Boeing defense unit finds itself on defensive

PARIS — On the eve of the Paris Air Show, Boeing defense chief Jim Albaugh sat down with journalists in the company's office in the French capital and shrugged off suggestions that his job could be on the line.

Politely deflecting that idea, Albaugh defended the record of his military division, whose performance and shrinking roster of airplane contracts concern some analysts.

Boeing's defense unit was hit hard by proposed Pentagon program cuts announced in April. It has lost some major bidding competitions and faces a dearth of contracts to build the next generation of military aircraft.

Boeing had spent a decade as the second- largest U.S. defense contractor, behind only Lockheed Martin. But in 2008, it lost that status as Northrop Grumman's sales of almost $34 billion pushed Boeing, with $32 billion in defense sale, into third place.

"We got hurt," Albaugh conceded Sunday, referring to the Pentagon's budget proposal, which would cut the C-17 military transport and Boeing's share of the F-22 jet fighter, among other key programs.

But Albaugh said there's potential new business in other areas, including sales of older-generation tactical aircraft overseas, and contracts in intelligence work, homeland security and energy creation. "I see a lot of opportunities," he said.

He said he will announce today at the air show an acquisition of a small company in the area of military intelligence.

He'll also announce the creation of a separate business unit devoted to unmanned aerial systems, a burgeoning field Boeing is keen to get a bigger piece of.

But these new areas will have to produce big results quickly to compensate for some of the losses ahead.

Furthermore, the proposed Pentagon cuts suggest a political tide may have turned against a key strategy Albaugh has championed: to have Boeing become an integrator of complex military systems, building fewer things itself while orchestrating the work of others.

The poster child of that strategy is the Army's Future Combat Systems (FCS), a multibillion-dollar program to create a series of ground vehicles and weapons systems linked by a sophisticated communications and data network.

Defense Secretary Robert Gates in April not only took part of that contract away from Boeing but also criticized the contract's structure. Essentially, Boeing, which integrated the work of dozens of suppliers, was viewed as having too much control over the program's funding and decisions about which fancy bells and whistles were needed.

The multiyear program has developed slowly and costs more than any other defense program except the Joint Strike Fighter. Top brass in the Pentagon and the Obama administration are pushing for acquisition reform to rein in spending and put more control over such programs back in the hands of government.

But Albaugh rejected the idea that systems integration as a concept is dead or that Boeing had too much control in FCS procurement.

"The Army was involved in every decision we made," he said. "It's been a great partnership with the Army."

He insisted that when the government is finished restructuring FCS, he still expects a large role for Boeing. "There is a need to do integration," Albaugh said. "We are well positioned to do it."

Loren Thompson, a respected defense-industry analyst with the Lexington Institute, in an interview Sunday agreed with Albaugh's positive analysis of Boeing's FCS performance.

Yet Thompson said questions about the overall performance of Albaugh's division are inescapable. "Boeing's defense operations have fared worse over the last several years than any other major contractor," said Thompson.

He cited the abandonment in 2005 of a classified multibillion-dollar program to create a constellation of secret spy satellites, shut down after the government had spent an estimated $4 billion; the loss of a major GPS satellite contract; the proposed C-17 cancellation; and the "doubts about Boeing's ability to remain in the tactical aircraft business" since it has no work on future-generation fighters once F-22 ends.

A Wall Street analyst in Paris for the show also defended Albaugh, saying that through all the losses and write-downs, the unit has made money.

In the end, the outcome of one more big competition could decide Albaugh's fate and the future of Boeing's military business: the Air Force tanker program.

An Airbus plane first won the tanker contract last year, then had the award canceled after a Boeing protest. The Pentagon is to restart the whole drama next month.

If Boeing were to lose again when the final decision is made next year, it would be left with no next-generation fighters, bombers or air transports in its product line.

Dominic Gates: 206-464-2963 or dgates@seattletimes.com