Reference no: EM132893131

Boeing's impressive earnings beat in the first quarter reflects the performance of an enterprise that is firing on all cylinders. Each of Boeing's major business units reported gains in revenue and earnings over 2017, and 2017 was a record year for the company. Furthermore, all of Boeing's addressable markets are forecast to grow in the years ahead, suggesting that the good times are going to last for quite a while.

As chance would have it, I participated in a meeting with Boeing Chairman and CEO Dennis Muilenburg only hours after his Wednesday earnings call, and was able to put some questions to him about the company's long-term strategy (Boeing is a contributor to my think tank). The picture that emerged was of a company that is gradually draining cyclicality out of its business and building up a vast backlog of orders that will buffer any future softness in markets.

In fact, the way Muilenburg is restructuring the Boeing portfolio of aerospace businesses, soft demand for new aircraft might actually work to the advantage of the recently formed Global Services unit, because if customers don't buy new planes they have to spend more money maintaining old ones. When you combine that prospect with an order book for new planes and space gear that approaches half a trillion dollars, it seems Muilenburg is well on his way to fashioning an enterprise that would be unusually resilient in the face of adversity.

Not that adversity is a problem at the moment. As the briefing slides from Wednesday's earnings call reflect, the business outlook is very encouraging. The commercial aviation business appears to be in a prolonged expansion around the world, with strong passenger growth and robust carrier profitability. Federal support for defense and civil space programs is in an upswing, while overseas demand for U.S. weapons is rising steadily. And the business opportunities in aerospace services are nearly limitless.

But good times don't last forever, and Boeing has had some near-death experiences in its past when demand withered due to circumstances beyond its control. For instance, the recession of 1969-1971 -- which hit at the same time military spending for the Vietnam War was winding down -- saw employment at Boeing's commercial airplane unit plummet from 83,700 to 20,750 in only three years. Muilenburg's long-term strategy is aimed at assuring that Boeing will never again have to deal with that kind of cyclicality.

The first step in escaping from the negative impact of demand swings was to build up the defense side of the company, a move that was largely accomplished by Muilenburg's predecessors. In the past, demand cycles for military goods and commercial aerospace products have tended to be inversely related, meaning when demand is up in one market segment, it is down in the other. For example, demand for airliners tanked after 9-11, but military spending skyrocketed. The reverse happened during the Obama years.

Thus by remaining committed to the defense business, Boeing is able to take the edge off of any cyclicality in commercial markets. It has further covered its bets by working hard to develop overseas markets for its military aircraft, so that its defense business is not as heavily dependent on Pentagon spending as many of its "pure-play" competitors in the defense space are. This facet of the strategy came naturally to Boeing because although it builds all its commercial transports in the U.S., the vast majority are sold overseas.

Muilenburg's move to create a separate sevices unit addressing both commercial and military customers is aimed at further draining cyclicality out of results. The goal is to grow the services unit from about $15 billion in annual revenues today to $50 billion circa 2025, a goal Muilenburg thinks is doable with a few acquisitions. Briefing materials released with the earnings call describe an addressable global services market of $2.6 trillion over the next ten years, with a compound annual growth rate of 3.5%. Boeing curently claims less than 10% of that market.

So there is plenty of room to grow -- especially given the fact that half of the commercial aircraft active around the world today were built by Boeing (not to mention much of the military fleet). But Muilenburg isn't content to just generate revenues from his growing Global Services unit. He wants superior returns, which means focusing on high-end, mostly high-tech product lines like complex modifications and pilot training. In the first quarter of this year, Global Services generated an operating margin of 16.3%, better than what most aero companies realize from their hardware businesses.

Obviously, investors are most interested in Boeing's near-term financial performance. On that score, Dennis Muilenburg's tenure as Chairman and CEO has been nothing short of spectacular. By any conventional measure -- revenues, earnings, operating cashflow -- he has outperfomed expectations. The company's share price has reached stratospheric levels because every quarter Muilenburg turns in superior results. Wednesday's upward adjustment in company guidance for the remainder of the year will do little to moderate this trend.

But it is important to understand that despite all the near-term stresses with which Muilenburg must deal, he has a vision for the Boeing enterprise that stretches decades into the future. He feels keenly that he is the shepherd of a national treasure that existed before he was born, and will continue beyond the birth of his great grandchildren. So he will never be just about the near term. He will always have a long-term plan that preserves the unique Boeing franchise for shareholders and stakeholders alike.

There is a lot more to Muilenburg's strategy than I have laid out here. His strategy for space by itself is worthy of a lengthy treatment. Perhaps I can give that subject the attention it deserves next time, because - as in the case of Boeing commercial airplanes and combat systems and global services - Dennis Muilenburg has a plan for space. It starts with this week's earnings call, but it eventually leads to the Red Planet.

Questions

1. What exactly is the policy of Boeing Corporation? Why are the executing this strategy? Discuss.

2. What benefits do you think Boeing is gaining with its strategy? When and why should Boeing review its current strategy?

3. Which organization in aviation industry would you want to choose to learn from Boeing's strategy?