The Boeing Company, together with its subsidiaries, is one of the world’s major
aerospace firms. We are organized based on the products and services we offer.
We operate in six principal segments: Commercial Airplanes; Aircraft and Weapon
Systems (A&WS), Network Systems, Support Systems and Launch and Orbital Systems
(L&OS), collectively Integrated Defense Systems (IDS); and Boeing Capital
Corporation (BCC). We also established an Other segment classification which principally
includes the activities of Connexion by BoeingSM, a two-way data communications
service for global travelers; Air Traffic Management, a business unit developing
new approaches to a global solution to address air traffic management issues;
and Boeing Technology, an advanced research and development organization focused
on innovative technologies, improved processes and the creation of new products.
Commercial Airplanes Segment
The Commercial Airplanes segment is involved in developing, producing and marketing
commercial jet aircraft and providing related support services, principally
to the commercial airline industry worldwide. We are a leading producer of commercial
aircraft and offer a family of commercial jetliners designed to meet a broad
spectrum of passenger and cargo requirements of domestic and foreign airlines.
This family of commercial jet aircraft currently includes the 717 and 737 Next-Generation
narrow-body models and the 747, 767 and 777 wide-body models. Final delivery
of the MD-11 aircraft occurred in 2001. Final delivery of the 757 aircraft is
scheduled to occur in the second quarter of 2005.
Commercial jet aircraft are normally sold on a fixed-price basis with an indexed
price escalation clause. Our ability to deliver jet aircraft on schedule depends
on a variety of factors, including execution of internal performance plans,
availability of raw materials, performance of suppliers and subcontractors,
and regulatory certification. The introduction of new and derivative commercial
aircraft programs involves increased risks associated with meeting development,
production and certification schedules.
The major focus of commercial aircraft development activities over the past
three years has been the 737 Next-Generation-900 model, the 747-400ER, the 747-400ERF,
the 777-200LR, and the 777-300ER. The initial delivery of the 737-900, the largest
member of the 737 Next-Generation family, occurred in the second quarter of
2001. Certification and first delivery of the 747-400ER and 747-400ERF occurred
during the fourth quarter of 2002. Certification and first delivery of the 777-300ER
and 777-200LR is scheduled for 2004 and 2006, respectively.
Integrated Defense Systems Segments
IDS is involved in the research, development, production, modification and
support of the following products and related systems: military aircraft, including
fighter, transport and attack aircraft; helicopters; missiles; space systems;
missile defense systems; satellites and satellite launching vehicles; rocket
engines; and information and battle management systems.
The IDS business environment extends over multiple markets, including defense
(A&WS, Network Systems and Support Systems), homeland security (Network
Systems), space exploration (L&OS), and launch and satellites (L&OS).
IDS derives over 85% of its revenue from sales to the U.S. Government and we
are forecasting this business mix will remain at this level into the foreseeable
future. Specifically, IDS’s primary customers are the U.S. Department of Defense
(DoD) for our products in the defense market, the U.S. Department of Homeland
Security for the homeland security market, NASA for the space exploration market,
and the U.S. Government for the launch and satellites market.
The major trends that shape the current environment of IDS include significant
but relatively flat U.S. Government defense and space budgets; rapid expansion
of information and communication technologies; the need for low cost, assured
access to space; and a convergence of military, civil and commercial markets.
We are continuing to invest in business opportunities where we can use our
customer knowledge, technical strength and large-scale systems integration capabilities
to shape the market. Current major developmental programs include the F/A-22
Raptor, V-22 Osprey tiltrotor aircraft, C-130 Avionics Modernization Program
(AMP) and the Unmanned Combat Air Vehicle (UCAV) and Future Combat Systems (FCS).
Both the V-22 and F/A-22 programs have transitioned to low-rate initial production
but also continue developmental activities. The CH-47 Chinook is currently transitioning
from development to production of a major new upgrade program. Current products
in the tactical missiles market include the Harpoon Block II, SLAM-ER, CALCM
and the Joint Direct Attack Munition (JDAM). Future programs include the Small
Diameter Bomb. We are aggressively pursuing opportunities that utilize high-speed
technology for the next-generation missile.
