Boeing sees no impact from strike on defense orders

WASHINGTON (Reuters) - Boeing Co (BA.N) said on Monday it did not expect a strike by 27,000 machinists to affect its defense orders, but noted that any impact on programs already under way would depend on the length of the work stoppage.

Chicago-based Boeing said work on the P-8A submarine-hunter plane it is developing for the Navy, which is based on the commercial 737 airliner and built in Renton, Washington, was meeting cost and schedule targets.

"On the P-8A, it's mostly developmental work and the engineers are on the job, so that work is continuing," Boeing spokesman Tim Healy said.

He said the P-8A was not scheduled to fly until 2013, so there would be time to catch up on any work affected by the walkout by the International Association of Machinists and Aerospace Workers (IAM).

"Obviously the impact depends on the length of the strike, and it's too soon to say anything about that," he said.

Analysts agreed that the Boeing strike would have little impact on the company's defense business, noting production rates are lower and delivery times are much more long-term.

They said federal law also allows companies to pass on any increase in wages resulting from a union agreement, but a protracted strike could lower the company's operating margins in the defense sector.

Healy said 1,550 of the IAM members worked on orders for the company's defense business, or Integrated Defense Systems, which generates about $32 billion in annual revenues.

Loren Thompson, defense analyst with the Virginia-based Lexington Institute, said the strike could put pressure on Boeing's costs at a time it remains locked in a fierce competition with a team made up of Northrop Grumman Corp (NOC.N) and Europe's EADS (EAD.PA), the parent of Airbus for a $35 billion contract to build new aerial refueling tankers.

Northrop and EADS won the contract in February, but the Pentagon reopened the competition after auditors ruling on a Boeing protest found significant errors in the way the Air Force handled the original competition.

The Pentagon had hoped to issue a final request for proposals (RFP) for the revamped competition by mid-August, but the release has slipped as officials weigh Boeing's request for six months to prepare a new bid.

Pentagon spokesman Bryan Whitman last week said the plan was still to award a contract by the end of December, but on Monday he was uncertain when the final RFP would come.

"The demands of the unions will probably drive up Boeing costs when it's already bidding higher than Airbus on most military and commercial contracts," Thompson said, noting Northrop substantially underbid Boeing on the acquisition costs for the A330 aircraft that it will modify as a tanker.

One industry executive, who asked not to be named, said the strike could add cost to future bids, and might harm Boeing's "past performance" reviews if the work stoppage wound up affecting other weapons programs.

Jim McAleese, another Virginia-based defense consultant, said costs had not been a major deciding factor in the Air Force's initial contract, and the strike should not have a material impact on the tanker contract.

He said Boeing knew it had to bid a lower price for the tankers in the second round of the competition, given that Northrop beat its price the first time.

He also discounted any effect on the competition of a possible delay in 767 orders because of the strike, noting that the new tankers were not to be delivered until 2010 under the original schedule, and that would probably be even later now.

Boeing was docked in the initial contest because the Air Force said it could take 12 to 18 months for Boeing to get its new tanker variant of the 767 certified by the Federal Aviation Administration, McAleese said.

But that was risk based on nonrecurring engineering issues, not work force considerations, which did not play a role in the initial process, he said.

(Reporting by Andrea Shalal-Esa, editing by Richard Chang)