Enterprise Risk Management at Boeing

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Themes: -
Period : 2003
Organization : -
Pub Date : 2003
Countries : USA
Industry : -

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Case Code : ERMT-002
Case Length : 11 Pages
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Enterprise Risk Management at Boeing: Introduction

Established by William Boeing in 1916, Boeing was the world's largest aerospace and Defence Company with three major business segments: Commercial airplanes, Defence (specializing in military aircraft and missile systems) and Space and Communications. It also had a captive finance company, Boeing Capital Corp ("BCC"). Boeing employed 78,400 people in the Seattle area and was Washington State's largest private employer. At the end of 2001, two-thirds of Boeing's sales were generated in the US. Overseas revenues were generated in Europe (14%), China (3%), Asia excluding China (12%).

Boeing's commercial airplanes were sold to airlines all over the world. Despite the severe downturn in demand for commercial jets, this segment still generated roughly half of group revenue and operating profits. The division (59% of revenues, 51% of operating profits and 7.5% profit margins in 2001) made a full line of commercial aircraft, ranging from 100-passenger 717s to giant, 500-seat 747s. Based on recent orders, British Airlines and Airbus each controlled about 50% of the mature, global 100-plus seat passenger jet market.

The worldwide commercial aircraft fleet was expected to grow from 11,300 planes in 2001 to 20,100 planes by year-end 2020, which translated into a compound annual growth rate (CAGR) of 2.9%.

Military aircraft and missile systems contributed to over one-third of group sales and operating profits. For this division, the primary customer was the US government. Boeing's military weapons-making segment primarily made the F-18 fighter jets, the C-17 troop and equipment transport planes, helicopters, the AH-64D Apache Longbow, refueling planes, and various precision missiles. The segment was also a major producer of computer-based battle management systems used in missile defence applications.

The Space and Communications business generated only modest profits. For this division, the primary customer was again the US government. Boeing was one of the world's largest makers of satellite-carrying rockets and satellites. Both businesses were expected to suffer from industry overcapacity and cut-throat price competition.

The Customer and Commercial Financing segment was primarily engaged in the financing of commercial and private aircraft, commercial equipment, and real estate. About 75% and 25% of the segment's revenues were derived from commercial aircraft and non-aerospace leasing and financing activity, respectively. In 2001, total financing/leasing assets jumped to $10.3 billion, up almost 50% from $7.0 billion in 2000.

Since the late 1990s, Boeing had been attempting to transform itself from an aerospace manufacturer into a comprehensive aerospace manufacturing and services provider. Over the past decade, volatile yet maturing markets, intensifying competition, and the commoditization of jets, rockets and satellites, had affected the company's profitability. Boeing had attempted to use new equipment sales as a platform for selling high margin, long-term maintenance contracts, to generate more predictable earnings streams and higher returns.

Higher margin fixed price production contracts accounted for about 80% of Boeing's defense revenues. Lower margin research & development (R&D) contracts accounted for the balance 20%.

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