NEW Boeing fears of possible layoffs in '09

SEATTLE -- Boeing management warned workers Thursday that employment will fall in 2009 and that layoffs are possible, an ominous sign that even the previously booming aerospace sector is staggering from the worldwide economic downturn.

A memo from Boeing's Executive Council said the company next year anticipates lower military spending and a potential global recession in the airline industry.

"We must respond aggressively to these business realities," Boeing Chairman and Chief Executive Jim McNerney wrote in the memo.

The memo said that "while no firm estimate has been made, the employment decline could exceed Boeing's average annual attrition rate of 4 to 5 percent and will be composed of a mix of normal attrition, hiring freezes and layoffs."

That seems like little more than initial belt-tightening, compared with many other industries.

But top aerospace analyst Richard Aboulafia of the Teal Group said a more substantial Boeing downturn is clearly on the way.

A freeze in the credit markets and falling passenger numbers have crimped airlines' buying power, and the most ambitious jet buyers -- Middle Eastern carriers -- have been undercut by the plunging price of oil.

Teal Group's most optimistic scenario forecasts production dropping from 2010 on, falling about 15 percent by 2013. A ramp-up of the new 787 Dreamliner would cushion the total production decline from getting any worse.

Worst-case scenario

In the worst-case scenario, assuming the credit freeze doesn't thaw, Aboulafia predicts a production drop and layoffs likely as early as next fall. In that case, the situation could worsen rapidly and the bottom is unpredictable.

The economic downturn has hit with massive force across industries from finance and homebuilding to automobiles and raw materials. But despite a series of production delays and a two-month Machinists strike, until now Boeing's business appeared rock-solid.

In the first quarter of this year, Boeing's commercial division raked in almost $1 billion in profit on revenues of more than $8 billion.

Employment has climbed steadily as production lines hummed in Boeing's Puget Sound-area factories. Since the middle of 2004, the jet maker has added more than 24,000 jobs in Washington state for a current employment total here of almost 77,000.

Boeing's security blanket in the economic downturn is its unprecedented backlog of orders, enough to stretch through five years of production. But Aboulafia warned that those orders could melt away.

"If airlines are hoarding cash, cutting capacity and behaving conservatively in a massive downturn, then there are no safe orders," he said.

Long-range look

The internal Boeing memo came after the top leadership, the Executive Council, met this week to review its long-range business plan.

While management affirmed Boeing's "overall health and strength," the memo said, executives "also agreed that the current business environment and global economic situation will require additional cost control and some employment reductions in 2009."

At the meeting, Rick Stephens, senior vice president of human resources, outlined a broad program of cost-cutting.

The prospect of a downturn is not the only reason for the cuts, the memo said.

Boeing needs to control costs "to fund development programs" such as the 787 Dreamliner. And its revenue has been hit both by government delays in awarding some defense contracts -- including the Air Force tanker and the combat search-and-rescue helicopter -- and Boeing delays in delivering on other defense programs, such as the Australian Wedgetail surveillance aircraft.

Not mentioned in the memo is the revenue hit from the Machinists strike.

Aboulafia said Boeing's weakness ahead is mostly on the commercial side, which has been hit both by the freezing of debt markets, so that airlines cannot finance airplanes, and a sharp decline in air traffic due to the global downturn.

Another factor is the precipitous drop in the price of oil, which sank below $50 a barrel Thursday from a summer high of above $145 a barrel.

The higher price had encouraged airlines to buy new fuel-efficient jets because the fuel and maintenance savings alone could cover the leasing costs.

"At $50 a barrel, the difference between the old planes and the new ones diminishes a lot," said Aboulafia. "Those older planes start to look good again."

Airline revenues are hostage to the broader economic recession, Aboulafia said.

The latest monthly statistics from the International Air Transport Association showed an "alarming drop" in passenger traffic not seen since the SARS flu outbreak in Asia in 2003. Traffic was down everywhere, including previous growth regions such as Asia.

After years of double-digit growth, passenger traffic by Middle Eastern carriers turned to a negative 2.8 percent.

"I'm shocked by that number," said Aboulafia. "These are the guys with grand plans and the oil money to pay for it."

In the previous aviation downturn of 2002 and 2003, he said, China and India were "safe havens."

"All bets are off now," he said.

Teal Group forecasts that in the best scenario, Boeing production drops after 2010 from a high of 475 jets a year to around 400 in 2013. In the worst case, it could fall as soon the fourth quarter of 2009.

If the economic downturn continues to deepen, Aboulafia said, "it's a fair bet that within 12 months you begin to run out of people who want and can pay for aircraft."

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