The Obama administration’s latest budget did not include funds to build more of Boeing’s F/A-18E Super Hornet.
Courtesy of Freddy Love.

When the Obama Administration sent its latest budget to Congress earlier this month, the Department of Defense—for the first time in four decades—made no request for funds to build more of Boeing Co.’s F/A-18E Super Hornets and EA-18G Growlers.

Although Boeing had been hoping for more orders of the workhorse military jets used on the U.S. Navy’s aircraft carriers, the absence wasn’t a major surprise: the Pentagon has committed to a new F-35 jet made by Lockheed Martin Corp., and the Navy, which is considering a plan to trim its fleet of carriers from 11 to 10, says it has all the Hornets it needs.

Last year’s sequestration ordered cutbacks in defense spending, meaning fewer deals for defense contractors. For Boeing Defense, Space and Security, one of the nation’s largest defense contractors, one impact of the latest budget cuts could be that  the highly profitable Hornet production line in St. Louis, Mo., will close in 2016.

The Hornet cutbacks are only one of a number of challenges that Boeing’s defense group faces as aircraft demand decreases.

The Chicago-based aerospace giant manufactures air, land, sea and space-based products for militaries and governments around the world, though 70 percent of its sales are domestic, with its two biggest customers being the Pentagon and NASA.  Profit margins are healthy: Boeing’s defense business represented 38 percent of the company’s total revenues last year, and 49 percent of the parent’s total operating profit.

Despite ongoing defense budget concerns and increasingly tough global commercial-jet competition, Boeing reported increased operating profit and revenue across the company in both its commercial and defense sectors.

Last year Boeing Defense had an operating profit of $3.24 billion, up 5 percent from $3.07 billion in 2012. Sales rose to $33.2 billion, up 2 percent from $32.61 billion in 2012. Helping to fuel the company’s success was increased deliveries of the P-8 maritime aircraft and the Inmarsat-5 satellite.

For Boeing Military Aircraft, the defense unit’s largest source of revenue, operating profit declined 1 percent to $15.94 billion in 2013 from $16.02 billion in 2012, on sales that declined 2 percent to $1.47 million from $1.49 billion.

The Pentagon managed to avoid $20 billion in budget cuts after the $1.1 trillion government-wide spending bill, passed in January, reduced cuts slated to take place this year.  Still, even after dodging that bullet, the defense budget remains tight since the 8 percent cut it endured last year.

The bill, known as the Ryan-Murray deal, delayed the full impact of sequestration by about half, Boeing CEO W. James McNerney, Jr. explained in a January conference call.

Although the 2014 defense budget will continue to fund several Boeing programs, including production of aircraft, rotorcrafts and satellites for use by the U.S. military and NASA, the company offered  a flat outlook for 2014.

Boeing’s revenue is expected to drop from last year’s figure of $33.2 billion to between $30 and $31 billion in 2014 as defense budget cuts mean less aircraft deliveries, notably of the CH-47 Chinook and V-22 Osprey rotorcraft used by the U.S. Army and U.S. Marine Corps.

“We remain very concerned about longer-term budget uncertainty, the ultimate consequences of sequestration on national security and the potential devastating impact to the nation’s industrial base,” McNerney told analysts.

The turbulence Boeing’s domestic defense operation faces is partially offset by its growing international defense business, which accounted for 26.4 percent of the company’s defense revenues last year. This was a 4 percentage point jump from 22.5 percent in 2007. The company plans to bring in 30 percent of defense revenues from international customers in its first quarter, McNerney said.

Lockheed Martin Corp. remains Boeing’s biggest competitor. The Bethesda, Md.-based company is the Pentagon’s largest defense contractor, supplying much of the aircraft, ground vehicles and missile defense systems used by the U.S. military. In the latest example of the two rivals head-to-head competition, Boeing and Lockheed Martin are now fighting to win what are expected to be sizeable drone contracts  from the Pentagon.

To maintain a competitive edge in the current environment, Boeing’s defense group is investing more in innovation, with a focus on unmanned systems development. Last year, the defense operation spent $1.2 billion on research and development, 40 percent of Boeing’s total research spending. That’s a jump from 2009 when Boeing’s commercial aircraft group was developing the high-tech 787 “Dreamliner,” which is now in service; in that year, defense R&D represented 17 percent of the parent’s total.

