767 program. Earlier, he worked on the B-52 and the Minuteman missile programs. Much of what we have today in The Boeing Company, we owe to Mr. Wilson.
Now, I want to talk about some of the challenges we have in the Boeing operating groups. It's a great company we work for! We've got great people, great technologies and a phenomenal potential in the road ahead. It's up to us to maximize that potential.
In the next 20 years, some 17,000 commercial airplanes will be built -- that's a $1.5 trillion market. What a great opportunity that represents for us.
In the next 10 years, the Information and Communications market is going to grow from $15 billion a year to about $120 billion a year. Another great opportunity! That's going to be an ever-expanding market we're pursuing.
The challenge of competing in these markets is that many of our products compete only on price. As a result, our ability to win competitions is going to have everything to do with becoming more competitive.
Most likely, you all saw the earnings announcement that came out today. Last year in the first quarter, we made .05 a share; for the first quarter of this year, we had .50 share. All of the operating groups exceeded their projections. And all of you in this room and thousands of others in Boeing just like you helped make this happen.
While we saw great improvement in the first quarter, we still have great challenges ahead. At BCAG, we have to reduce our cost structure. Already, I see a real turnaround in the Boeing Commercial Airplane Group as Alan Mulally's leadership team continues to reduce the cost of doing business and improve competitiveness. I look for great things coming from Alan and his team in the months ahead.
At Aircraft and Missiles, in spite of the success of the C-17 and other programs, we face a very flat market. If we're going to continue to have the great returns coming out of Mike Sears' organization, we're going to have to focus more on global markets. Mike and his team are doing just that and I'm sure they'll continue their great performance.
In Space and Communications, our challenge is to identify the targets of opportunity we want to pursue and to manage risk as we get into these new areas. With so many opportunities, we have to make sure we identify the right ones -- projects that suit our capabilities and core competencies. Of course, the assignment we've been handed is to double sales in the next six or seven years, and to increase our return on sales to about 12% by the year 2002.
Clearly, we have to change; we have to move from being a technology-driven organization to one that's driven by business considerations.
Getting into more detail on Space and Communications, there are four markets that we serve. I'm going to spend some time going through these markets, beginning with Launch Services. Last year, we had about 27% of the world's market. It's our intent to grow that to about 40% or 50%. The Space Shuttle is a signature product of The Boeing Company; a signature product of the United States. It is a statement to the world in terms of American know-how, engineering and workmanship. It's the world's only reusable launch vehicle and it's one that has used only about 25% of its useful life.
Working with United Space Alliance, we've been able to reduce the cost of flying the shuttle by some 30% since 1992. With prudent upgrades, we can reduce the cost even more. We're going to have 45 launches of the Space Shuttle to the International Space Station between now and the year 2004. I don't see any replacement in sight.
While many people are looking at new reusable launch vehicles, the shuttle is doing much more than merely getting payloads to space. It's also a platform for doing experiments that can be reconfigured for different missions. Rick Stephens (VP & General Manager, Reusable Space Systems) and Byron Wood (VP & General Manager, Rocketdyne Propulsion & Power) and all the people that support the shuttle have done a terrific job maintaining world class performance.
The Delta family is a phenomenal collection of vehicles with a great heritage. Delta II is the world's most reliable vehicle; we had 12 launches last year. We're going to have 13, maybe 14 launches this year. We had a successful launch this morning. We'll soon have the return to flight of Delta III.
What is really exciting, though, is what Gale Schluter (VP & General Manager, Expendable Launch Systems) and Mike Kennedy and their team are doing on Delta IV. Delta IV is going to be a completely redesigned vehicle from the bottom up. It's going to be the first vehicle designed with cost as an independent variable. It's going to have a LOX-hydrogen engine on it, courtesy of Rocketdyne, and it's going to cut the costs of going to space by about 50%. We had a competition with Lockheed Martin last fall and we captured 70% of the market. A year ago at this time, it was a paper rocket, but it's not a paper rocket anymore. All the components are coming together, and we're now testing the RS-68 engine at Edwards Air Force Base.
Sea Launch has been a difficult program with a lot of technical challenges. The real challenge, though, has been working through all the regulatory issues. Have you ever tried to get the permits necessary to get a Russian ICBM into Long Beach? We had our first launch on March 27 and it was flawless. Our customers are now very anxious to fly on it. We're going to have a commercial launch later this year and possibly as many as five in the year 2000. It's an exciting time for Sea Launch and for Launch Services.
In Information and Communications we have a tremendous range of capabilities, maybe not to the depth of some companies, but certainly in breadth. Let me ask a question... what was the first satellite constellation that was ever put into space? I think you all know, it was the GPS (Global Positioning System) satellite, built in Anaheim and Seal Beach. Not many people outside of Boeing know that.
The Airborne Warning and Control System (AWACS) is a franchise that Boeing owns. We've delivered some 66 E-3 AWACS so far to our customer. We've delivered four 767 AWACS to Japan over the past year. We're also pursuing 737 AWACS that we're selling on the international market. We just got down-selected to the final two in Turkey and we expect to win a competition in Australia this year. We're counting on about $2.6 billion in sales coming from our AWACS products over the next couple of years. These programs are fixed price and they have great returns.
