Space and Communications
"Remarks to the Orange County Forum"
Orange County, Calif.
November 11, 2001
Good afternoon. Thanks, Don, for that introduction. As someone who worked for Rockwell International for 22 years, it's an honor to be introduced by your former chairman. I can't think of better place to have learned how to run a business, than Rockwell under Don.
I'd also like to thank Bryan Murphy, Chairman of the Orange County Forum, and Jo Ellen Allen, the Forum's President, for inviting me here today. It's a pleasure to be with all of you.
What I'd like to do today is to tell you about the new Boeing Company, talk about the part of the business we run here in Orange County -- Space and Communications -- and say a few words about doing business in California.
Before I get into my remarks, let me say a few words about recent events, which have been on my mind and I imagine on yours, too.
Today marks 30 days since the Sept.11 attack on our nation that left 6,000 dead in Manhattan, 189 dead at Pentagon and 44 dead on a field outside of Pittsburgh.
I think it's fair to say no one has been untouched by the tragedy. At Boeing, we lost three of our colleagues, all on Flight 77. Two were from Southern California and one from was from Northern Virginia. All were bright young engineers with families. I'm sure everyone here knew someone affected, either directly or indirectly, or perhaps someone who's been deployed overseas.
Beyond the enormous human toll, there's also an economic toll. The commercial airline industry has been particularly hard hit. Now, that industry wasn't particularly strong before Sept. 11 - you may have seen an article in yesterday's Los Angeles Times by Peter Pae on the subject. A weakening economy is tough on a highly capital-intensive business like the airline industry, and it has begun to see some cash flow issues even before Sept. 11.
Since the attack, however, all major U.S. airlines but one have cut their "load factor" - or capacity as measured by available seat miles - by about 21 percent. That translates to some 900 airplanes (out of the 10,000-plane U.S. fleet) taken out of circulation and parked. That's equivalent to about two years of manufacturing by Boeing.
Fewer travelers and reduced load factors mean fewer airplanes produced by The Boeing Company. Last week we announced 19 fewer aircraft delivered than planned for third quarter 2001. Year-end deliveries could fall from 538 to 506. And 2002 deliveries are estimated to be in low 400s instead of the 510-520 previously forecast.
As a company, Boeing had to react quickly. You've probably seen the recent announcement that we may lay off as many as 30,000 employees through the end of 2002 as a result of the downturn in the commercial airplanes business. That was a tremendously difficult decision, but if you do the math, you see that 30,000 working at a combined pay-and-benefits rate of, say, $100 per hour (for argument's sake) equals $3 million per hour. If the business is not there to support those figures, then as a commercial company, we have to react.
So, clearly, Boeing is being impacted on the commercial side. Some of those impacts will eventually ripple through our supplier base, too, the largest portion of which is in California.
On the military side, the impact has been less significant, despite what you might have read. Prior to Sept. 11, the U.S. military was being transformed into an information-centric or network-centric force; one that was less dependent on platforms and more reliant on intelligence and communications. As I've said before, future conflicts will be decided not by which side has the biggest number of aircraft, tanks and ships, but who has the best information and can get it quickly and securely to the right people in the right places... which side can provide a common operating picture across the battlefield.
And, while it's hard for the Armed Forces to transform themselves while they're waging war, clearly that transformation will continue. Last month's attack shows we need to have better intelligence and situational awareness at home and across the world if we're going to take on the kinds of asymmetric threats we've begun to see
As an aside, since Sept. 11, there's been a lot of speculation about a potential defense windfall. Some analysts are predicting an increase to the U.S. defense budget of up to one full percent of GDP. I personally find any talk of an "upside" pretty distasteful and very premature.
Boeing, like others, has been asked by customers to do some "what if" studies, to look at whether we could accelerate certain programs and what kinds of capabilities we could provide the government. But right now, I'm not seeing any significant changes to our strategy or programs.
So... what does all this mean for The Boeing Company? In the long-term, I see no significant impact. People will get back on planes; they want and need to travel. The air travel industry will probably take longer to recover than after Gulf War, though, and it may take several years. The demand for aircraft will be driven by load factors and financial health of airlines.
On military side I see great growth opportunities, not because of 9/11 but because of overall transformation of the military from that platform-centric to network-centric model I talked about.
While our stock has been badly beaten up in recent weeks, the impact of Sept. 11th to Boeing could have been much more severe if we hadn't started our own transformation several years ago. It's a transformation many still aren't aware of.
We began five years ago transforming ourselves from airplane company to an integrated aerospace company.
It started with Don Beall agreeing to sell Rockwell International's aerospace and defense businesses to Boeing. With it, we got several of the world's leading space businesses, all based in Southern California, including: the number one human space flight company (based in Downey); the number one liquid propulsion provider, Rocketdyne in Canoga Park, Calif.; portions of the B-1 work in Seal Beach; and the global positioning system (GPS) satellites and defense electronics work in Anaheim.
The transformation continued with the merger with McDonnell Douglas a year later. That added to the diversification, giving us the C-17, the 717, the F-18 and F-15, several classified programs, the Delta rocket family, and Apache helicopters.
Then, last year we added Hughes Space & Communications in El Segundo, and we became the world's leading provider of commercial & military satellites.
All of these acquisitions were intended to broaden Boeing beyond airplanes and provide a much more balanced portfolio. They also provided for tremendous growth potential at Space & Communications.
Despite all that, if you ask the guy on the street what he associates with Boeing, he'll probably say we're an "airplane company." And with 80 percent of planes flying today built by Boeing, we obviously are.
