Boeing: No to Lowball Tanker Contract

Boeing will focus on making sure that its defense side produces strong margins, even if that means missing out on a big Air Force contract.
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CEO Jim McNerney said that his company accepts that rival Airbus may submit a lower bid for the new Air Force tanker.

"Airbus could win this thing on price," McNerney said Thursday at an investor conference. "They are promising to bid very aggressively. They have a lower cost of capital than we do because we don't get the kind of subsidies they get. We are going to bid very aggressively, but we are not going to bid to meet the lowest cost of Airbus."

"I really want to win it, and the chances are very high that we're going to bid," he said. "

But we don't want to be stuck with a bad deal for 10 years."

New bids for the long-delayed project, potentially worth about $35 billion, are now expected by July 9.

McNerney also said he wants to grow Boeing's Defense, Space and Security business, which accounts for half of the company's revenues. "I want to make sure we can deliver margins that you're used to, even if we don't grow," he said, noting that Boeing's commerical aircraft division is about growth while its defense sector is about having "a nice foundation of profitability underneath BCA."

Besides avoiding low margin deals, the company's defense division will focus on expanding internationally, with the goal that international sales will provide as much as 25% of revenues over the next five years. Among Boeing's three biggest challenges, said McNerney, is "nailing down 10 to 12 years of international orders for the company at good margins."

Boeing also wants to increase services revenue. "We've got most of the airplanes flying around the world today," McNerney said. "We have to take more advantage of it in services."

As for the continuing progress on the 787, McNerney said that "most of the big-ticket risk items have been retired," including static tests and aircraft configuration and initial crucial flight tests. "Now we are landing in cold, landing in hot," McNerney said. "These are the kind of tests that tend to be time intensive, but not as technically challenging as static tests."

Not to say the rest of the path is easy. "Getting to 10 a month

production by the end of 2013 is not a free throw," McNerney said. As in the case of other new airplane programs, "we are going to start at very low profitability levels -- this is going to be a long hard slog to get it to the place where it can be."

-- Written by Ted Reed in Charlotte, N.C.