In the area of satellites, the people who work for Ken Medlin (VP & General Manager, Information & Communications Systems) have taken existing resources -- space, air and ground -- and integrated them into systems that provide the ability to provide customer communications and to pinpoint locations. It's a great example of our ability to do large-scale systems engineering.
In the commercial satellite area, we're going to announce some commercial offerings this year: Just stay tuned in this area, it's going to be exciting.
Bob Paster (VP & General Manager, Electronic Systems & Missile Defense), John Peller (VP & Program Director, National Missile Defense/Leads System Integrator) and others are leading the Missile Defense team. We are players in virtually all missile defense programs whether they're national missile defense, theater missile defense or directed energy. We have two national-directed energy programs in the Airborne Laser and Space Based Laser programs.
A year ago, we won the Lead System Integrator role for National Missile Defense because we were able to bring together the expertise of the three heritage companies. We've got a $4-billion contract we believe we'll be able to double. Anyone who doubts you can hit a bullet with a bullet, should look at the footage of the PAC-3 intercept. We know how to do it.
The Orbital Systems and Exploration area is primarily NASA business. Boeing is the number one NASA contractor and we will continue that support long after assembly of the International Space Station, as we get into operation and utilization. We're also working on a number of other programs for NASA, such as the crew return vehicle, advanced tactical vehicle and the space-maneuvering vehicle (for the Air Force). Those aren't great programs from a profit standpoint, but they provide great technology leverage and we're going to maintain that position.
Our Subsystems and Support programs include enabling technologies that provide leverage in the large markets. These include Guidance, Navigation and Control at Anaheim, and Propulsion and Power at Canoga Park.
If you were to step back in time 30 years, you would find a time much like today, full of grand visions and great promise. The U.S. space program was moving at full tilt. We were in the midst of Apollo. Our heritage companies built the Saturn V rocket -- Boeing built the first stage, North American built the second stage and McDonnell Douglas built the third stage. Rocketdyne built all 34 engines on Saturn V. That was a Boeing vehicle!
In the Saturn V facility at Cape Canaveral, there is a Saturn V suspended in the air and it's very impressive to see. From October 1968 until July 1969, in just 10 short months, we launched five Apollo missions. We launched Apollo 7, the first Earth orbit with Apollo; we launched Apollo 8, the first orbit of the moon; then we launched Apollo 9 and 10, testing the lunar module. Two months later, we launched Apollo 11. It's really hard to believe we were able to do five missions in just 10 months! The fact that we were able to go from being tethered to Earth, to the moon and back in 10 short years -- in just half a generation -- is incredible.
We are approaching the 30th anniversary of landing on the moon this summer. I'm sure everyone can remember where they were 30 years ago. Walter Cronkite summed it up best when he said, of mankind's achievements in the 20th century, the one event that will dominate history books half a millennium from now will be our escape from our Earthly environment. In hindsight, I think it's amazing that the Apollo team accomplished the impossible without much of the technology we have today.
What drove the innovation, the speed and daring of 30 years ago? It was the Cold War and the race to be the first people on the moon. That became a national imperative for us and also for the Soviet Union. Thirty years later, we still stand on the accomplishments of Apollo in many ways. However, we have moved beyond the international rivalries to a situation that involves international cooperation and collaboration, as opposed to competition. We're in an age that's filled with strategic alliances and joint ventures we wouldn't have dreamed of 10 years ago, let alone 30 years ago, when we were working on Apollo.
Who would have thought the U.S. industry would be partnered with Russia and other countries on the International Space Station and on Sea Launch, or with Lockheed Martin's International Launch Services?
I was over in Ukraine last July visiting Yuzhnoye/Yuzhmash. They built all of the Soviet Union's ICBMs and also the Zenit for the Sea Launch vehicle. They were taking me through their museum, showing me their vehicles. They pointed toward one and said, "this is the Boeing Rocket." I said, "Why do you call it the Boeing Rocket?" They replied, "Because this is the vehicle that was targeted on Seattle."
It's funny, but it makes you pause. Just 10 years ago, these people were targeting us. Now were collaborating on a great program like Sea Launch.
Who would have thought in 1981, when we first launched the Space Shuttle, that a commercial company would be operating the Space Shuttle fleet? And that commercial company, United Space Alliance, is a 50-50 joint venture between Lockheed Martin and The Boeing Company.
Who would have thought that GPS would develop into a $12-billion-a-year commercial industry? Today, we couldn't fight a war without GPS... and many of us probably couldn't find our way to the airport without GPS. It's quite a program -- and it's a Boeing program.
Who would have thought 30 years ago that commercial space would be a much larger share than the government space activity today?
Many things have changed and we've entered a whole new era in space utilization. But I'd like to make a couple of points about this new era. It is more commercially driven than anything else. Our progress will continue to be dependent on factors such as specific impulse, mass fraction and bandwidth. But to a much larger degree, our progress will be driven by the internal rates of return -- return on sales, return on net assets and cash flows -- generated from these new programs. We've got to evaluate these new programs differently now to determine where we're going to invest our dollars.