The Network Systems research and development funding has been focused on communications
capabilities. In the communications market, we are investing to enable connectivity
between existing air/ground platforms, increase communications availability
and bandwidth through more robust space systems, and leveraged innovative communications
concepts. Investments were made in global situational awareness concepts to
develop communication system architectures to support various business opportunities
including FCS, Joint Tactical Radio System, FAB-T and Global Missile Defense.
A major contributor to our support of these DoD transformation programs is the
investment in the Boeing Integration Center where our network-centric operations
concepts are developed in partnership with its customers. We also will continue
to make focused investments that will lead to the development of next-generation
space intelligence systems.
Within the L&OS segment, we continued investing in the new Delta IV heavy
lift demonstration expendable launch vehicle, which is scheduled to be launched
July 2004. This product gave us greater access to a portion of the launch market
that was previously unavailable with the Delta II rocket alone. The Network
Systems segment has continued to be the premier provider of Airborne Early Warning
and Control Systems (AEW&C) with the execution of the agreement with the
Turkish government for four new AEW&C Systems aircraft and continued technical
progress on the previously awarded Australian AEW&C contract.
The acquisition and merger related consolidations among U.S. aerospace companies
resulted in three principal prime contractors for the DoD and NASA, including
ourselves. As a result of the extensive consolidation in the defense and space
industry, we along with our major competitors are also partners or major suppliers
to each other on various programs. We are in a 50% partnership with Lockheed
Martin in United Space Alliance, which is responsible for all ground processing
of the Space Shuttle fleet and for space-related operations with the U.S. Air
Force. United Space Alliance also performs modifications, testing and checkout
operations that are required to ready the Space Shuttle for launch. United Space
Alliance operations are performed under cost-type contracts. Our proportionate
share of joint venture earnings is recognized as income.
The Sea Launch venture, in which we are a 40% partner with RSC Energia (25%)
of Russia, Kvaerner ASA (20%) of Norway, and KB Yuzhnoye/PO Yuzhmash (15%) of
Ukraine, provides ocean-based launch services to commercial satellite customers.
Boeing Capital Corporation Segment
Historically, BCC has acted as a captive finance subsidiary by providing market-based
lease and loan financing for commercial aircraft as well as commercial equipment.
In November 2003, we announced a significant change in BCC’s strategic direction,
moving from a focus on growing the portfolio to a focus on supporting our major
operating units and managing overall corporate exposures. For our commercial
aircraft market, BCC will facilitate, arrange, and selectively provide financing
to Commercial Airplanes’ customers. For our defense and space markets, BCC will
primarily arrange and structure financing solutions for IDS’s government customers.
In addition, BCC will enhance the risk management activities to reduce exposures
associated with the current portfolio. BCC expects to satisfy any external funding
needs through access to traditional market funding sources.
BCC competes in the commercial equipment leasing and finance markets, primarily
in the United States, against a number of competitors, mainly larger leasing
companies and banks. BCC’s Commercial Financial Services’ portfolio encompasses
multiple industries and a wide range of equipment, including corporate aircraft,
machine tools and production equipment, containers and marine equipment, chemical,
oil and gas equipment and other equipment types. Historically, approximately
20% of BCC’s portfolio was related to commercial equipment leasing and financing
activities. In January 2004, we announced that we are exploring strategic alternatives
for the future of BCC’s Commercial Financial Services business. The alternatives
being examined include a sale of the operation itself, sale of the portfolio
or a phased wind-down of the existing portfolio.
The commercial jet aircraft market and the airline industry remain extremely
competitive. We face aggressive international competitors, including Airbus,
that are intent on increasing their market share. To effectively compete, we
focus on improving our processes and continuing cost reduction efforts. We continue
to leverage our extensive customer support services network for airlines throughout
the world to provide a higher level of customer satisfaction and productivity.
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