News Analysis: Asian flu kills off 48,000 jobs at Boeing

Jetmaker's decision to slash production threatens pounds 1.4bn trade with UK suppliers

THE PUGET SOUND, a stretch of water that cuts inland from the north-west Pacific coast of the United States, is Boeing country. From Everett in the north, on through Boeing Fields and downtown Seattle, to Renton at the southern tip of the Puget, the familiar logo of the world's biggest aircraft manufacturer dominates the landscape.

Sure, Seattle has other household names and other big employers - Microsoft and Starbucks, the coffee people, come to mind. But when Boeing sneezes, the Puget shakes. Yesterday, it was still reverberating from Boeing's stunning announcement that it intends to shed 48,000 employees - a fifth of its workforce - over the next two years and cut back production savagely.

Boeing has caught a bad dose of the Asian flu and its workforce is paying the price for the collapse in air travel and hence demand for passenger jets in the Pacific Rim. But the effects will be felt not just in Puget Sound. Boeing is a big spender in the UK as well, where it buys pounds 1.4bn- worth of supplies a year from 200 component firms including Rolls-Royce, British Aerospace, GEC Marconi and Smiths Industries. Across Europe, some 90,000 direct and indirect jobs are said to depend on Boeing orders.

Half of those job cuts were already in the pipeline. Nevertheless, the scale of the additional reductions, coupled with a warning that profits would be $500m lower next year than forecast, caught the aerospace industry and Wall Street on the hop.

Production of Boeing's entire model range, with the exception of the new 100-seater 717, will be cut back. Output of the 747 Jumbo jet, Boeing's biggest profit earner, will fall from 3.5 a month now to two in 1999 and just one a month the year after.

Production of the New Generation 737, the workhorse of most airline fleets, is also being trimmed back by more than 10 per cent, while the 757 and 767 lines will slow down.

The Asian downturn has not yet materialised in cancelled, delayed or deferred orders. In fact Boeing has lost just three orders in the region so far - and that followed the collapse of Phillipines Airlines. Worldwide deliveries this year are on target to reach 550 and are forecast to increase to 620 next year. Boeing expects to deliver all 84 aircraft on order from Asian airlines in 1999.

But beyond that, the market falls off a cliff. Harry Stonecipher, Boeing's chief operating officer, said yesterday: "Options are not being exercised and there is zero market growth. It is not a pretty picture, nor is it improving. We think this situation will take between two and five years to work through."

Not everyone in the aviation industry is convinced by Boeing's explanation. Over the last decade, the workforce at Seattle has gone up and down like a fiddler's elbow - more because of Boeing's inability to match production capacity to customer demand than because of any collapse in the market.

The last big jobs cull took place in the early 1990s when the workforce was trimmed by 20 per cent. But just as Seattle was recovering from that, Boeing unveiled a hugely ambitious programme to double production and, until last year, it was taking on workers at the rate of 1,000 a month. Then Boeing hit the buffers in late 1997 when it had to cut back production of the New Generation 737 because of acute bottlenecks on its assembly lines.

The resulting financial mayhem and penalty payments to airlines drove the company into its first loss in five decades.

A rival aerospace executive said: "When I heard the news from Seattle I could not believe it. Boeing is blaming the Asian crisis for its troubles but the reality is that it has been too greedy."

Doug McVitie, managing director of the Arran Aerospace aviation consultancy, agrees: "I'm not sure all of this can go down to the situation in Asia. They overstretched themselves and left very little margin for error."

Boeing's problems are compounded by the fact that it is losing market share to its European rival Airbus Industrie, in which British Aerospace has a 20 per cent stake. This year the Toulouse-based consortium has scooped half the market for new orders, which explains its air of confidence and rapidly growing production lines. Airbus has increased production by 25 per cent this year to 230 aircraft and expects to raise output to 290 aircraft in 1999 and 320 the following year. Overall, Airbus forecasts that the world's airlines will require 13,600 new aircraft of 70 seats or more over the next 20 years, worth a total of $1,200bn.

The Asian market is important. It accounts for 20 per cent of world airline traffic and is forecast to grow at a faster rate than any other part of the world except for China in the next 20 years.

But Adam Brown, vice-president of forecasting and strategic planning at Airbus, thinks the impact of the Asian crisis has been overdone. He estimates that the areas of Asia that are in decline represent only 7 per cent of the world airline market. "If air travel in all these areas were to come to a complete standstill for a year, total world air traffic would show hardly any decline at all. Also, despite the severe short-term problems facing the Asian airlines, the fundamentals underlying the region's great potential for sustained long-term economic growth remain unchanged."

It will be some months before Boeing's UK suppliers feel the full backdraft from the cutbacks in Seattle. Meanwhile, at least there is the consultation of knowing that Boeing's loss is Airbus Industrie's gain.