Boeing

Boeing is the world's leading aerospace company and the largest manufacturer of commercial jetliners and military aircraft.

Firm Information

William E. Boeing formed Pacific Aero Products Co. in Seattle, Washington, in 1916.  In 1934, because of the Air Mail Act, which prohibited airlines and manufacturers from being under the same corporate umbrella, the company split into Boeing, United Airlines, and United Aircraft Corporation (today known as United Technologies).  Boeing started out manufacturing planes for the military during World War I and then began participating in mail delivery.  They also entered the passenger plane market when it became popular.  Within ten years, Boeing was one of the largest aircraft manufacturers in the country.

Boeing designs and manufactures rotorcraft, electronic and defense systems, missiles, satellites, launch vehicles, and advanced information and communication systems.  Boeing also operates the International Space Station because it is a major service provider of NASA.  The company operates in 145 countries and is headquartered in Chicago, Illinois with over 154,000 employees.

Competitive Advantage and Strengths

The greatest competitive advantage that Boeing has to offer is its diversification in the market.  Boeing has two distinct product lines:  Integrated Defense Systems and commercial planes.  The commercial aircrafts include the narrow-body planes (200-350 passengers like the Boeing 787), wide-body planes (350+ passengers like the Boeing 747), and freight planes.  The Integrated Defense Systems (IDS) produces military aircraft (including fighters, transports, tankers, and helicopters), missiles, space systems, missile defense systems, and satellites and satellite launch vehicles.  In addition, Boeing also offers replacement parts for its products.  Each division is responsible for about 50% of the total revenue for Boeing, which shows that the company does not rely on one division heavily.

At the heart of Boeing is the Research and Development Department, which is responsible for the innovations.  To make innovations possible, Boeing employees Phantom Works.  This helps Boeing to implement new technologies throughout Boeing, which includes manufacturing, production, development, and management.  Its newest announced jet, the 787 Dreamliner, is largely possible due to the employment of Phantom Works because of the great deal of virtual testing.  The 3D virtual modeling allows for a more smooth production process, which eliminates errors between design phase and production of the prototype through digital models at virtually no cost.  Also, Boeing is now able to outsource the production of large parts to Asian countries which was not possible before Phantom Works.  Previously all these large parts had to be manufactured in the U.S. to ensure that changes could be made as quickly as possible; this meant that Boeing had to endure the higher cost.
Boeing’s power due to its brand name is another competitive advantage.  Boeing is one of the world's leading aerospace companies, being the largest manufacturer of satellites and military aircraft in the world.  In fact on September 26, 2008 it was announced that IDS was awarded a $241 million contract by U.S. Navy.  Boeing is also one of the leading exporters with $23 billion in revenues generated from just exports in fiscal 2006.  Boeing has economics of this scale due to it being such a large global company, which in turn helps establish a strong brand name.

Future Opportunities

The biggest future opportunity that Boeing has is that the market is looking for direct long-haul flights, which are offered by the future 787 Dreamliner and the A350 by Airbus, the largest competitor of Boeing.  The 787 is aimed at being “greener” and more fuel-efficient than the A350 because the plane is made out of composite material.  Boeing, seeing the market demand, saw that the A350 would enter the market in 2013, and announced the Dreamliner to enter the market in May 2008.  However, events such as the economic recession and the many strikes have caused production to be delayed to 2010.  This is still three years before Airbus, and should prove an advantage. 

Overall, there is also a growing demand for commercial airplanes.  The airplane commercial market is projected to grow to $2.8 trillion by 2027, or about 4.8% annually on average.  This means each year about 28,000 new planes will be needed. The largest growth area is said to be Asia, with 36% of the $2.8 trillion; North America will make up 26%, and Europe 25%, of this growth.

To account for the other 50% of Boeing’s revenue, there is a rise in US military spending which will help Boeing.  Boeing supplies military aircraft (including fighters, transports, tankers, and helicopters), missiles, missile defense systems and other services to the US military. During 2006, the company received about $32,000 million (84% of the company’s IDS revenues) from the military. The increasing defense spending by the US government will help Boeing.

In 2006, Boeing acquired Aviall which could be very beneficial.  Aviall is the largest individual supplier of aviation parts and services.  Since it distributes products for more than 225 manufacturers and has more than 1 million products, Boeing should actively pursue using this to their advantage. 

Threats and Weaknesses

The largest threat to Boeing is without a doubt, Airbus.  Airbus and Boeing share close to 50% of the market share each for commercial airlines.  Boeing has had more growth overall than Airbus because Boeing is publicly held while Airbus is privately held.  However, Boeing has been struggling ever since 2003, when Airbus displaced Boeing as the world’s best-selling aircraft maker with the A380.  Boeing has since realized that they need to embrace innovation again like they once did instead of just taking their position of power for granted which has really destroyed their dominance.  It is this dominance they hope to reclaim through the production of their 787 Dreamliner.  In the IDS sector, Lockheed Martin is really eating away Boeing’s market share.  Lockheed has the F-22 Raptor which is heavily used by the Navy and has recently won another contract with the 35 Lightning II beating the Boeing X-32.  Although Boeing does help Lockheed produce the F-35, it is not good enough for such a big company to just help.

Another threat is the increasing prices of aluminum and titanium due the increasing demand for them in China and Taiwan.  Prices for aluminum increased by close to $3,000/ton in 2007 and the price for titanium increased close to four times in 2006.  Increased prices of raw materials will most definitely threaten the profit margins of Boeing.  To adjust for this the Airbus A350 will be primarily made out of carbon fiber reinforced plastic, which could spark an adjustment in design from Boeing.

Strikes have stunted Boeing’s growth on many occasions.  Strikes have resulted in Boeing having to write-off their aircrafts due to missed delivery deadlines and subsequent late fees.  The most recent strike was on September 6, 2008 due to Boeing’s employees feeling threatened by outsourced jobs.  This strike further delayed the launch of the 787 Dreamliner to 2010.  

Opinion

Boeing is a company that has been struggling.  However, this only means that if Boeing is successfully able to reclaim its position of dominance, the growth one will see as an investor will be significant.  If one really wants to consider Boeing as a long-term investment, one should be careful since this is a complicated business because of the highly technical products.  In addition, Boeing has labor unions, which often initiate strikes that cause considerable damage to companies, evidenced by GM, Chrysler and Ford.  In the short term, the airline industry does not look good because of the economic recession, which means less people will travel.