Boeing: Business Is Great But Profit Margins Need Work

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Aerospace industry giant Boeing (NYSE:BA) builds aircrafts for both the commercial air travel sector and the governments of many nations, and those two operations have vastly different implications for the company’s profitability. Currently, its defense business is facing a tough environment thanks to constrained government spending, while its commercial aircraft business remains strong. Yet, there is a common theme; the company wants to improve profit margins at both its commercial and defense arms.

In a Wednesday interview at an investor conference in New York, Boeing Chief Executive Officer Jim McNerney explained that company plans to improve margins by increasing jet production rates for its commercial aircraft while securing better terms from its suppliers. According to the chief executive, some of those suppliers are even more profitable than Boeing itself, the player in the jetliner construction process that takes much more risk. “The relationship between risk and reward I think is out of kilter in some places,” said McNerney, according to the Wall Street Journal. Improved internal efficiency combined with the company’s “Partnering for Success” program, aimed at securing better terms from suppliers, will lead to better margins, he added.

Still, Boeing’s commercial airliner business is stronger than McNerney has seen it in his career. But with faster jet production and better prices from suppliers, the unit’s margins have room to widen he told investors, according to Reuters. Currently, approximately one-third of the jet manufacturer’s suppliers are involved in the “Partnering for Success” program, through which both parties work together to reduce costs and share the resulting benefits. The remaining two-thirds of suppliers are either in discussion or not engaged in the program, McNerney told Reuters reporters, but he expects the program to grow. “We have volume to offer and they have efficiency they can offer,” he said.

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