Boeing

STATEMENT OF THE PROBLEM

In October of 1990, the Boeing 777 Project was officially announced. The 777 aircraft was designed to meet the growing demand for medium-to-large passenger airframes for intercontinental routes. Aircrafts from competing firms have already been announced and increasing competition is expected.  Two and a half years after the conception of the Boeing 777 Project, preliminary research and development (R&D) have been completed. R&D costs are now reaching new records and the inception of the Gulf War is causing uncertainty in fuel prices and passenger demand. These factors contribute to Boeing’s chances of profiting in the current market.

Increasing the long term Return on Equity (ROE)—the measure of a corporation’s profitability—is a top priority for Boeing. If ROE increases, shareholder wealth increases. In the face of growing uncertainty, Boeing must decide whether or not to commit billions more to the 777 Project or reassess their long-term approach to increasing shareholder wealth.  Looking forward, forecasts for 1996 show that Boeing will have positive after-tax profits; Furthermore, in 1997, the project will exhibit a positive annual free cash flow. If profits continue to increase over the project life, net income will increase, raising shareholder wealth. However, up-to-date, short term projections of the project show a decrease in the corporation’s profits.

Introducing a costly project such as the 777 to an increasingly unstable market may be detrimental to the Boeing Corporation; however, several factors need to be considered. As a strong competitor in the market—holding 53% of the market share-- Boeing exhibits the ability to positively influence the commercial airline industry while increasing their bottom line profits. However, short term profits will suffer not only as a result of back-orders, but also due to excessively high up-front costs associated by taking on the 777 Project. If the project does not succeed,...