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Boeing Scraps C-17 Production


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The Boeing Company (BA - Analyst Report) has declared that it will no longer produce C-17 Globemaster III military cargo jet and will therefore close the C-17 final assembly facility in Long Beach, Calif. in 2015. A lack of sufficient orders led the company to take this decision. The threat of sequestration has created significant planning difficulties for customers and the entire aerospace industry, thereby leading to a decline in the order book.  

The company in the past has delivered 257 C-17s at a cost of about $311 million each. This includes 223 jets to the U.S. Air Force and the remaining 34 to Australia, Canada, India, Qatar, the United Arab Emirates, the United Kingdom and the 12-member Strategic Airlift Capability initiative of North Atlantic Treaty Organization and Partnership for Peace nations.

Boeing will continue to offer after-delivery support to the worldwide C-17 fleet through 2017 as part of the C-17 Globemaster III Integrated Sustainment Program Performance-Based Logistics agreement. The company will also continue the production of the last 22 C-17s at the rate of 10 C-17s per year. Of these 22, 7 are for the Indian Air Force, 2 for another international customer, while 13 have not yet been sold.

Since its first flight in 1991, C-17 has continued to support airlifting of troops and large cargo, precision airdrop of humanitarian supplies and lifesaving aeromedical missions.

The company expects this announcement to result in a charge of less than $100 million. However, it indicated that this will not impact its 2013 financial guidance. The company plans to begin the reduction of the C-17 workforce in 2014. However, it intends to assist these employees in their job search.

Though the C-17 is considered as one of the world's most capable airlifter with supreme readiness and cost effectiveness, this decision would not affect the company’s position severely. We note that Boeing is one of the major players in the defense business, which accounts for approximately half of its top line. Its other products like the F/A-18 fighter jet and its carrier-based version EA-18G Growler, P-8A Chinook helicopter, Apache and Osprey rotorcraft, and the brigade combat team modernization program would help in offsetting the adverse impact. The company presently retains a short-term Zacks Rank #3 (Hold).

Among the stocks worth considering in the space are Lockheed Martin Corp. (LMT - Analyst Report) , Alliant Techsystems Inc. and Northrop Grumman Corp. (NOC - Analyst Report) . While Lockheed and Alliant Techsystems hold a Zacks Rank #1 (Strong Buy), Northrop Grumman carries a Zacks Rank #2 (Buy).