Boeing's Defense Chief Looks Beyond Fighters

When the new head of defense at Boeing Co. laid out her priorities for the business in April, making jet fighters didn't make the cut.

Leanne Caret has made waves inside and outside the company with the stark admission that a company which has produced fighters for decades won't be making them beyond the early 2020s.

Orders for its F-15 and F/A-18 jets have been drying up for years and production has been slowed, but Ms. Caret is the first Boeing executive where a future without fighter production is a centerpiece of their strategy.

"I'm very much a realist," said the 28-year Boeing veteran in her first media interview since taking over in March as president of its Defense, Space & Security business following the surprise retirement of Chris Chadwick after just three years in the position.

Her plan is to replace sales from making jets with more work repairing and upgrading the hundreds already flying. Profit margins for the services business Ms. Caret used to head were 13.4% last year, compared with 9.8% for the military aircraft unit, which includes helicopters.

"We're not getting out of the fighter business," she said. "We're just evolving what the fighter business means to us."

Stabilizing sales at the defense business is crucial for Boeing's wider investment case as it funnels more cash back to shareholders via stock buybacks and higher dividends, just as doubts emerge about the profitability of its big commercial jetliner programs. The military unit, which also makes Apache helicopters, surveillance aircraft and satellites, contributed 42% of Boeing's operating profit last year.

Boeing's defense sales have averaged $30 billion over the past decade and profit margins top those of its best-selling passenger jetliners.

Ms. Caret hopes to maintain Boeing's technical prowess by converting its focus to supporting more plane upgrades and maintenance while leaving the expertise in place for future combat-jet opportunities.

That is a tough message for Boeing engineers weaned on developing combat jets, but Ms. Caret said the technical challenges of upgrading existing planes are as onerous as developing new ones.

Ms. Caret also wants to sell more military versions of its passenger jets. It has sold more than 100 of its 737 jets filled with surveillance equipment rather than seats to the U.S., India and Australia. It also hopes to sell as many as 400 of its larger 767s converted as aerial tankers.

Ms. Caret said she is committed to halting the drop in revenue and restoring growth. She is targeting leading market positions in services, autonomous vehicles such as a new underwater drone, manned spacecraft and satellites, as well as helicopters.

Ms. Caret said she won't allow defense revenue to shrink to $25 billion, but analysts are skeptical about whether sales can be sustained, much less grown without fighter production. The defense business saw its sales last year dip 2% to $30.4 billion.

"It's feasible to increase the revenues via militarized jetliners and services, but they will have to push hard for years," said Loren Thompson at the Lexington Institute, a think tank part-funded by Boeing and other defense companies.

Richard Aboulafia at the Teal Group consultancy, said: "You can't fill that gap" left by sales of fighters, noting that helicopter sales—another of Ms. Caret's priority areas—are also set to shrink in the near term.

After the bruising loss to Northrop Grumman Corp. on a contract to build a new Air Force bomber, Ms. Caret is more cautious about Boeing's prospects with other big contracts to be awarded in the next few years.

She calls as "can wins" coming contests for a new Air Force training jet, surveillance planes, Navy drone and replacing Boeing-made Minutemen ballistic missiles. Boeing executives previously talked about winning "their share" of the big programs.

The new Air Force tanker remains her biggest challenge. The Air Force and Boeing announced last month that the company would be late with its first batch of 18 planes, having already taken $1.5 billion in charges, with analysts expecting more to come when it reports earnings in July. The announcement came just three weeks after Boeing executives said the program was on track.

"There's a lot of second guessing going on about what we knew and what we didn't know," said Ms. Caret. A fix to the software that controls the boom from the KC-46 refueling plane—derived from its 767 passenger jet—failed to solve lingering problems, forcing Boeing and its suppliers to do redesign work.

Still, the military business is in better shape than Boeing's jetliners after reducing annualized costs by $6 billion over the past five years. Ray Conner, head of Boeing's commercial business, earlier this year accelerated cost-cutting efforts because of concerns it was becoming less competitive with rival Airbus Group SE.

"We've already had our 'yikes' moment," said Ms. Caret of costs at the defense business, though she's looking to cut bureaucracy at the unit.

Write to Doug Cameron at [e-mail]

(END) Dow Jones Newswires

June 10, 2016 09:55 ET (13:55 GMT)

Copyright (c) 2016 Dow Jones & Company, Inc.