"Boeing raises base prices 5%"
by Jeff Cole
Seattle Times aerospace editor
Moving to brace up future profits, Boeing
has raised the base price of nearly all its
commercial jetliners by 5 percent, its
first base-price increase in 23 years.
In recent weeks, the aircraft manufacturer
began quietly informing its customers of
that action. Carriers also have been told
of another, separate change aimed at
further increasing returns by toughening
the terms of sales contracts that protect
Boeing from inflation.
Those increases, which are expected to add
millions of dollars to the prices fetched
for many Boeing jets in the coming decade,
became effective July 1 and will apply to
negotiations begun after that date.
The first of the higher-priced planes would
be delivered in two years, with much of the
effect seen in deliveries in subsequent
years. Despite the moves, the company's
base prices are expected to remain 2
percent to 6 percent below those of its
chief competitor, Europe's Airbus Industrie
consortium.
Both companies have typically adjusted
their "list" prices modestly each year for
inflation. But the base prices, which
underpin those list prices, are seldom
changed. These increases are a one-time
opportunity for Boeing to raise the
starting point for all its negotiations
with airlines.
While Boeing has enjoyed record rates of
production and a boom in orders for its
planes in the past two years, the company
has been battling to recover from parts
shortages and other production foul-ups
that have cost it $3 billion so far and
prompted a $178 million net loss for 1997.
At the same time, faced with stiff
competition from the four-nation Airbus
consortium, Boeing has come under criticism
at times from investors and analysts for
discounting its products too deeply to win
orders.
The price increases could be a strong
signal to Wall Street that Boeing is
serious about restoring profitability.
With the new price increase, Boeing is
"recognizing that there are some revenue
pressures," said Ronald Woodard, a Boeing
senior vice president and chief of the
company's commercial-airplane group, who
confirmed the company's actions in an
interview. "We definitely want to improve
the profitability of our products," he
added.
But Woodard noted the moves won't boost
sales and profits by themselves for some
time. He maintained the actions are largely
geared to "level the playing field" with
Airbus, which typically has higher starting
prices for similar-sized jets.
A U.S. spokeswoman for Airbus said the
development is "intriguing." One senior
European executive familiar with the Airbus
view said Boeing's action will have to be
judged over time, but any move to price
more closely to Airbus offers the hope of
"some rationality" at a time when both "are
bleeding" from price cuts to win important
orders.
While it remains to be seen whether Boeing
can make higher prices stick in
negotiations with individual airlines,
experts say the plane maker ought to be
able to capture higher revenues over time.
Robert Baker, the top operations executive
at American Airlines, said the move was
understandable. "Boeing's got to get its
financial house in order, or the (stock)
market is just going to run from them," he
said.
The base-price increase would not affect
airplane orders or options already
negotiated or now being negotiated.
American is one of three big U.S. carriers
that have agreed to buy planes exclusively
from Boeing. Each has been guaranteed no
rival will get planes at a lower price, and
those terms remain intact, Boeing officials
said.
In the complex and competitive world of
airplane pricing, base prices are really a
"point of departure," in Woodard's words,
and true prices are carefully guarded and
hard to divine.
Indeed, both manufacturers privately
acknowledge that pivotal customers can get
double-digit percentage discounts from list
prices. Much depends on who is buying, how
many planes they want, and when.
Prices are sometimes altered retroactively.
Financing is always a factor, and even some
smaller carriers can shave a few million
dollars off the list price if they're ready
to buy when some other airline needs to
delay a delivery.
For the moment, the current prices peg the
most expensive 420-seat 747 at nearly $177
million and the smallest, least expensive
150-seat 737 at just under $39 million.
Airbus doesn't yet produce a jumbo jet with
747-like capacity; its most expensive
four-engine A-340s, which typically carries
380 passengers, lists for more than $160
million.
Even more than the base-price increases,
the new changes in Boeing's "escalation
formula" - the combination of
producer-price and employment-cost
indicators it uses to cover the rising cost
of labor and materials - may offer a
greater assurance of increasing cash from
airplane sales.
Boeing estimates that because it has been
less aggressive than Airbus in calculating
inflation, its base pricing has dropped to
a level 10 percent below that of the
European consortium during the nine years
since 1990. Its new inflation formula more
closely parallels that of Airbus.
In late trading, Boeing stock had slipped
19 cents a share to $47.875.
Wolfgang Demisch, an aerospace analyst with
BT Alex Brown, said the move sends Boeing
"an internal signal" that restraint in
price-cutting is important. He added that
the industry has "a very poor record" of
being able to maintain pricing discipline.
One Boeing official acknowledged
competitive pressures "will continue to
influence actual net prices paid by
customers."
The price increase could prompt questions
from those who followed Boeing's year-old
merger with McDonnell Douglas. European
regulators eventually approved the deal,
but not before claiming it could lead to
higher airplane prices. Boeing officials
say they would have taken the same pricing
action even without the merger.
Meanwhile, Boeing's labor contracts with
Machinist and engineering unions are due
for renegotiation next year, but Boeing
executives say they're not trying to buy
"insurance" for higher labor costs in the
future.
Among the planes in Boeing's line, two are
not affected by the 5 percent increase and
the altered inflation formula. The base
price of the 100-passenger 717-200 will
remain between $30.5 million and $34.5
million. Boeing is eager to promote
languishing sales of the aircraft, a former
McDonnell Douglas design known as the
MD-95.
Meanwhile, the 100-passenger 737-600, whose
list price ranges from $32.5 million to
$39.5 million, will increase by a flat 10
percent. The price increase for that plane
includes the price of its engines.
In all other cases, the increase excludes
engine prices, which are set by engine
manufacturers.
Copyright c 1998 The Seattle Times Company
Posted at 01:06 p.m. PDT; Friday, July 10,
1998
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