1. Enterprise Risk Management at Boeing: Introduction Established by William Boeing in 1916, Boeing was the worlds largest aerospace and DefenceCompany with three major business segments: Commercial airplanes, Defence (specializing inmilitary aircraft and missile systems) and Space and Communications. It also had a captive financecompany, Boeing Capital Corp ("BCC"). Boeing employed 78,400 people in the Seattle area and wasWashington States largest private employer. At the end of 2001, two-thirds of Boeings sales weregenerated in the US. Overseas revenues were generated in Europe (14%), China (3%), Asiaexcluding China (12%). Boeings commercial airplanes were sold to airlines all over the world. Despite the severedownturn in demand for commercial jets, this segment still generated roughly half of group revenueand operating profits. The division (59% of revenues, 51% of operating profits and 7.5% profitmargins 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 themature, global 100-plus seat passenger jet market. The worldwide commercial aircraft fleet was expected to grow from 11,300 planes in 2001 to20,100 planes by year-end 2020, which translated into a compound annual growth rate (CAGR) of2.9%. Military aircraft and missile systems contributed to over one-third of group sales andoperating profits. For this division, the primary customer was the US government. Boeings militaryweapons-making segment primarily made the F-18 fighter jets, the C-17 troop and equipmenttransport planes, helicopters, the AH-64D Apache Longbow, refueling planes, and various precisionmissiles. The segment was also a major producer of computer-based battle management systemsused in missile defence applications. The Space and Communications business generated only modest profits. For this division, theprimary customer was again the US government. Boeing was one of the worlds largest makers ofsatellite-carrying rockets and satellites. Both businesses were expected to suffer from industryovercapacity and cut-throat price competition. The Customer and Commercial Financing segment was primarily engaged in the financing ofcommercial and private aircraft, commercial equipment, and real estate. About 75% and 25% of thesegments revenues were derived from commercial aircraft and non-aerospace leasing and financingactivity, 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 aerospacemanufacturer into a comprehensive aerospace manufacturing and services provider. Over the pastdecade, volatile yet maturing markets, intensifying competition, and the commoditization of jets,rockets and satellites, had affected the companys profitability. Boeing had attempted to use new
• 2. equipment sales as a platform for selling high margin, long-term maintenance contracts, to generatemore predictable earnings streams and higher returns. Higher margin fixed price production contracts accounted for about 80% of Boeings defencerevenues. Lower margin research & development (R&D) contracts accounted for the balance 20%. The Commercial Airplanes Business was virtually a duopoly between Boeing and Airbus. It wasonce dominated by Boeing but was now split roughly 50/50 between the two players. The events of9/11 combined with the economic slowdown had led to a sharp decline in demand for air travel andprompted US airlines in particular to cut capacity. Whilst demand for air travel had reboundedsubsequently, it remained well below FY00 levels. Capacity utilization rates had failed to sustain therecovery seen early in 2002. Meanwhile, competition remained intense and the US airlines inparticular had remained under considerable financial stress, culminating in UALs (United Airlines)recent filing of chapter-11 protection. Reflecting the above trends, total global jet deliveries wereexpected to decline from 852 in 2001 to 760 in 2002 and 575/580 in 2003, with Boeings shareexpected to be 527, 380 and 275/280 respectively. In the long run, Boeing faced intense competition from Airbus which was aggressively gainingmarket share. The Airbus A380 super-jumbo which was due to become operational in 1Q06 was inparticular a major threat. The A380 was capable of carrying 555 passengers over long distances and had been heraldedby some as the only means of coping with the expected long term growth in passenger traffic givenlimited global airport capacity and congested skies. Boeings plan had been to develop the 747x"sonic cruiser", a faster but smaller long range rival but this might be scrapped due to weak demandsince September 11. Airbus reportedly had 97 orders for its A380. Aircraft programs, particularly new aircraft models such as the 717 program, faced theadditional risk of pricing pressures and rising costs inherent in the design and production of complexproducts. Boeing might also have to provide financing support to airlines, which were unable toobtain other means of financing. The US defence sector was still very competitive although consolidation had resulted in justfour prime contractors for defence aerospace systems and electronics; Lockheed Martin, Boeing,Raytheon and Northrop Grumman (which has recently acquired TRW). At a global level, however,the company faced strong competition from major European corporations where consolidation hadcreated a number of formidable competitors such as BAE Systems, EADS (owner of Airbus), MatraBAe Dynamics Alenia (MBDA), Augusta-Westland and Euro copter. Boeing expected launch services to remain highly competitive due to the downturn in demandfor non-geo-stationary satellite launches and the human space flight and exploration market.However, it expected solid growth overall through space digital imagery architecture, missiledefence, the current Delta IV launch vehicles and the in-progress 737 Airborne Early Warning andControl System programs.
