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Wall Street: Boeing Sweetheart Deal Equivalent of up to 1,033 B-737 Aircraft Commercial Orders Without the Risk: Now Owes Political "Payback"

June 17, 2003 


A new stock analyst report [click here to see the Morgan Stanley report] advises potential investors that a plan by the Air Force to lease 100 Boeing-767 tanker aircraft will return the defense contractor a profit equivalent to a commercial order for as many as 1,033 of Boeing's popular 737 commercial aircraft.

Boeing would reap up to a 15% profit and an operating profit of up to $2.3 billion for the first 100 tanker aircraft delivered to the Air Force, according to the investment analysis report written by Heidi Wood, a Morgan Stanley vice president and prominent aerospace and defense industry analyst. "BA (Boeing) would need to deliver between 830 - 1,033 737 aircraft to equal the estimated profits for the 767 tanker," Wood wrote. In addition, the 767 tanker deal carries "substantially less risk than is common in the commercial aircraft market," according to Wood.

Wood is a presidential appointee to the Commission on the Future of the U.S. Aerospace Industry and has been cited by the Wall Street Journal as one of the top best stock pickers in the Aerospace/Defense sector.

Wood's report says that each of the smaller commercial B-737 aircraft would sell for roughly $30-$35 million each, with a much lower profit margin of only about 5-8%. The $16 billion deal announced by the Pentagon last month calls for 100 B-767s to be converted into military refueling tankers at a cost of $138 million each to lease for a period of six years.

Boeing currently ranks 15th in sales on the Forbes 500 list.

"This report makes it clear that the tanker lease deal is based on politics, and not the national interest," said Eric Miller, POGO Senior Defense Investigator. "Undersecretary Aldridge said last month that profit is not a dirty word, but the word 'rip-off' is."

Wood's analysis also hints that the Boeing tanker deal is largely the work of the Washington state Congressional delegation and that the defense contractor now "owes its Washington politicians some payback, which may limit flexibility on where (Boeing's new) 7E7 is built." Recent media reports have said that Boeing is attempting to convince officials in several states to give the company tax and other concessions in return for building a new 7E7 wide-body jet manufacturing plant.

"A subtle negative may be the payback required considering political capital BA (Boeing) has expended to land the tanker deal," the report said. "Now the company is somewhat beholden to its hard-working Washington constituency. This may limit some of the latitude the company would probably like to have in deciding where to build 7E7, adding pressure to keep some of 7E7 work in expensive, union-dominated Seattle."

For more information on the Boeing leasing deal see POGO's report, "Fill 'Er Up: Back-Door Deal For Boeing Will Leave the Taxpayer On Empty."

Founded in 1981, the Project On Government Oversight (POGO) is a nonpartisan independent watchdog that champions good government reforms. POGO's investigations into corruption, misconduct, and conflicts of interest achieve a more effective, accountable, open, and ethical federal government.

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