The products covered by the group’s innovation effort are starting to come off the drawing board.  Boeing’s first prototype of an unmanned airborne vehicle, or drone, is the liquid hydrogen fuel-powered Phantom Eye, designed to be an “eye in the sky” to perform reconnaissance and gather intelligence, said Garrett Kasper of Boeing’s Advanced Military Aircraft sector.

The goal is for the drone, already capable of gathering and transmitting information, to be able to travel for seven to 10 consecutive days, Kasper said. Boeing Defense is actively working to lengthen the drone’s wingspan and reduce  its “cost-per-flight hour,” a figure comparable to miles-per-gallon heavily considered by Congress when making defense-spending decisions.

Boeing has also developed an unmanned helicopter coined the Unmanned Little Bird. Users program a route on the computer and upload it to the aircraft. It can also be flown by a pilot in situations when human judgment is needed, whether a change in course or if the system fails.

Boeing has also added the ability to control unmanned aircraft to its Apache Guardian combat helicopter. The company is also converting retired F-16 aircraft into drones for surveillance use by the U.S. Air Force.

Apart from aircraft, Boeing is also developing a rugged combat vehicle called the Phantom Badger. At 60 inches wide, it is small enough to fit in the back of Boeing’s V-22 Osprey helicopter. Like a “true innovation vehicle,” its back end can be swapped out “like Legos” with other modules depending on the mission’s needs, Kasper said.

Boeing will continue to face the challenge of keeping its costs down, since the Pentagon heavily considers product affordability when making contract decisions.

“We continue to target organic growth through investments in technology and innovation in areas such as…space unmanned systems, intelligence surveillance and reconnaissance, [and] cybersecurity,” said McNerney.

The Chicago-based aerospace giant manufactures defense products for militaries and governments around the world.

Increased deliveries of the Bell Boeing V-22 Osprey to the U.S. Marine Corps in the fourth-quarter boosted Textron revenues from the year-ago period.
Courtesy of Kate M. Gray.

Textron Inc. reported sharply higher fourth-quarter earnings Wednesday on increased deliveries of its civilian and military aircraft. Shares of the aircraft and defense company shares closed up 5.26 percent Wednesday from the previous day’s close.

In the three months ended Dec. 28, Textron posted net income of $171 million from continuing operations, or 60 cents per diluted share, up 17.1 percent from $146 million, or 50 cents per diluted share, in the year-ago period.

Results were just below estimates by securities analysts. Wall Street analysts surveyed by Zacks Investment Research Inc. were expecting Textron to earn 61 cents per diluted share.

Revenues rose 4.3 percent to $3.56 billion, up from $3.51 billion the previous year.

CEO Scott Donnelly attributed the company’s strong performance to a rise in revenue from new products, including the delivery of 62 new Citation jets this quarter within the company’s Cessna Aircraft Co. manufacturing unit. Within Textron’s Bell Helicopters business, delivery of helicopters and commercial aircraft also increased.

Securities analysts were generally satisfied with the results. Carter Copeland, equity research analyst covering global aerospace at Barclays Capital, said he will maintain his buy rating in a research note released Friday.

Copeland attributed the company’s recent growth to the “fresh pipeline of new product” and strong corporate profit growth in its Cessna Aircraft Company segment. Homeland security and natural disaster efforts are key factors also driving the recent growth in Textron’s Bell Helicopters business.

For the year-ended Dec. 28, Textron earned $498 million from continuing operations, or $1.75 per diluted share, down 14.3 percent from $581 million, or $1.97 per diluted share, in 2012. Wall Street analysts surveyed by Zacks Investment Research Inc. were expecting Textron to earn $1.76 per diluted share for the full year.

Revenue for 2013 dropped 1 percent to $12.10 billion from $12.24 billion in 2012.

Donnelly forecasts even better performance this year, with 2014 being a “full year of new products that have been well-received in the marketplace.” Donnelly said the company will produce revenue growth and earnings in the range of $2.00 to $2.20 per diluted share this year. In 2013, Textron earned $1.75 per diluted share.