I see many commercial programs within Boeing, and at other places I visit. Many of these programs do not have a solid business foundation. In the launch area, we see start-up companies assume they're going to capture 70-80% of the market share. Regardless of their price, it's not going to happen. In the satellite area -- in communications and in remote sensing -- there are many programs that assume a $200-300 million anchor order every year from the Department of Defense. That's another assumption that will never be realized.
We've got to come to some sobering realities about what makes a good business case. All of us need to think about how we're going to embrace this new commercial era. I'm leading up to our performance and how well we're doing in the areas of RONA (return on net assets), return on sales and important areas like inventory turns. Because those are the things that are going to determine whether or not we're going to be competitive in the years to come and whether we'll continue to see the price go up in our stock.
At an investors conference in Orlando, Fla., in the first week in February, Debbie Hopkins, Alan Mulally, Mike Sears and I talked about our businesses. We also shared with the analysts how well we were performing on a number of these critical measures -- measures that are essential as we go forward commercially. When compared with our competition, companies such as GE, Allied Signal, Proctor and Gamble, General Motors, Ford and Exxon, we were at the bottom of the list on RONA. I don't like that position. There are many things we can do, working together, to raise this bar. It's everyone's responsibility to chip in and improve this status.
Our assets, such as facilities, equipment, receivables and inventories, are all things we can influence every day in the decisions we make. The stock went up the last couple of days for one reason: because our earnings went up. If we can continue to increase our earnings and reduce our assets, we're going to have positive and meaningful results.
In return on sales after tax, we were at 3.9% last year. Space and Communications was at 3.6%. We can make a lot of excuses why Space and Communications was at 3.6%. We invested heavily in new programs, about twice as much as we made. We could have managed for the short term and gotten that number up, but we decided to go for the long term. But the fact is, the analysts don't care how we invest in the future; they care about our earnings today. And our earnings weren't very high.
There are things we can do, all of us collectively, to improve that number. We've got to reduce costs and improve efficiencies. We need to think very hard about low margin businesses that we may need to exit. Inventory turnover is a simple measure -- sales divided by assets -- and, for the most part, it follows RONA. Again, we need to go off and work on reducing our inventory, working on collectibles, eliminating assets that aren't being fully utilized. We talked about some of the consolidations that are going on, and that's all about making sure the assets we have are put to use 100% of the time.
Our goals are pretty lofty at Space and Communications. We want to double our sales by the year 2005. We want to have a 12% operating margin by the year 2002. We want to go from having some negative cash flow this year up to having a billion dollars of cash by the year 2001 that we can invest in new programs. We want to be leaders in the markets we share.
Everyone can help as we go forward toward meeting these goals. We have a very simple plan we've developed with three steps.
The first step is to fix or eliminate value-destroying programs. We have to understand how our programs are performing. If they aren't performing up to the measures we want, we've got to put plans in place to fix those programs. Or, in the event that we can't get the margins up and we can't fix them, we need to think about exiting some of those businesses.
The second step is to maximize the value creation in the profitable programs we have. Go off and work on assets and processes, get people in employee involvement and responsible for improving what they do each and every day. By doing that, we can improve the margins on some of the profitable programs.
The last step is all about growth; that is, adding new value-creating programs or activities to the portfolio. We are working very hard to do that. An example is Delta IV. Delta IV is a major investment on the part of The Boeing Company to go after a bigger share of the launch market. It's a program that McDonnell Douglas or Rockwell could never have sought. We're able to do it because we've got the financial power of The Boeing Company behind us.
About three or four weeks ago, we took about 375 managers from Space and Communications to downtown Los Angeles for two-and-a-half days. We discussed various ways to grow the business and do things radically different than before. Each of the businesses came back after two days and reported on the actions they were going to take to improve business performance. Huntington Beach, for instance, committed to reducing inventory by 50%. Rick Stephens and his organization committed to making a significant improvement in RONA performance. We're not talking about doing the same things better; we're talking about doing things differently. Over the next few weeks, I'm sure some of those initiatives will flow down to all of you.
Let me talk about leadership expectations... none of you would be here if you weren't leaders. Leadership isn't reserved for people who have corner offices or a title under their names. Leadership is something we all have to assume. Leadership is about determining where we're going, and then figuring out how we're going to get there. It's about putting a plan together and making it happen. It's about doing things differently tomorrow from how we're doing them today. I don't care if you're in the mailroom or the corner office, you can improve your processes and become much more effective. That's what I'm asking the leadership team of Space and Communications to do. We have to do this quickly, with a sense of urgency.
I like what I saw today in the stock market. It certainly reinforced what I've been saying lately... that it's not about technology per share; it's about earnings per share.
We can do it if we work the right things, measure our performance with the right metrics and execute to our plans. It's all about blocking and tackling. We've got to do the things we commit to. And certainly, we've got to create an environment in which people feel comfortable talking about the issues they face so we can address the things that are important. Working together we can make it happen.
It's going to take the leadership of everyone here to make that happen. I love Boeing, I love the programs we have and I love the promise of space. We've got a great future, a future we can influence and control. The people in this room can make it happen. We can make those dreams come true.