Why Boeing Layoffs Do Not Point to Problems at the Company

Boeing Co. (NYSE: BA) has announced that it will be letting go of about 4,000 employees in its Commercial Airplanes division by midyear. The layoffs would be voluntary, combined with leaving positions unfilled. While the move may just be strictly cost-cutting due to negative conditions, it also may indicate a simple shift of resources towards its Defense, Space and Security (BDS) division in the near future. Evidence suggests the latter is probably the case, and that there is no serious trouble at Boeing.

Since 2013, Boeing steadily has increased its research and development (R&D) spending in the Commercial Airplanes department. That spending has grown 30% to $2.34 billion since 2013 on the back of new programs for improved models. R&D for BDS on the other hand has dropped 19% to $986 million, its lowest level since 2008.

This follows a pattern of higher investment in Commercial Airplanes and lower in BDS since 2008. For 2008, 53% of total company revenues came from BDS, meaning Boeing was a majority Military Industrial Complex company. Since then though, its business in the private economy has increased its share. In 2015, 69% of Boeing’s top line came from the Commercial Airplanes division and only 32% from BDS.

Now, Boeing looks to be shifting back, and for several reasons. First, from a pure numbers standpoint, operating margins in the respective segments are pointing the company in that direction. Operating margins are at 7.8% for Commercial Airplanes, down from 10.9% in 2013. At BDS, they are at 10.8%, up from 9.7% in 2013. Return on revenue is now 38% higher at BDS.
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Second, Boeing actually has proportionally much more physical space for its BDS division than Commercial Airplanes, so it may as well make use of it. Though 69% of revenues are from airplanes, only 55% of the land owned or leased is for that division. Some 32% come from BDS, but it has 41% of the space.

A third reason, though more speculative, is that Boeing may be anticipating higher military activity in the coming years, making it an appropriate time for swinging the pendulum back. Terrorism seems on the rise internationally, and tensions with Russia and China are flaring.

The fact that the layoffs will be strictly voluntary indicates that this is more of a gentle readjustment akin to a rebalancing in the normal course of business, rather than a mistake that had to be corrected through painful concessions.