Risk Management At Boeing

Content
Introduction Marketing Risks Political Risks Environmental Risks Legal Risks Financial Risks 1 3 4 5 5

Introduction

Established by William Boeing in 1916, Boeing was the world's largest aerospace and Defence Company with three major b siness segments! Commercial airplanes, Defence "speciali#ing in military aircraft and missile systems$ and %pace and Comm nications& 't also had a capti(e finance company, Boeing Capital Corp ")BCC)$& Boeing employed *+,,-- people in the %eattle area and was Washington %tate's largest pri(ate employer& .t the end of /--1, two0thirds of Boeing's sales were generated in the 1%& 2(erseas re(en es were generated in E rope "1,3$, China "43$, .sia e5cl ding China "1/3$& Boeing's commercial airplanes were sold to airlines all o(er the world& Despite the se(ere downt rn in demand for commercial jets, this segment still generated ro ghly half of gro p re(en e and operating profits& 6he di(ision "793 of re(en es, 713 of operating profits and *&73 profit margins in /--1$ made a f ll line of commercial aircraft, ranging from 1--0passenger *1*s to giant, 7--0seat *,*s& Based on recent orders, British .irlines and .irb s each controlled abo t 7-3 of the mat re, global 1--0pl s seat passenger jet mar8et& 6he worldwide commercial aircraft fleet was e5pected to grow from 11,4-- planes in /--1 to /-,1-- planes by year0end /-/-, which translated into a compo nd ann al growth rate "C.9:$ of /&93& ;ilitary aircraft and missile systems contrib ted to o(er one0third of gro p sales and operating profits& <or this di(ision, the primary c stomer was the 1% go(ernment& Boeing's military weapons0ma8ing segment primarily made the <01+ fighter jets, the C01* troop and e= ipment transport planes, helicopters, the .>0 6,D .pache ?ongbow, ref eling planes, and (ario s precision missiles& 6he segment was also a major prod cer of comp ter0based battle management systems sed in missile defence applications& 6he %pace and Comm nications b siness generated only modest profits& <or this di(ision, the primary c stomer was again the 1% go(ernment& Boeing was one of the world's largest ma8ers of satellite0carrying roc8ets and satellites& Both

b sinesses were e5pected to s ffer from ind stry o(ercapacity and c t0throat price competition& 6he C stomer and Commercial <inancing segment was primarily engaged in the financing of commercial and pri(ate aircraft, commercial e= ipment, and real estate& .bo t *73 and /73 of the segment's re(en es were deri(ed from commercial aircraft and non0aerospace leasing and financing acti(ity, respecti(ely& 'n /--1, total financing@leasing assets j mped to A1-&4 billion, p almost 7-3 from A*&- billion in /---& %ince the late 199-s, Boeing had been attempting to transform itself from an aerospace man fact rer into a comprehensi(e aerospace man fact ring and ser(ices pro(ider& 2(er the past decade, (olatile yet mat ring mar8ets, intensifying competition, and the commoditi#ation of jets, roc8ets and satellites, had affected the company's profitability& Boeing had attempted to se new e= ipment sales as a platform for selling high margin, long0term maintenance contracts, to generate more predictable earnings streams and higher ret rns& >igher margin fi5ed price prod ction contracts acco nted for abo t +-3 of Boeing's defense re(en es& ?ower margin research B de(elopment ":BD$ contracts acco nted for the balance /-3&

Marketing Risk

6he Commercial .irplanes B siness was (irt ally a d opoly between Boeing and .irb s& 't was once dominated by Boeing b t was now split ro ghly 7-@7- between the two players& 6he e(ents of 9@11 combined with the economic slowdown had led to a sharp decline in demand for air tra(el and prompted 1% airlines in partic lar to c t capacity& Whilst demand for air tra(el had rebo nded s bse= ently, it remained well below <C-- le(els& Capacity tili#ation rates had failed to s stain the reco(ery seen early in /--/& ;eanwhile, competition remained intense and the 1% airlines in partic lar had remained nder considerable financial stress, c lminating in 1.?'s "1nited .irlines$ recent filing of chapter011 protection& :eflecting the abo(e trends, total global jet deli(eries were e5pected to decline from +7/ in /--1 to *6- in /--/ and 7*7@7+- in /--4, with Boeing's share e5pected to be 7/*, 4+and /*7@/+- respecti(ely& 'n the long r n, Boeing faced intense competition from .irb s which was aggressi(ely gaining mar8et share& 6he .irb s .4+- s per0j mbo which was d e to become operational in 1D-6 was in partic lar a major threat& 6he .4+- was capable of carrying 777 passengers o(er long distances and had been heralded by some as the only means of coping with the e5pected long term growth in passenger traffic gi(en limited global airport capacity and congested s8ies& Boeing's plan had been to de(elop the *,*5 )sonic cr iser), a faster b t smaller long range ri(al b t this might be scrapped d e to wea8 demand since %eptember 11& .irb s reportedly had 9* orders for its .4+-&

