[spcwby]

From SeattleTimes of 14 Oct........A 'new business model' with the same old story: "Pony up" if you want to play!

Sky-high request? 7E7 bidders asked to provide freighters

By Katie Pfleger and Dominic Gates
Seattle Times staff reporters

Boeing says it wants 747-400 jets with modified fuselages — planes to be provided by the winning site — to be used for parts delivery for the proposed 7E7.

7E7 Watch: Suitor Boeing shows 'amore' for Italy

Commercial-airlines unit still profitable for Boeing


In an unusual twist on the corporate-incentive game, Boeing has asked states competing for the 7E7 assembly line to provide a small fleet of oversized cargo planes that would be used to deliver parts for the next-generation jet.

The planes, 747 jumbo jets with a bulging modified fuselage, could dramatically speed the delivery of components from far-off suppliers in places like Japan and Italy.

Boeing announced yesterday it has adopted air freight as the primary method of parts delivery for the 7E7. That could decrease Puget Sound's chances of landing the project by undercutting any advantage of direct sea transportation from Japan, where more than one-third of the 7E7 is expected to be built.

Instead, the announcement is offering new hope to East Coast sites such as Charleston, S.C., and locations far from the sea, such as Tulsa, Okla.

"If they are really serious (about air freight), a Japan-facing deep seaport should matter a lot less," said Richard Aboulafia, an industry analyst with the Teal Group. However, he questioned whether Boeing really wants the additional cost of air-freighting large, heavy parts around the globe.

Instead, Aboulafia wondered if Boeing's announcement might be a negotiating tactic: "Are they trying to eliminate the widespread perception that Washington has an inside track?"

In closed-door discussions, Boeing has asked competing sites for help in acquiring the cargo planes, according to people close to the site-selection process.


BOEING
Wind-tunnel testing at the University of Washington has been done for Boeing on a model of a modified 747-400 to demonstrate that the planes are effective for transporting large assemblies to the 7E7 final assembly site.


Boeing representatives have expressed the need to keep the debt for the jumbo freighters off the company's books, sources say. That means the planes could be owned by an air-freight company or by one of the states themselves.

Business developers across the country have grown increasingly accustomed to offering free or cheap land, training programs, tax breaks and other similar incentives to lure companies to a location.

Boeing has been offered a half-billion-dollar loan by the Kansas legislature, $350 million in cash and loans financed by taxpayers in Tulsa, a reported $30 million from the Texas governor and $3.2 billion worth of industry tax breaks in Washington state.

Three modified 747 freighters, which Boeing says it needs, could cost about an additional $300 million, analysts say.

However, the company said it could save money air-freighting, in part because million-dollar parts would spend less time in transit. Some parts would get to the plant in a single day, down from 30 days.

Boeing has steadfastly declined to comment on the site-selection process, saying only that it will have a location chosen by the end of the year, at the same time the Boeing board decides whether to offer the 7E7 for sale.

If the process follows the same pattern as a recent Boeing site selection for its Delta rocket business, the company is now negotiating with state and local officials to maximize the incentive packages.

Most states involved in the process have also stopped commenting publicly on what they are offering Boeing, saying that to talk would be to risk dropping out of consideration.

Ray Gilley, president and chief executive of the Metro Orlando Economic Development Commission in Florida, said with a wide-open competition such as this one, a company's requests and the sites' responses can get creative.

"The company, I think, is asking for what they believe and feel is critical for their success," said Gilley, whose city is not competing for the 7E7.

"To the extent that various communities might be able to supply what they need or come close to it is a question for the communities."

He said he has had a variety of special requests during his 20 years in business development, such as assistance in getting an executive's child into a school for special needs, or getting a spouse in the arts sector a job as a curator.

As for a request for 747 freighters: "Oh, it would make my jaw drop," Gilley said.

The creation of such a fleet of specialized transport aircraft would be an entirely new and costly step for Boeing if it were to finance the fleet itself.

Analysts estimate that Airbus spent about $1 billion to build its fleet of five Beluga transport planes, which it uses to ferry major components from its European partners to its headquarters in Toulouse, France.

Boeing's shipping distances would be much greater, because major components for the 7E7 are expected to come from Japan and Italy to the United States.

Ned Laird, managing director of the Air Cargo Management Group, estimates that Boeing could pick up a used 747-400 passenger jet for around $50 million and do the cargo conversion for another $30 million.

Boeing could even use some of the 747-400s currently sitting on the books of Boeing Aircraft Trading, a unit of Boeing Commercial Airplanes that deals in used planes traded-in for new sales.

Who will pay for the design, development, testing and operation of the new fleet? Boeing said that it hasn't been decided yet who will even own the fleet of specialized jets.

"This is a new business model," said Boeing spokeswoman Yvonne Leach. "Lots of possibilities are being pursued. We're looking at multiple business structures."

The company expects to recoup the upfront costs through inventory cost savings "within a few years" of initial production.

As for final 7E7 assembly-site selection, Boeing warned against reading too much into this move.

It insists that the decision to move forward with the air-transport idea doesn't change the requirement that the site be accessible by water.

"It doesn't diminish the need for a port," Leach said. "This air solution is just for the large subassemblies."

Katherine Pfleger: 206-464-2772 or kpfleger@seattletimes.com

Dominic Gates: 206-464-2963 or dgates@seattletimes.com