Boeing sees 'tough' defense business climate, flat margins

By Alwyn Scott

REUTERS - Boeing Co expects its defense business to continue facing a tough environment with "flatish" profit margins, Chief Executive Jim McNerney said on Wednesday.

A recent federal government budget deal has pushed off automatic spending cuts known as sequestration by two years, but "sequestration has not gone away," McNerney said at a Cowen & Co investment conference.

In contrast, the commercial jetliner business is better than McNerney has seen it in his career, which includes time running General Electric Aviation, the maker of aircraft engines. Commercial aircraft business margins have room to widen, he said, due to faster jet production and the ability to get better prices from suppliers.

But he said it is a "fair criticism" that Boeing needs to do more to help suppliers on engineering and process improvement that will provide better prices.

He said about one-third of Boeing's suppliers are involved in the company's "partnering for success" program, under which they work together to reduce costs and share the benefits. The remaining two-thirds are either in discussion or not engaged in the program, he said. He said he expects the program to continue to grow. "We have volume to offer and they have efficiency they can offer," he said.

McNerney also acknowledged that Boeing is hiring contract workers to help fix production problems at the 787 Dreamliner factory in South Carolina, and that some work was being moved to the Seattle area to be finished.

"We have traveled some work to Everett," he said, referring to the location Boeing's main 787 assembly line. But he characterized it as routine: "This is what we do all the time."

He also acknowledged there were "still some hard feelings" with machinists in the Seattle area after an acrimonious contract vote last month that ensured Boeing's new 777X jet program would be located in Washington state. The contract required machinists to give up their pension for a defined contribution plan.

Boeing's commercial jet business is not being affected by weakness in emerging markets, McNerney said. But there is more divergence among emerging countries and China and the Middle East remain strong. Demand in the U.S. is improving, while a pick up in Europe is "still to come," he said.

Boeing likely will announce new aircraft orders at an upcoming airshow in Singapore next week, but not at the level of the record orders announced last November, he said.

(Reporting by Alwyn Scott; Editing by Jeffrey Benkoe and Gunna Dickson)