Boeing's Next Job: New 777?

Even "the world's strongest, best-integrated aerospace company," as Boeing was tagged Wednesday by CEO Jim McNerney, has to consider what its competition is doing.

After reporting solid earnings, especially in the commercial-jet sector, McNerney said one strategic question for Boeing is what airplane to build next, after the 787 Dreamliner and the revamped 747-8 jumbo jet.

Everyone has assumed it will be a new single-aisle jet to replace the 737. But maybe not.

McNerney said Boeing may have to introduce an updated derivative of its Everett-built 777 twin-aisle jet to fend off the approaching challenge from Airbus' planned A350.

In an upbeat teleconference with analysts, McNerney also said:

? Three trained teams are in place to deal with last-minute issues that might arise with the 787.

? On the defense side, Boeing is looking for opportunities to make acquisitions.

? McNerney won't shrink from partnering with countries such as China that may one day produce vigorous competitors.

? In response to growing pressure on aviation companies from environmentalists, Boeing will push green improvements in each new generation of airplanes.

The first quarter's earnings news was positive. The results beat Wall Street expectations, with revenue up 8 percent and earnings up 28 percent compared with a year ago.

Boeing's stock closed up more than a dollar at $94.69, an all-time high.

The commercial-airplane division showed a strong performance, with operating profit margins of 9.3 percent. Sales of commercial jets make up $188 billion of the company's record total order backlog of $262 billion.

Boeing did not change its financial guidance or projections for airplane production. The company expects to deliver as many as 445 commercial jets this year and 520 jets in 2008, up from 398 last year.

Boeing is nearing the final sprint to roll out its first 787 in July, and McNerney said it has teams prepared for any potential problems.

One team is focused on wiring; another on tubes and brackets; the third on other work that might have to be done at the Everett final-assembly site rather than by Boeing's partners.

"If they need to, they are ready to go," McNerney said.

He said one such team, created to deal with any extra 787 composite-material work that partners couldn't handle, has already been disbanded.

"It turned out we didn't need that. All of the partners did their composite work," McNerney said. "That team has sort of gone moot."

With 787 spending set to peak, Chief Financial Officer James Bell confirmed one analyst's estimate that Boeing will trim commercial-side research-and-development expenditure to about $1 billion in the second half of this year. Total R&D for the first half is projected at $2 billion, most on the commercial side.

As for future airplane programs, McNerney made clear that whether or not Boeing will need to rush a major update of the 777 depends on its rival.

Airbus is proposing a new family of big twin-jets, the A350s. The smallest models will compete against the 787, and larger models against the 777, which entered service in 1995.

The troubled European aircraft manufacturer has not yet defined the A350 final specifications, but the jet would be an all-composite plane with new-generation engines.

If Airbus firms up the specifications of the largest A350 model so that it competes directly against the hugely successful 777-300ER twin-aisle jet, then Boeing may have to act.

Revamping any of its older planes would likely involve incorporating new technologies developed for the 787, including more efficient engines.

The company could put a revamped 777 on the front burner, ahead of a 737 replacement, McNerney indicated.

Boeing has said previously the 737 single-aisle replacement jet is scheduled to debut around 2014.

"I think we need to see what the A350 is or isn't before we can make a judgment," McNerney said. "What we are doing is maturing the technologies and listening to customers, so we are ready to go when it becomes clear which one we need to do first.

"If the A350 presents a legitimate competitive threat to certain parts of the 777 line, we would respond," McNerney said. "In all likelihood, it would be some kind of a modification [of the 777], because we are not really due to fully replace that plane for many years out.

"We want to be ready to do what the market needs," he said.

On the military side of the business, McNerney said "it would not surprise me" if Boeing spent some of its $8.1 billion in cash and liquid assets acquiring high-tech companies.

"All of us see opportunities there," he said "We are in the flow on deals. We are looking at them regularly."

McNerney said he expects a Chinese company to build a competitive jet in "10 years or 20 years," probably beginning with a single-aisle plane.

But he pointed out that between 10 and 12 percent of Boeing's sales in recent years have been to China, and said he won't change the current strategy of partnering with Chinese aircraft companies.

"It's a huge market for us. We've many partnerships over there," McNerney said. "I am one of these people who believes that partnering with people who are potentially competitors is not necessarily a bad thing."

The successful 787 program presents the prime example of a new model of partnering globally to build airplanes a model McNerney believes has only strengthened Boeing.

"They will find us a tough competitor," he said.

McNerney also addressed the growing pressure on Boeing to go green.

Just a day after proclaiming a new environmental initiative with Virgin Atlantic, McNerney disagreed, though gently, with those environmental groups that assert jets contribute excessively to global warming.

"In every endeavor in mankind, there has to be a balance between getting things done and economic development, [and] treating the environment properly," McNerney said.

"I leave it to our customers and their customers and the politicians who represent them to sort of figure out what that balance is."

McNerney said the 787 will yield 20 to 40 percent improvements in environmental-quality measures such as fuel consumption and noise, and that Boeing will aim for similar improvements in successor jet programs to reduce "the environmental footprint of our products."



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