Boeing Plans to Keep Defense Scale

By Doug Cameron And Jon Ostrower 

Boeing Co. said Tuesday that it didn't expect a drastic revamp of its defense and space arm if it fails to win a share of upcoming Pentagon weapons contracts potentially worth more than $100 billion.

The world's second-largest defense contractor aims to replace declining sales of its fighter jets by winning deals to build new long-range bombers and jet trainers for the U.S. Air Force, as well as large drones for the Navy.

Jim McNerney, Boeing's chief executive, said the company wouldn't pursue big changes at the $31 billion defense arm or a transformative deal if it fails to win any of the contracts.

"It's hard to believe we wouldn't get one of these big programs," Mr. McNerney said at the company's annual investor day, adding that its commercial jet backlog provided a backstop for the company's broader growth plans.

The $90 billion bomber program is viewed by analysts as a must-win for Boeing and rival Northrop Grumman Corp., with a contract award expected in the summer. Boeing is teamed with Lockheed Martin Corp. in the contest, and with Saab AB in a joint bid to build the T-X trainer.

Mr. McNerney said a clean-sweep loss of those and the Navy's planned UCLASS drone would shrink the defense business modestly and prompt a return to organic growth as it boosts output of a new aerial refueling tanker and expands its service business.

"We would not overreact," Mr. McNerney said.

Wes Bush, his counterpart at Northrop Grumman, has also rejected suggestions that the bomber contest could prompt another round of industry consolidation, perhaps including a combination with Boeing.

Mr. McNerney also said he was more confident about U.S. lawmakers reaching a compromise deal on military spending, even as the company pursued faster growth overseas.

While the latest push to reform weapons' buying at the Pentagon hasn't so far led to any substantive changes, Boeing and its rivals have been cutting costs, with the Chicago-based company targeting another $1 billion in savings on top of the $5 billion already achieved.

Chris Chadwick, head of Boeing's defense and space arm, rejected the notion that the Pentagon's push to recruit nontraditional suppliers would hurt his business. He said there was plenty of innovation at Boeing, whose research spending is higher than many rivals, but well below that of big technology companies like Google Inc. or Facebook Inc.

Boeing remains optimistic that new orders for its fighter jets could extend the business into the early 2020s, with the new KC-46 aerial refueling tanker providing the main avenue for near-term growth.

The company is building an initial 18 jets for the Air Force by 2017, an order that could expand to 179, and executives said Tuesday that the global market was for between 400 and 500 of the jets.

The first flight of a fully-equipped tanker was due to take place last month. That slipped to the summer, but Boeing executives said they remained confident on meeting the Air Force schedule for the planes.

Write to Doug Cameron at [e-mail] and Jon Ostrower at [e-mail]

Access Investor Kit for The Boeing Co.

Visit http://www.companyspotlight.com/partner?cp_code=P479&isin=US0970231058

Access Investor Kit for Northrop Grumman Corp.

Visit http://www.companyspotlight.com/partner?cp_code=P479&isin=US6668071029

Subscribe to WSJ: http://online.wsj.com?mod=djnwires