Boeing Restructures Defense Arm

By Doug Cameron Features Dow Jones Newswires

Boeing Co. said it is removing a layer of executives from its defense business this year in response to government criticism that slow decision making has hurt its chances of winning big contracts from the Pentagon.

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The world's second-largest defense contractor by revenues is chasing a big win to maintain its production lines and engineering workforce, having suffered sobering losses such as its failed pursuit in 2015 to build the new Air Force B-21 bomber.

Leanne Caret, president of Boeing Defense, Space & Security, said in an interview that the restructuring announced Tuesday wasn't driven by a particular contract loss, but the company recognized it couldn't afford to stand still as rivals including Lockheed Martin Corp., Northrop Grumman Corp. and Raytheon Co. returned to growth on the back of winning big long-term contracts.

Boeing's defense revenues have fallen over the past three years, but it's been more profitable than its commercial jetliner business and expansion is central to efforts to boost company margins to the midteens from around 10% at present.

The company has already cut jobs and moved the defense unit's headquarters close to the Pentagon from its longtime home in St. Louis, Mo. She said feedback from the Defense Department indicated the need for Boeing to become more agile.

It's cutting the number of management layers to six or less, with more program leaders reporting direct to the president of the division, and it will cut or downgrade around 50 executive positions.

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"There was the culmination of not winning," Ms. Caret said, with frustration at the absence of a big new program that could sustain the business for years or even decades.

For instance, Boeing and partner Lockheed Martin were ultimately undercut on price by Northrop in the B-21 contest. It's a program expected to cost $80 billion which could sustain the winner for more than a decade.

Like its rivals, Boeing has found the Pentagon's selection process for big new contracts has become more fickle. Proposal documents can run to thousands of pages, and competing offerings often have only tiny differences in their technical merits.

"Then it's a price competition," said Ms. Caret, with a premium placed on companies that can quickly respond to any changes required by the Pentagon.

The defense unit will be restructured around four smaller entities covering military aircraft, rotorcraft, autonomous systems and space and missile systems.

Ms. Caret said she expected the changes to make Boeing more competitive in three big ongoing contests for fleets of new Air Force training and surveillance jets, as well as replacing land-based nuclear missiles. "This is affecting the executive ranks, not the engineers and technicians on the floor," she said.

The restructuring is also directed at longer-term opportunities such as revamping military helicopters and developing new unmanned undersea vehicles for the Navy.

While there's concern about Boeing's ability to win new weapons' platforms, the existing business has outperformed management expectations over the past year, potentially preserving two combat jet lines that had been earmarked for potential closure by the end of the decade.

Sales still dipped 3% in 2016 to $29.5 billion last year, some 31% of group revenue, though the backlog of new business climbed to $63 billion at the end of the first quarter, more than a third of it from overseas customers. Boeing said it picked up a potential $50 billion in deals during President Donald Trump's recent state visit to Saudi Arabia.

Write to Doug Cameron at doug.cameron@wsj.com

(END) Dow Jones Newswires

June 13, 2017 16:36 ET (20:36 GMT)