.ircraft programs, partic larly new aircraft models s ch as the *1* program, faced the additional ris8 of pricing press res and rising costs inherent in the design and prod ction of comple5 prod cts& Boeing might also ha(e to pro(ide financing s pport to airlines, which were nable to obtain other means of financing& 6he 1% defence sector was still (ery competiti(e altho gh consolidation had res lted in j st fo r prime contractors for defence aerospace systems and electronicsE ?oc8heed ;artin, Boeing, :aytheon and Forthrop 9r mman "which has recently ac= ired 6:W$& .t a global le(el, howe(er, the company faced strong competition from major E ropean corporations where consolidation had created a n mber of formidable competitors s ch as B.E %ystems, E.D% "owner of .irb s$, ;atra B.e Dynamics .lenia ";BD.$, . g sta0Westland and E ro copter& Boeing e5pected la nch ser(ices to remain highly competiti(e d e to the downt rn in demand for non0geo0stationary satellite la nches and the h man space flight and e5ploration mar8et& >owe(er, it e5pected solid growth o(erall thro gh space digital imagery architect re, missile defence, the c rrent Delta 'G la nch (ehicles and the in0progress *4* .irborne Early Warning and Control %ystem programs& 6he la nch ser(ices mar8et had some degree of ncertainty since demand depended on the la nch c stomers' access to capital mar8ets& ;oreo(er, some of Boeing's competitors for la nch ser(ices recei(ed direct or indirect go(ernment f nding& 6he satellite mar8et incl ded some degree of ris8 and ncertainty relating to the attainment of technological specifications and performance re= irements&

Political risk

.ny war or terrorist e(ent wo ld ha(e a (ery negati(e impact on the airline ind stry& E5ternal b siness en(ironment ris8s for Boeing incl ded " .d(erse go(ernmental e5port and import policies, " <actors that res lted in significant and prolonged disr ption to air tra(el worldwide, " 2ther factors that affected the economic (iability of the commercial airline ind stry& E5amples incl ded the (olatility of aircraft f el prices, global trade policies, worldwide political stability and economic growth, acts of aggression that had an impact on the percei(ed safety of commercial flight and competition from .irb s& 6he ;ilitary .ircraft and ;issile %ystems and the %pace and Comm nications segments were s bject to changing priorities and red ction in the 1% 9o(ernment defence and space b dget& 9o(ernment contracts co ld be terminated by nilateral go(ernment action "termination for con(enience$ or fail re to perform "termination for defa lt$& Ci(il, criminal or administrati(e proceedings in(ol(ing fines, compensatory and treble damages, restit tion, forfeit re and s spension of debarment from

go(ernment contracts might res lt d e to (iolation of b siness r les and other irreg larities& Boeing's primary defence c stomer was the 1% go(ernment& <ollowing %eptember 11 military action in .fghanistan and the ongoing threat of terrorism, near term Department of Defence "DoD$ b dgets had increased and longer0range defence b dget forecasts had been re(ised pwards& >owe(er, Boeing itself did not e5pect DoD proc rement to increase significantly in (iew of the softer global economy&

4.Environmental Risks
Boeing's operations were s bject to (ario s federal and state en(ironment laws& .reas of concern incl ded discharge of ha#ardo s materials and remediation of contaminated sites& 6he company had been in(ol(ed in related legal proceedings, claims and remediation obligations since the 19+-s& Boeing ro tinely assessed its contingencies, obligations and commitments for remediation of contaminated sites, based on in0depth st dies, e5pert analyses and legal re(iews& Boeing generally accr ed or e5pensed e5pos res related to en(ironmental remediation sites immediately, based on estimates of in(estigation, clean p and monitoring costs to be inc rred& Beca se of the reg latory comple5ities and ris8 of nidentified contaminated sites and circ mstances, the potential e5isted for en(ironmental remediation costs to be materially different from the estimated costs& >owe(er, based on all 8nown facts and e5pert analyses, Boeing belie(ed it was nli8ely that en(ironmental contingencies wo ld ha(e a material ad(erse impact on Boeing's financial position or operating res lts and cash flow trends& ,& ?egal ris8