• 3. Any war or terrorist event would have a very negative impact on the airline industry. Externalbusiness environment risks for Boeing included: Adverse governmental export and import policies, Factors that resulted in significant and prolonged disruption to air travel worldwide, Other factors that affected the economic viability of the commercial airline industry. Examples included the volatility of aircraft fuel prices, global trade policies, worldwide politicalstability and economic growth, acts of aggression that had an impact on the perceived safety ofcommercial flight and competition from Airbus. The Military Aircraft and Missile Systems and theSpace and Communications segments were subject to changing priorities and reduction in the USGovernment defence and space budget. Government contracts could be terminated by unilateralgovernment action (termination for convenience) or failure to perform (termination for default). Civil, criminal or administrative proceedings involving fines, compensatory and trebledamages, restitution, forfeiture and suspension of debarment from government contracts mightresult due to violation of business rules and other irregularities. Boeings primary defence customer was the US government. Following September 11 militaryaction in Afghanistan and the ongoing threat of terrorism, near term Department of Defence (DoD)budgets had increased and longer-range defence budget forecasts had been revised upwards.However, Boeing itself did not expect DoD procurement to increase significantly in view of the softerglobal economy. Environmental Risks Boeings operations were subject to various federal and state environment laws. Areas ofconcern included discharge of hazardous materials and remediation of contaminated sites. Thecompany had been involved in related legal proceedings, claims and remediation obligations sincethe 1980s. Boeing routinely assessed its contingencies, obligations and commitments forremediation of contaminated sites, based on in-depth studies, expert analyses and legal reviews.Boeing generally accrued or expensed exposures related to environmental remediation sitesimmediately, based on estimates of investigation, cleanup and monitoring costs to be incurred. Because of the regulatory complexities and risk of unidentified contaminated sites andcircumstances, the potential existed for environmental remediation costs to be materially differentfrom the estimated costs. However, based on all known facts and expert analyses, Boeing believed itwas unlikely that environmental contingencies would have a material adverse impact on Boeingsfinancial position or operating results and cash flow trends.