In December the company announced its purchase of Beech Holdings. Donnelly said in the conference call that Textron will revise its revenue and earnings outlook once the transaction is complete.

Textron shares closed at $38.00 Wednesday, up $1.90 from Tuesday’s close of $36.10.

Sochi Adler International Airport
Credit: Stefan Krasowski

Security concerns surrounding the Winter Games that begin Friday in Sochi are regaining steam amid recent reports of kidnap threats against athletes.

Earlier this week, the Austrian Olympic Committee announced it had received letters containing a kidnap threat against two of its female athletes. Threatening messages were also sent last month to U.S. Olympic Committee and other countries, warning tourists against attending the games.

The U.S. will be well-represented in Sochi, with 230 athletes, 270 coaches and more than 10,000 spectators expected. The U.S. committee has said that State Department security officials will accompany athletes to and from their events and be responsible for evacuating Americans in case of an attack by insurgents. Still, some teams and family members have invested in additional security precautions.

The U.S. ski and snowboard teams, for example, have hired Global Rescue, a Boston-based private company specializing in security and medical evacuation. The firm will “provide life-saving medical evacuations and other critical emergency services to skiers and their families,” said Global Rescue in a statement.

Global Rescue memberships for combined security and medical evacuation services start at $225 for a seven-day trip, said Sam Highley, senior manager of response services.

Some teams are also taking cybersecurity precautions. Coaches of the U.S. biathlon team purchased pricy satellite phones that will allow them to make phone calls in case increased cellphone call volumes overload terrestrial network capacity.

The satellite phones, priced at an average of $1,500, are equipped with a programmable emergency contact feature so coaches can seek help at the push of a button, said Brent Thomason of satellite communications company Ground Control. But the user must be outside or next to a window with a clear view of the sky to connect with a signal from a low-orbiting satellite, Thomason said.

Athletes and coaches aren’t the only ones taking precautions. After news was released last month about Russian authorities looking for “black widow” suicide bombers, the State Department issued an updated travel advisory encouraging all Americans traveling to Sochi to “consider purchasing private medical evacuation and/or repatriation insurance.”

The updated advisory was in response to December’s two suicide bombings in nearby Volgograd, for which an Islamic militant group claimed responsibility.

“Medical capacity and infrastructure in the region are untested for handling the volume of visitors expected,” the statement said.

Hundreds of spectators have booked Global Rescue’s services, which differ from the travelers insurance they might purchase if the Winter Games were in a less risky region.

Rather than simply reimburse travelers for costs incurred from medical treatment or evacuation during a crisis, the firm deploys its own former military personnel and doctors to the scene, said Highley.

International SOS, a travel and medical security company, is also providing services in Sochi including access to an emergency hotline. The hotline has a service center in Moscow, staffed with regional experts who will provide and medical and security information in a crisis. Members have access to the 24/7 hotline via phone, text and email. Membership services for an individual traveling to Sochi start at around $80 for a 10-day trip.

“Preparation is key,” said SOS Vice President John Rendeiro. “We are telling people to remain vigilant, not just in Sochi but in surrounding areas.”

Rendeiro also advises travelers not to linger in targeted areas like train stations longer than necessary.

Russian President Vladimir Putin has ordered a $2 billion security perimeter surrounding Sochi. The “ring of steel” comprises roadblocks, check points, and 50,000 Russian military and law enforcement officials. Though Putin has declined U.S. military assistance, the Department of Defense has announced two naval warships will be in the nearby Black Sea, along with several aircraft on standby in Germany.

“If we need to extract our citizens, we will have appropriate arrangements with the Russians to do that,” Defense Secretary Chuck Hagel said last month.

Despite the contingency planning, some athletes’ families are staying home.

Fred Evans, father of Chicago’s Olympic bobsledder Aja Evans, told The Washington Post that he will not be traveling to Sochi as originally planned, although other family members have kept their plans. Instead, Evans told the Post he will host a viewing party.

Not everyone is worried, however. Chris Goepper, father of 19-year-old freestyle skier, Nick, said he is “not at all” concerned. The Lawrenceburg, Ind., resident said his family is not paying for any extra precautions.

“We are confident that everything will work out safely and the Olympic Games will be a fantastic event,” Goepper said.