2n 2ctober 41,199*, a federal sec rities laws it was filed against Boeing in a 1% district co rt in Washington, %eattle& 6he laws it named as defendants the company and three of its then e5ec ti(e officers& .dditional laws its of a similar nat re were filed in the same co rt& 6hese laws its were consolidated on <ebr ary /,, 199+& 6he laws its generally alleged that the defendants desired to 8eep BoeingHs share price as high as possible in order to ens re that the ;cDonnell Do glas shareholders wo ld appro(e the merger& 'ndi(id al defendants, benefited directly from the sale of Boeing stoc8 d ring the period from .pril *,199* thro gh 2ctober //,199*& 6he Co rt certified two s b0classes of plaintiffs in the action! all persons or entities who p rchased Boeing stoc8 or call options or who sold p t options d ring the period I ly /1, 199* J 2ctober //, 199*, and all persons or entities who p rchased ;cDonnell Do glas stoc8 on or after .pril *, 199*, and who held s ch stoc8 ntil it was con(erted to Boeing stoc8 p rs ant to the merger& 6he plaintiffs so ght compensatory damages& 2n %eptember 1*, /--1, Boeing reached an agreement with class co nsel to settle the laws it for A9/&7 million& 6he settlement wo ld ha(e no

impact on BoeingHs earnings, cash flow or financial position, as it was within ins rance limits& 2n <ebr ary /7,/---, a p rported class action laws it alleging gender discrimination and harassment was filed against Boeing, Boeing Forth .merican, 'nc&, and ;cDonnell Do glas Corporation& 6he complaint, filed with the 1nited %tates District Co rt in %eattle, alleged that Boeing had engaged in a pattern and practice of nlawf l discrimination, harassment and retaliation against women o(er the co rse of many years& 6he complaint, Bec8 (& Boeing, named /+ women who had wor8ed for Boeing in the K get %o nd areaE Wichita, LansasE %t& ?o is, ;isso riE and 6 lsa, 28lahoma& 2n ;arch 17, /---, an amended complaint was filed naming 1- more plaintiffs& 6he laws it attempted to represent all women who wor8ed for Boeing, or who had wor8ed for Boeing in the past se(eral years& Boeing denied the allegation that it was engaged in any nlawf l Mpattern and practice&N KlaintiffsH motion for class certification was filed in ;ay /--1& 6he class incl ded salaried employees in K get %o nd, Wichita, %t& ?o is, and ?ong Beach, and ho rly employees in K get %o nd, Wichita, and %t& ?o is& 2n 2ctober 19, /--1, the co rt granted class certification to a segment of the pop lation so ght by the plaintiffs& 6he co rt r led that the action co ld proceed on the basis of two limited s bclasses! all non0e5ec ti(e salaried women "incl ding engineers$ in the K get %o nd area, and all ho rly wages women co(ered by the ;achinistsH Bargaining .greement in the K get %o nd area& 6he claims to be litigated incl ded alleged gender discrimination in compensation and promotion& 6he co rt also held that the plaintiffs co ld not see8 bac8 pay& 'n case of liability, the potential remedies wo ld incl de some form of inj ncti(e relief as well as p niti(e damages& 6he 1% Finth Circ it Co rt of .ppeals had accepted BoeingHs appeal against the class certification decision, partic larly the r ling that left open the possibility of p niti(e damages& Boeing intended to defend these cases aggressi(ely& B t it was not possible to predict the o tcome& 'n . g st /--/, the 1% Fa(y notified Boeing that it wanted A/&, billion of ad(ance progress payments and o(erd e interest to be paid or it wo ld refer the matter to the go(ernment for collection thro gh offset nder c rrent contracts& BoeingHs share of any settlement wo ld be 7-3 or A1&/ billion& 6his wo ld add to the companyHs debt b rden& Boeing, howe(er, felt its c rrent A47- million loss pro(ision was ade= ate& Boeing was s bject to 1% go(ernment in(estigations from which ci(il, criminal or administrati(e proceedings co ld res lt& % ch proceedings co ld in(ol(e claims by the go(ernment for fines, penalties, compensatory and treble damages, restit tion and@or forfeit res& 1nder go(ernment reg lations, a company, or one or more of its operating di(isions or s bdi(isions, co ld also be s spended or debarred from go(ernment contracts, or lose its e5port pri(ileges, based on the res lts of in(estigations& Boeing, howe(er, belie(ed that the o tcome of any s ch go(ernment disp tes and in(estigations wo ld not ha(e any serio s impact on its financial position or contin ing operations&

