For Boeing, Sequester Means No C-17 Orders and a Factory Closure
The United States Air Force has stopped ordering Boeing’s (NYSE:BA) bulky, four-engine jet, known as the C-17, an aircraft capable of carrying tanks, supplying troops, and performing medical evacuations across the globe. “It’s an awesome airplane,” Rachid Ali, a Boeing avionics inspector, told CNN. “Capability, reliability, it’s above and beyond. The first 50 are still flying. After 25 years, you can refurbish them and they’re as good as new.”
But on September 12, during a ceremony at Boeing’s assembly plant in Long Beach, California, the military took delivery of the 223rd and final C-17 Globemaster III that will ever manufactured for the Air Force. That plane was also one of the last C-17s that will be made ever.
For Boeing, it is the end of an era — defense spending is shrinking worldwide. While the C-17 may be an “awesome airplane” and “the desire for the C-17′s capabilities“ remains high, as Dennis Muilenburg, chief executive of Boeing’s Defense, Space & Security division, said in a statement, U.S. military “budgets cannot support additional purchases in the timing required to keep the production line open.” After the delivery of the last transport plane to the Air Force, Boeing had counted on the prospect of future overseas orders to sustain production.
However, the past week proved that foreign sales were also flagging and could not compensate for the loss of U.S. military orders. Thus, Boeing announced on September 18 that it would stop manufacturing the distinctive military transport plane in 2015, close the last major aircraft production plant in Southern California, and lay off up to 3,000 employees who were involved in the 30-year-old program at four sites in California, Georgia, Arizona, and Missouri. The company’s decision will also affect more than 650 suppliers in 44 U.S. states who employ about 20,000 people, Boeing said.
“We do anticipate that the job reduction required by this will be moderated to some extent by redeployment to other programs,” Nan Bouchard, vice president and C-17 program manager, said in a conference call, according to Reuters. “We recognize how closing the C-17 line will affect the lives of the men and women who work here, and we will do everything possible to assist our employees, their families and our community,” Bouchard added in the press release announcing the closure.
The conclusion of the C-17 program marks the end of major aircraft production in Southern California, a region that was once the center of the United States aerospace industry. In fact, “Boeing has been a part of California and its rich aerospace legacy for more than 90 years,” noted the press release. The company did not explain its future plans for the large C-17 final assembly line in Long Beach, but it is unlikely that it will be used for another commercial or defense program. That facility was first opened by the Douglas Aircraft company in 1941 and it became part of Boeing when the company acquired McDonnell Douglas Corporation in 1997.
Muilenburg attributed the military’s decision to stop ordering C-17s to the across-the-board federal budget cuts, known as sequestration. “Our customers around the world face very tough budget environments,” he said. “What’s more, here in the United States, the sequestration situation has created significant planning difficulties for our customers and the entire aerospace industry. Such uncertainty forces difficult decisions like this C-17 line closure.”
While Boeing’s explanation cited sequestration, the Pentagon has said for years that it did not need any more of the transport planes — lawmakers only approved more orders to maintain jobs. The additional aircrafts have left the U.S. military with a relatively modern cargo feet, which contrasts to its aging fighters, long-range bombers, and aerial tankers. Those plane types now have priority when it comes to allocating the military’s shrunken budget.
Boeing said it plans to begin reducing its C-17 workforce in mid-2014 and end production in 2015 after building a final 22 planes — 13 of which have not yet been sold. In total, the company has delivered 257 of the transporters, including 223 to the U.S. Air Force. The production halt will result in a charge of less than $100 million in the current quarter, but Boeing said the charge will not alter its forecast for full-year earnings.
Here’s how Boeing has traded in the past 5 sessions:
Follow Meghan on Twitter @MFoley_WSCS