• 4. On October 31,1997, a federal securities lawsuit was filed against Boeing in a US district courtin Washington, Seattle. The lawsuit named as defendants the company and three of its thenexecutive officers. Additional lawsuits of a similar nature were filed in the same court. These lawsuitswere consolidated on February 24, 1998. The lawsuits generally alleged that the defendants desiredto keep Boeings share price as high as possible in order to ensure that the McDonnell Douglasshareholders would approve the merger. Individual defendants, benefited directly from the sale ofBoeing stock during the period from April 7,1997 through October 22,1997. The Court certified twosub-classes of plaintiffs in the action: all persons or entities who purchased Boeing stock or calloptions or who sold put options during the period July 21, 1997 - October 22, 1997, and all personsor entities who purchased McDonnell Douglas stock on or after April 7, 1997, and who held suchstock until it was converted to Boeing stock pursuant to the merger. The plaintiffs soughtcompensatory damages. On September 17, 2001, Boeing reached an agreement with class counselto settle the lawsuit for $92.5 million. The settlement would
1. Enterprise Risk Management at Boeing: Introduction Established by William Boeing in 1916, Boeing was the worlds largest aerospace and DefenceCompany with three major business segments: Commercial airplanes, Defence (specializing inmilitary aircraft and missile systems) and Space and Communications. It also had a captive financecompany, Boeing Capital Corp ("BCC"). Boeing employed 78,400 people in the Seattle area and wasWashington States largest private employer. At the end of 2001, two-thirds of Boeings sales weregenerated in the US. Overseas revenues were generated in Europe (14%), China (3%), Asiaexcluding China (12%). Boeings commercial airplanes were sold to airlines all over the world. Despite the severedownturn in demand for commercial jets, this segment still generated roughly half of group revenueand operating profits. The division (59% of revenues, 51% of operating profits and 7.5% profitmargins 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 themature, global 100-plus seat passenger jet market. The worldwide commercial aircraft fleet was expected to grow from 11,300 planes in 2001 to20,100 planes by year-end 2020, which translated into a compound annual growth rate (CAGR) of2.9%. Military aircraft and missile systems contributed to over one-third of group sales andoperating profits. For this division, the primary customer was the US government. Boeings militaryweapons-making segment primarily made the F-18 fighter jets, the C-17 troop and equipmenttransport planes, helicopters, the AH-64D Apache Longbow, refueling planes, and various precisionmissiles. The segment was also a major producer of computer-based battle management systemsused in missile defence applications. The Space and Communications business generated only modest profits. For this division, theprimary customer was again the US government. Boeing was one of the worlds largest makers ofsatellite-carrying rockets and satellites. Both businesses were expected to suffer from industryovercapacity and cut-throat price competition. The Customer and Commercial Financing segment was primarily engaged in the financing ofcommercial and private aircraft, commercial equipment, and real estate. About 75% and 25% of thesegments revenues were derived from commercial aircraft and non-aerospace leasing and financingactivity, 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 aerospacemanufacturer into a comprehensive aerospace manufacturing and services provider. Over the pastdecade, volatile yet maturing markets, intensifying competition, and the commoditization of jets,rockets and satellites, had affected the companys profitability. Boeing had attempted to use new
• 2. equipment sales as a platform for selling high margin, long-term maintenance contracts, to generatemore predictable earnings streams and higher returns. Higher margin fixed price production contracts accounted for about 80% of Boeings defencerevenues. Lower margin research & development (R&D) contracts accounted for the balance 20%. The Commercial Airplanes Business was virtually a duopoly between Boeing and Airbus. It wasonce dominated by Boeing but was now split roughly 50/50 between the two players. The events of9/11 combined with the economic slowdown had led to a sharp decline in demand for air travel andprompted US airlines in particular to cut capacity. Whilst demand for air travel had reboundedsubsequently, it remained well below FY00 levels. Capacity utilization rates had failed to sustain therecovery seen early in 2002. Meanwhile, competition remained intense and the US airlines inparticular had remained under considerable financial stress, culminating in UALs (United Airlines)recent filing of chapter-11 protection. Reflecting the above trends, total global jet deliveries wereexpected to decline from 852 in 2001 to 760 in 2002 and 575/580 in 2003, with Boeings shareexpected to be 527, 380 and 275/280 respectively. In the long run, Boeing faced intense competition from Airbus which was aggressively gainingmarket share. The Airbus A380 super-jumbo which was due to become operational in 1Q06 was inparticular a major threat. The A380 was capable of carrying 555 passengers over long distances and had been heraldedby some as the only means of coping with the expected long term growth in passenger traffic givenlimited global airport capacity and congested skies. Boeings plan had been to develop the 747x"sonic cruiser", a faster but smaller long range rival but this might be scrapped due to weak demandsince September 11. Airbus reportedly had 97 orders for its A380. Aircraft programs, particularly new aircraft models such as the 717 program, faced theadditional risk of pricing pressures and rising costs inherent in the design and production of complexproducts. Boeing might also have to provide financing support to airlines, which were unable toobtain other means of financing. The US defence sector was still very competitive although consolidation had resulted in justfour prime contractors for defence aerospace systems and electronics; Lockheed Martin, Boeing,Raytheon and Northrop Grumman (which has recently acquired TRW). At a global level, however,the company faced strong competition from major European corporations where consolidation hadcreated a number of formidable competitors such as BAE Systems, EADS (owner of Airbus), MatraBAe Dynamics Alenia (MBDA), Augusta-Westland and Euro copter. Boeing expected launch services to remain highly competitive due to the downturn in demandfor non-geo-stationary satellite launches and the human space flight and exploration market.However, it expected solid growth overall through space digital imagery architecture, missiledefence, the current Delta IV launch vehicles and the in-progress 737 Airborne Early Warning andControl System programs.
