Boeing to stop making 717 jet, write off loss of tanker contract

Low demand, scandal cost company $615 million

January 15, 2005|By Susan Chandler | Susan Chandler,CHICAGO TRIBUNE

Boeing Co. acknowledged yesterday that two major offerings for which it once had high hopes aren't meeting the mark.

The aerospace manufacturer said it will close the production line for its 717 commercial jet at a cost of $340 million and write off $275 million in deferred expenses on a 767 Air Force tanker contract that was grounded by an ethics scandal.

The moves will lop $615 million, or 48 cents a share pretax, from Boeing's 2004 profit. That would be more than 30 percent of the estimated $2 billion profit the company expected to earn last year. Boeing's full-year results are to be released Feb. 2.

Investors took the news in stride, bidding up Boeing's stock 28 cents to $50.91 a share.

"That's prima facie evidence the market doesn't care," said Lehman Brothers aerospace analyst Joe Campbell.

Although the write-offs didn't come as a surprise, they did highlight some disturbing trends in Boeing's business, analysts said.

Boeing is reducing its product offerings as Airbus SAS, its European rival, continues to extend its lead in deliveries and new orders for commercial jetliners. Boeing was winning that fight until two years ago. Last year, Airbus delivered 320 jets to customers; Boeing delivered 285.

The 717, a small passenger jet with 100 seats, didn't contribute much to those numbers. A dozen twin-engine 717s were delivered last year.

Not long ago, Boeing was promoting the 717 as a jet with a bright future. The demand for jets in the 100-seat category was projected at 3,000 over the next 20 years, Boeing said.

On closer analysis, however, Boeing found that most of that demand would be coming in the second half of that period and that it could serve that market with the 737, which can be configured with as few as 110 seats.

"There simply is not enough demand to sustain a profitable production line" for the 717, said Tom Brabant, a Boeing spokesman.

Without the 717, Boeing has three families of commercial aircraft in full production: the 737, which is popular with discount carriers; the long-haul 777 for international routes; and the 747 jumbo jet.

Boeing closed its 757 line last year because of a lack of orders, and its 767 line has been slowed down because it is down to 25 orders remaining from commercial and military customers. A decision will have to be made this year about whether to close that line, a Boeing spokeswoman said.

Airbus will unveil its A380 jumbo jet, which seats 555 passengers, next week, and it recently announced plans for an A350 model that will compete head-to-head with Boeing's 7E7, a jet under development that will be made from composite material rather than aluminum.

The first 717 was delivered to AirTran Airways in 1999, which makes the jet's six-year life span one of the shortest in commercial aviation history.

AirTran, which operates about 80 717s and has eight more on order, said it won't be inconvenienced by Boeing's move. The uncertain status of the jet was a factor in AirTran's decision to order 100 737-700s in 2003, Airtran said in a statement. Boeing said it will continue to supply spare parts and maintenance work on the 717.

On the defense side, Boeing was unusually stubborn in refusing to write off tanker costs after its contract with the Air Force got into trouble and then was thrown out last fall, analysts said.

Boeing might have been worried that writing off expenses for its 767 tanker would signal that it was giving up on the contract, Campbell said. But it would have been "more normal" to take the write-off a year ago, he said.

In December 2003, the contract was put on hold after Boeing fired its chief financial officer for arranging a post-retirement job for the top Air Force acquisitions official while she was working on the tanker deal, a violation of federal law.

The Air Force official, Darleen Druyun, admitted at her sentencing last year that she had raised the price tag on the tanker deal as a "parting gift" to Boeing.

The Pentagon has said it will start from scratch and hold a new bidding competition for tankers, which will include EADS, the European parent of Airbus.

The Chicago Tribune is a Tribune Publishing newspaper.

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