Boeing to close Wichita plant, cites defense cuts

Wed Jan 4, 2012 7:10pm EST

(Reuters) - Boeing Co (BA.N) said it would close a plant in Wichita by the end of 2013 that employs more than 2,160 workers maintaining and converting planes for the military, part of a move to cut costs as the U. S. defense budget tightens.

The decision announced on Wednesday drew a bitter reaction from Kansas politicians, who felt Boeing had betrayed commitments to the state and their efforts to help the company win a big refueling aircraft contract from the U.S. Air Force.

The Wichita plant is the base for the company's Global Transport & Executive Systems business, which supports the U.S. Air Force's executive fleet, and its B-52 and 767-based aerial tanker programs.

The first job cuts are expected in the third quarter. Boeing said it still expects to make purchases worth billions of dollars with Kansas-based suppliers.

Work on the 767-based KC-46 tankers, picked last year as the new refueling aircraft for the U.S. Air Force, will be relocated in Puget Sound, Washington. Other aircraft maintenance and engineering work is moving to Texas and Oklahoma.

Kansas Governor Sam Brownback, said the move was disappointing, especially since he and other Kansas officials had worked hard to support Boeing through its 10-year battle to win the refueling plane contract.

Representative Mike Pompeo said Boeing clearly had the right to change its business plans and operate in the best interests of its stakeholders, but the company was breaking "years and years of promises" to the state.

Boeing had said the new tanker would add 7,500 jobs in the state.

President Barack Obama and Congress, in an effort to get control of the government's huge deficits, agreed last year on a budget deal that could cut projected defense spending by more than $1 trillion over the next decade.

TIGHTENING THEIR BELTS

U.S. weapons makers are preparing for leaner times by redoubling their efforts to cut costs, drum up export sales and sell more goods to commercial clients.

Northrop Grumman Corp (NOC.N) this week said it would lay off over 200 workers in Texas. BAE Systems Plc (BAES.L) is also closing a plant in Texas.

"In this time of defense budget reductions, as well as shifting customer priorities, Boeing has decided to close its operations in Wichita to reduce costs, increase efficiencies, and drive competitiveness," said Mark Bass, vice president and general manager for the Maintenance, Modifications & Upgrades division of Boeing's defense business.

The company did not give an estimate for cost savings or expenses associated with the move.

"This is the kind of closure you expect to see in a declining defense market," said Richard Aboulafia, aerospace analyst with the Teal Group.

The Wichita decision essentially marks the company's exit from the city, Aboulafia said. Boeing formerly owned Spirit Aerosystems (SPR.N), which is based in Wichita and still makes Boeing wings and fuselages.

COSTS VS LOBBYING CLOUT

Boeing's lobbying clout with lawmakers, who control the defense pursestrings, has been buttressed by distribution of its manufacturing across the United States. Boeing's overall defense business has about 64,000 workers.

"It's a difficult calculation, you lose political leverage but you also get rid of overhead," Aboulafia said of the Wichita closure.

Defense analyst Loren Thompson said Boeing urgently needed to cut costs to keep its tanker work on budget while still making money.

"Boeing bid very aggressively to win the tanker program and so it has to find ways of cutting costs if it is ever going to make a profit," said Thompson chief operating officer of Virginia-based Lexington Institute.

Boeing said it spent more than $3.2 billion with about 475 Kansas suppliers in 2011, spanning its commercial and defense businesses. The company said that based on Boeing Commercial Airplanes growth projections for the next few years, Boeing anticipates even more growth for suppliers in Kansas.

The closure comes at a tough time for the U.S. economy, which shed 7.5 million jobs during the 2007-2009 recession and has regained only 1.2 million of them through November despite growth in the country's population.

Manufacturing has been a pillar of the economic recovery so far, but factory jobs have come back even less strongly than in the wider economy. The number of U.S. manufacturing jobs has slipped by about a third since 1999.

Boeing shares, down earlier on Wednesday after the announcement, ended slightly higher, closing up 11 cents at $74.33 on the New York Stock Exchange.

(Reporting by Kyle Peterson in Chicago; Additional reporting by

Andrea Shalal-Esa and Jason Lange in Washington, DC, and Joe Stumpe in Wichita; Editing by John Wallace and Tim Dobbyn)