SATELLITE WEEK July 28, 2003
BOEING SUSPENSION LEVELS PLAYING FIELD, BUT ISN'T SURPRISE, ANALYSTS SAY
The U.S. Air Force (AF) announcement of its suspension of Boeing's Integrated Defense Systems unit from eligibility for new govt. contracts was the culmination of an investigation into allegations that Boeing employees had used Lockheed Martin documents to win contracts in the evolved expendable launch vehicle program (EELV). Space and satellite industry analysts agreed that there was little surprise in the AF announcement. "This has taken away a clear advantage that Boeing had... but it doesn't put Boeing at a disadvantage," Teal Group Senior Space Analyst Marco Caceres said.
"As a matter of policy we do not tolerate breaches of procurement integrity," Teets said, "and we hold industry accountable for the actions of their employees. We believe the suspension is necessary and we hope all contractors will take note and strive to enforce the highest integrity standards in their organizations." Three former Boeing employees also have been suspended, the AF said. It said Boeing would suffer the following additional consequences: (1) Its current EELV launch contracts from the first phase of awards (Oct. 1998) would be reduced to 12 from 19. Lockheed Martin's contracts would be increased to 14 from 7. (2) It was disqualified from the 3 pending awards of the 2nd phase of EELV launch contracts. All 3 contracts will be awarded to Lockheed. (3) Lockheed can develop a West Coast launch facility at Vandenberg AF Base in Cal.
An AF spokesman confirmed that the suspension was indefinite: "It ends when Boeing takes corrective actions to be a responsible provider of services to the U.S. government. Of course, we hope Boeing will take those actions soon." Boeing CEO Philip Condit said the company was disappointed with the decision, but "we understand the U.S. Air Force's position that unethical behavior will not be tolerated. We apologize for our actions. We will continue to work with the [AF] to address the issues that caused the suspension." Boeing spokesman Dan Beck said the company's recent actions, including the pending ethical review by former Sen. Warren Rudman (R-N.H.) (SW July 21 p11), were part of the solution.
Boeing also announced a "stand-down" for its Integrated Defense Systems unit, which now encompasses its Launch Systems, Launch Services and Delta 4 units -- scheduled for Wed. (July 30). Beck said the stand-down was different from other ethics training in which employees already participated because "all employees will stop working and go to workshops for 4 hours where they will engage in intensive interactive training on ethics. The various training modules we [usually] go through are generally half an hour to an hour long. We want people to stop what they're doing and think about why ethics is important in everything we do." Beck said remaining Air Force issues or concerns would be addressed: "We will do everything we can to continue to work with them as a partner according to a high ethical standard."
The suspension is unlikely to last very long, analysts agreed. "The Air Force needs Boeing as much as Boeing needs the Air Force," Caceres said. The whole point of the EELV program was to have 2 active vehicle families available for military launches, he said, so if one failed, there would be another as backstop: "The Air Force's priority is to have quick access to space. They don't want to hurt one of 2 companies. So, to me, they're sending no more than a message." All govt. contractors can learn a lesson from Boeing's suspension, Beck said: "Even the unethical actions of a small handful of people can have a significant impact on an entire company."
The indefinite suspension period is just a measure to "find out how high [Boeing] will jump," said John Pike, space and defense analyst and director of GlobalSecurity.org. "What the Air Force did was to sort of reallocate the work to reflect how things might have been awarded if there had been a level and fair playing field," Pike said. Suitable contrition will have to be shown, said Coudert Bros. analyst Timothy Logue, "but it's in the interest of all parties to resolve this as quickly as possible." He said there was likely to be some political pressure on Boeing and the Air Force to resolve the situation to reduce the impact on employment in the aerospace industry.
Boeing spokesman Beck said it was too early to assess the financial impact of the suspension on Boeing's business plan but said it was evaluating it. In the meantime, he said, "we'll continue to reduce costs, to operate with greater efficiency and to ensure reliability and mission success for customers." Caceres said the company still could have "a fair amount of activity. The important thing is to see how much business they have for the next 2 or 3 years."
Meanwhile, the company posted in a 2nd-quarter net loss of $192 million, reversing net earnings of $779 million a year ago, as a result of satellite and launch business charges it reported last week (SW July 21 p5). Revenue decreased to $12.8 billion from $13.9 billion and losses from operations deepened to $293 million compared with $1.2 billion in earnings a year earlier. Boeing said its commercial space market outlook remained poor through the rest of the year and into 2004, but expected its defense and noncommercial space business would continue to grow.
© Copyright 2003, Warren Publishing, Inc.
