Boeing's Near Term Revenue May Be Affected By Defense Budget

Last year about this time I wrote an article at Seeking Alpha about how Boeing despite some setbacks in the defense realm was still a safe stock due to its large commercial aviation backlog and the coming of the 787. The article: Boeing's Defense Future: Stock Remains a Fortress made the argument that even without the KC-X tanker contract there was enough defense work for the company.

Boeing at that time was looking forward to the entering into service of the 787 Dreamliner which would be the driving force for its revenue and profit for the next several years. Significant orders for that aircraft have been made and the first ones will be entering service with various world airlines in the next several months. Of course there was also the presumption that several current military programs would continue -- the Future Combat Systems (FCS), C-17 production as well as V-22 and helicopter programs.

Now AFP is reporting that the new proposals by Secretary Gates for the Fiscal Year 2010 budget are putting pressure on Boeing as they seemed to lose the most.

Boeing sees the end of C-17 and F-22 aircraft production beyond what is currently on order when there had been hope that several more of each aircraft could be procured. FCS lost all of its wheeled vehicles which was basically half of the program. The CSAR-X recompetition was also ended despite Boeing having won it once but lost it on protest by Sikorsky and Augusta Westland. This along with a rejuvenated tanker contract would have more then made up for the loss of the transport and fighter aircraft.

Boeing also loses if the cuts to missile defense hold in Congress. The company was the lead system integrator on the mid-course ground based system that was planning on installing interceptors in Europe as well as expanding the number in Alaska. The Airborne Laser (ABL) second aircraft was also lost. The movement of funds to the Navy's ship based system and the THAAD program will not help the company make up those losses.

On top of all this The Wall Street Journal reported that Boeing is having issues with the first deliveries of the 787. Normally the first aircraft built while final production quality do have some issues that the final production variant won't. This is especially in the areas of weight and aerodynamics that may reduce the range and increase the fuel consumption until the design is finally tweaked for maximum efficiency. Originally All Nippon Airways (ANA) was to receive the first aircraft off the line and they still will, but the first six production ones will not be provided to that airline or possibly any other commercial customer.

There are also reports that the initial orders are being juggled moving some to ANA and Qantas that were originally planned to go to Chinese airlines and Delta. The downturn in the world economy which is greatly affecting airlines may have contributed to these plans. Although one of the selling points of the 787 is its greater efficiency leading to lower fuel use and costs.

If Boeing does see some of the cuts Gates' has proposed standing along with a continued downturn in commercial aviation sales then it could be a rough few years for the company. The winning of the new tanker for the Air Force could offset some of these losses as well as possibly winning some other new contacts. Unfortunately the Obama Administration's mind set at least as expressed by the defense budget doesn't hold out much hope for any new, big programs anytime soon.