Financial Risk

Leverage & Liquidity Boeing's consolidated net debt had increased o(er the past fi(e years& 'n %eptember /--/, net debt was A11&9 billion, compared to A1&* billion in December 199*& Despite strong growth in gro p EB'6D. thro gh to <C-1, consolidated gro p le(erage had contin ed to

rise& 6he sharp decline in EB'6D. at Boeing in <C-/ as its commercial aircraft segment had s ffered, co pled with additional f nding needs at BCC had contrib ted to the increase in le(erage& 'n /--4, Boeing's EB'6D. and cash flows were e5pected to wea8en f rther as commercial jet deli(eries waned& >owe(er, Boeing wo ld still remain free cash flow positi(e& 6his together with slower growth in b siness (ol mes wo ld limit the e5tent of f rther wea8ening in the le(erage ratios& 'n terms of li= idity, Boeing had j st A1&6 billion of short0term debt in %eptember /--/ with the remainder ha(ing an a(erage mat rity of close to 1- years& .gainst this, it had A1&* billion of cash and A,&7 billion in n sed ban8 facilities, consisting of a A4 billion 46,0day re(ol(er, a A*-- million facility e5piring in %ept0 -7 and an A+-- million facility d e /--,& 6here were no ratings triggers that wo ld re= ire a cash call o(er the near term& Boeing sed swaps to adj st the amo nt of total debt that was s bject to (ariable and fi5ed interest rates& 6he company also sed forward0starting interest rate swap agreements to fi5 the cost of f nding& 6his mitigated the changes in fair (al e of the hedged portion of the firm commitment ca sed by changes in interest rates& 6he net change in fair (al e of the swap and the hedged portion of the firm commitment was reported in earnings& Boeing sed foreign c rrency forward contracts to manage c rrency ris8 associated with certain forecasted transactions, specifically sales and p rchase commitments made in foreign c rrencies& Commodity deri(ati(es, s ch as fi5ed0price p rchase commitments, were sed by Boeing to hedge against potentially nfa(orable price changes for items sed in prod ction& 'n /--1, Boeing sed s ch commitments to p rchase electricity and nat ral gas at fi5ed prices o(er the ne5t three years& Credit Risk 2f the A17,77, million in acco nts recei(able and c stomer financing, A*,/47 million related to commercial aircraft c stomers "A466 million of acco nts recei(able and A6,+69 million of c stomer financing$ and A/,79* million related to the 1% 9o(ernment& .;: Corporation and 1.? Corporation were associated with /43 and 143 of all financial instr ments related to c stomer financing& <inancing for aircraft was collaterali#ed by sec rity in the related asset& >istorically, Boeing had not e5perienced a problem in accessing s ch collateral& 2f the A6,+69 million of aircraft c stomer financing, A6,,,- million related to c stomers, which had less than in(estment0grade credit in Boeing's opinion& %imilarly, of the A*,7-+ million of irre(ocable financing commitments related to aircraft on order incl ding options, A*,114 million related to c stomers which had less than in(estment0grade credit in Boeing's opinion& Boeing was a party to financial instr ments with off0balance0sheet ris8, principally relating to c stomer financing acti(ities& <inancial instr ments with off0balance0sheet ris8 incl ded financing commitments, credit g arantees, and participation in c stomer financing recei(ables with third0party in(estors that in(ol(ed interest rate terms different from the nderlying recei(ables& 'rre(ocable financing commitments related to aircraft on order, "incl ding options$, sched led for deli(ery thro gh /-1- totaled A*,7-+ million and A6,/4-

million as of December 41, /--1 and /---& Boeing anticipated that not all of these commitments wo ld be tili#ed and that it wo ld be able to arrange for third0party in(estors to ass me a portion of the remaining commitments, if necessary& 6he company had additional commitments to arrange for commercial e= ipment financing totaling A4,, million and A/++ million as of December 41, /--1 and /---& Karticipations in c stomer financing recei(ables with third0party in(estors that in(ol(ed interest rate terms different from the nderlying recei(ables totaled A71 million and A7, million as of December 41, /--1 and /---& Boeing's ma5im m e5pos re to credit0related losses associated with credit g arantees, totaled A77+ million "A1*, million associated with commercial aircraft and collaterali#ed and A4*4 million associated with the %ea ?a nch joint (ent re$ as on December 41, /--1 and /---& 2f the A1*, million e5pos re associated with commercial aircraft as of December 41, /--1, the company estimated that the fair (al e of the nderlying collateral, principally commercial aircraft wo ld co(er appro5imately A64 million of the e5pos re& . s bstantial portion of the commercial aircraft credit0related g arantees had been e5tended on behalf of co nter parties with less than in(estment0grade credit&