• 3. Any war or terrorist event would have a very negative impact on the airline industry. Externalbusiness environment risks for Boeing included: Adverse governmental export and import policies, Factors that resulted in significant and prolonged disruption to air travel worldwide, Other factors that affected the economic viability of the commercial airline industry. Examples included the volatility of aircraft fuel prices, global trade policies, worldwide politicalstability and economic growth, acts of aggression that had an impact on the perceived safety ofcommercial flight and competition from Airbus. The Military Aircraft and Missile Systems and theSpace and Communications segments were subject to changing priorities and reduction in the USGovernment defence and space budget. Government contracts could be terminated by unilateralgovernment action (termination for convenience) or failure to perform (termination for default). Civil, criminal or administrative proceedings involving fines, compensatory and trebledamages, restitution, forfeiture and suspension of debarment from government contracts mightresult due to violation of business rules and other irregularities. Boeings primary defence customer was the US government. Following September 11 militaryaction in Afghanistan and the ongoing threat of terrorism, near term Department of Defence (DoD)budgets had increased and longer-range defence budget forecasts had been revised upwards.However, Boeing itself did not expect DoD procurement to increase significantly in view of the softerglobal economy. Environmental Risks Boeings operations were subject to various federal and state environment laws. Areas ofconcern included discharge of hazardous materials and remediation of contaminated sites. Thecompany had been involved in related legal proceedings, claims and remediation obligations sincethe 1980s. Boeing routinely assessed its contingencies, obligations and commitments forremediation of contaminated sites, based on in-depth studies, expert analyses and legal reviews.Boeing generally accrued or expensed exposures related to environmental remediation sitesimmediately, based on estimates of investigation, cleanup and monitoring costs to be incurred. Because of the regulatory complexities and risk of unidentified contaminated sites andcircumstances, the potential existed for environmental remediation costs to be materially differentfrom the estimated costs. However, based on all known facts and expert analyses, Boeing believed itwas unlikely that environmental contingencies would have a material adverse impact on Boeingsfinancial position or operating results and cash flow trends.
• 4. On October 31,1997, a federal securities lawsuit was filed against Boeing in a US district courtin Washington, Seattle. The lawsuit named as defendants the company and three of its thenexecutive officers. Additional lawsuits of a similar nature were filed in the same court. These lawsuitswere consolidated on February 24, 1998. The lawsuits generally alleged that the defendants desiredto keep Boeings share price as high as possible in order to ensure that the McDonnell Douglasshareholders would approve the merger. Individual defendants, benefited directly from the sale ofBoeing stock during the period from April 7,1997 through October 22,1997. The Court certified twosub-classes of plaintiffs in the action: all persons or entities who purchased Boeing stock or calloptions or who sold put options during the period July 21, 1997 - October 22, 1997, and all personsor entities who purchased McDonnell Douglas stock on or after April 7, 1997, and who held suchstock until it was converted to Boeing stock pursuant to the merger. The plaintiffs soughtcompensatory damages. On September 17, 2001, Boeing reached an agreement with class counselto settle the lawsuit for $92.5 million. The settlement would
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