Boeing Takes Hit on Two FrontsJuly 01, 2009

 

The Pentagon told Boeing that it was trimming its plans to develop a new generation of weapons and computer technologies for the U.S. Army, according to an article in the Los Angeles Times.

The decision is a major blow to Boeing defense business, which played an integral role in the Army's Future Combat Systems (FCS) program. The initial cost of the program was originally estimated at $160 billion, but the Pentagon said it was canceling a major component of it and will instead to develop new manned vehicles. The program was budgeted at $87 billion.

In the original contract, Boeing was the prime contractor to oversee all the elements of the Army’s new weapon systems, including the manned and robotic elements, according to the LA Times.

Defense Secretary Robert Gates had several issues with the plans, including concerns that the FCS program did not take into account the lessons learned from counterinsurgency and close-quarters combat in Iraq and Afghanistan, according to a Pentagon statement. "He was further troubled by the terms of the current single contract covering the whole FCS effort," the statement read. "The restructuring ordered today addresses these issues."

Boeing is studying what impact this directive will have on its defense operations. The company also took a hit on the commercial front when Qantas Airways canceled its order for 15 new 787 Dreamliner aircrafts and delayed delivery of another 15 units by four years. The Australian airline, the largest customer for Boeing's new, long-range fuel-efficient aircraft, cited the turmoil in the airline industry and a need to cut costs as the reason for the cancellations, according to an article in The New York Times.

The news of the Qantas' decision came days after Boeing said it was delaying the first flight of the 787 to make minor modifications to the design of an aircraft many consider the most sophisticated in the world.

Boeing has received another 73 cancellations – or about 8% of the total orders for the aircraft – from other airlines this year, according to the Times article. But the Qantas cancellation is by far the most significant, according to analysts.

The global economic crisis has led to tumbling passenger and cargo traffic. The latest figures from the International Air Transport Association shows passenger traffic in May was 9.3% below the same period last year. Freight traffic took an even bigger hit with demand down 17.4%. Soaring jet fuel prices last year also led many airlines to cut staff and flights, ground jets and investment plans for updating their fleets.

All Nippon Airways, meantime, will receive the first delivery of the 787 in the first quarter of 2010.