But we're also proud to say we've built 65 percent of the military aircraft flying today. And we're proud to say we're the largest space company in the world. Clearly, we've been able to diversify successfully and are in a much better position to weather this downturn than we were even a few years ago.
In fact, nearly a quarter of the company's workforce is involved in space-related activities - everything from operating the Space Shuttle and building the International Space Station to overseeing development of our nation's missile defense system and building NRO reconnaissance systems.
Today, S&C is $10-billion, 40,000-person operation serving four markets: Launch Services; Human Space Flight & Exploration; Missile Defense; and Information & Communications. The first two markets represent our healthy core businesses, and the last two represent areas where we see potential for considerable growth.
In the Launch Services market, we provide the Delta rocket family, an innovative joint venture called Sea Launch, and liquid propulsion through Rocketdyne.
In the Human Space Flight & Exploration market, we're NASA's largest contractor, we built the space shuttle and the International Space Station, and we're a partner in operating the space shuttle through a joint venture called United Space Alliance.
In the area of Missile Defense, Boeing is involved in work on the Airborne Laser, the Space Based Laser and a variety of theater missile defense initiatives. We're also the prime contractor on the land-based segment of the National Missile Defense Program (now called Ground-based Midcourse Segment), which you may have seen the Pentagon recently plussed up from $5 billion to $8 billion per year.
Finally, in the area of Information and Communications, we're the world leader in commercial and military communications satellites and a significant contractor for the National Reconnaissance Office. In fact, about 25% of the work we do is classified. It's interesting stuff, but we can't talk about it.
In short, if it goes to space, operates in space, sends data via space, or keeps the peace from space -- chances are, it comes from Boeing... and it comes by way of Southern California.
Besides being home to the Space & Communications business, Boeing has a lot of other work here, too. Some 26,000 of our employees work and live in Southern California, most in Orange County.
Of the Company's seven largest operating units, all but two have operations in Southern California, including:
- Aircraft & Missiles in Long Beach, where we build the C-17, which is currently being used in humanitarian aid drops in Afghanistan;
- Boeing Commercial Airplanes, also in Long Beach, which builds the 717, a 100-passenger plane designed for short-range, high-frequency markets;
- Phantom Works, our research and development arm, which spreads throughout the company; and
- Connexion by Boeing, our Internet-to-airplanes initiative in Irvine
The two businesses that don't have activity here in California are World Headquarters and Air Traffic Management (ATM), though we actually started ATM here and spun it off last year.
I'd like to talk for just a minute about Air Traffic Management. If you think about it, not much changed in last 50 to 60 years in terms of controlling air traffic. In the early days, they'd set bonfires on top of hillsides and pilots would fly from bonfire-to-bonfire. Today, they fly from radar beacon to radar beacon, still in one-lane highways, so to speak. Boeing (along with some of its partners in the public and private sector) is proposing a space-based option that would allow free-flight, would cut travel times by allowing planes to fly point-to-point, and would allow us to put more planes in the sky safely.
Finally, on World Headquarters and the recent move to Chicago - folks ask me about that a lot. The move to Chicago highlights the diversification I talked about earlier. By being in Seattle, we were always going to be identified with airplanes. By separating headquarters from any one business unit, it allows folks to really focus on the breath and depth of our product line.
That brings me to last thing I want to talk about today: some of the challenges of doing business in California. Now, no one likes living in Southern California better than I do, but I think we do have to acknowledge the issue of remaining competitive despite the high costs of doing business here.
I'd like to talk about three things on the radar now that affect our ability to compete in the state: the Energy Issue; the Workers' Compensation Reform proposal now on the Governor's desk; and the bill just signed into law this last week to raise unemployment insurance.
On the energy issue, I applaud the California Public Utilities Commission for what it did to broker a deal with Southern California Edison. The cost of bankruptcy would have been huge compared to the marginal rate increases we'll have to pay, and during that time, there would have been no investment in infrastructure. The real issue is assured supply, and I think the deal the state has struck takes care of that.
On Workers' Compensation, while we're clearly not opposed to increased benefits to injured workers, we are opposed to the current proposal on the Governor's desk because it raises benefits without providing any offsetting reforms. Reforms that would effectively take lawyers and doctors who feed off injured workers out of the equation and provide payments directly to injured workers. Without appropriate reforms like this, I fear that over $3 billion will be added to a system without assurance that the benefit increases go to the injured workers.
On unemployment insurance benefits, the Governor just signed into law a bill that will be the single largest increase in unemployment insurance benefits in the history of the state. While, clearly, we support an increase for unemployed workers, especially now, the process needs to be fixed to eliminate some of the abuses we've seen.
I cite these three issues... because I think we can all agree they're some of the cost-drivers of doing business in the state. Each of these things factored into our decision several years ago to move Delta II manufacturing to Pueblo, Colo., and to start our new Delta IV production facility in Decatur, Ala.
More recently, you've probably read that we're planning to move some 1,200 jobs from Huntington Beach to Houston and Florida. Here, the real driver isn't so much the high cost of doing business in California, but our customer's desire to have that work closer to its centers of operation
With that, let me wrap this up. Five years ago, Boeing had little presence and no employees in Southern California. We've worked hard over the last five years to diversify and expand our business base and we've grown tremendously in the region. When we talk about the extraordinary heritage of aerospace in Southern California, can't help but recall the legacy of companies like Hughes Aircraft, North American Rockwell and Douglas Aircraft. Merged with heritage Boeing, these companies make for a great lineup and I'm excited about our prospects.
At the same time, we've worked hard to be a good neighbor... and an involved corporate citizen. We're excited to be here. And we're here to stay.