Boeing Runs Into Turbulence
Boeing readies an attractive new plane, but serious doubts persist about engineering, management, labor relations, and commitment to civil aviation
Not so long ago, if you looked up in the sky and saw a passenger jet, chances were roughly 80 percent that it was made by the Boeing Co. That was then; this is now. Boeing, based in Chicago, has changed its flight plan. Fiercely committed until recently to producing the world's best airplanes--and making just about every part of them--it now wants to become the dominant player in the military and aerospace businesses. Those markets increasingly provide the greater part of its revenues, which were about US $50 billion in 2003.
In commercial aviation, faced with a sharp challenge from Europe's Airbus SAS, the company hopes to achieve efficiencies--like Airbus--by styling itself as a large-scale systems integrator. It expects to buy airframe subsystems from suppliers for less than it would cost to make them itself. It will put together large sections of planes at its Everett, Wash., facility, leaving its suppliers with the job of making nuts, bolts, and panels.
The recent news about Boeing has been encouraging, including a positive first-quarter earnings report and a huge launch order for the much-anticipated 7E7 Dreamliner midsize jet [see photo, " Boeing's Bet"]. But if Boeing is to maintain its preeminent position in commercial aviation and successfully meet the Airbus challenge, it will have to confront head-on the basic and large-scale problems that have undermined confidence in its future [see box, " "].
Boeing's market share, once 75 percent, is now barely 50 percent, based on the number of new orders per year. In 2003, it delivered fewer planes than Airbus did--281 versus 305--for the first time. Airbus had already taken the lead in new aircraft orders in 1999 and, through 2003, it continued to outpace Boeing in this area.
Among The Big Issues facing Boeing, the most serious and widespread concern, expressed by insiders and outsiders, is where the company is setting its sights. In commercial jet production--which Boeing dominated for a century, mainly because of the technological superiority of its aircraft--there are indications that it is no longer doing the things that kept it ahead of the pack.
Jennifer MacKay, president of the Society of Professional Engineering Employees in Aerospace (SPEEA, Seattle), the main union representing engineers and technical workers at Boeing, told IEEE Spectrum that Boeing makes no bones about its willingness to be second best. MacKay, a former Boeing engineer, says a top official at Boeing's commercial airplane division once told her that the company's Chicago brass had decided not to keep trying to be world class at everything. Boeing would focus on one thing--large-scale systems integration--and let others focus on being world class at all those other things it used to do.
Says Pat Waters, a longtime Boeing engineer who retired in January, "We used to build a better product. I'm not so sure we can say that anymore."
Concerns about Boeing's corporate leadership and the company's commitment to quality go deep, and not just among its own engineers and workers. A crisis in the company's executive suite erupted last December with the resignation of chairman and chief executive Philip M. Condit. His ability to hold the reins and guide the aeronautics behemoth had already been in doubt when a series of scandals happened on his watch. These included the revelation that the company's chief financial officer had offered a job to a U.S. Air Force procurement officer who was still in a position to decide who would win a US $17 billion contract for tanker planes to refuel jets in midair.
Then there's the separate but related issue of growing labor discord. Boeing employees say it stems from their concern that, along with the shifts in Boeing's business priorities, there came an unwelcome change in what they had traditionally seen as a partnership with the company. Employees, having seen their colleagues "insourced," or transferred to another company to do the same job at the same facility, but with lower pay and fewer benefits, began wondering who would be next. "You remember the last strike? What we mainly struck for was respect," observes Waters, lamenting the tanker scandal, uncertainties about the 7E7 rollout, and Boeing's sluggish response to competition from Airbus. The European company, once the David to Boeing's Goliath, presents an ever more formidable challenge to its U.S. rival.
Founded In 1970 ,a dozen years after Boeing introduced what was to become its enormously popular 707 jetliner--Airbus is a patched-together multinational company based in Blagnac, France. It seemed an unlikely contender at first. But by 1994, it claimed 30 percent of the commercial jet market. Today, 10 years later, it has closed the gap [see timeline, " "]. And 10 years from now, claims Rainer Hertrich, chief executive of Netherlands-based EADS NV, which owns 80 percent of Airbus, "We'll be No. 1, everywhere, worldwide." Hertrich was expressing Airbus's confidence that it can begin doing business with U.S. carriers that have been loyal Boeing customers.
Airbus has done this, in a nutshell, through a combination of attractive pricing and quality product. Formed from parts of the leading aerospace companies of France, Germany, Spain, and the United Kingdom, Airbus was willing and able from the start to undercut Boeing's prices for comparable planes in order to get its jets in the air. Though the company doesn't like to discuss its discounting strategy, there is a wide belief that it often sells planes below cost--a strategy the Europeans justify on the grounds that Boeing's civil aviation division is subsidized, in effect, by the military work the company does for the U.S. government.
U.S. congressional committees have documented that Airbus's government backers, besides providing direct subsidies, have helped it along with debt rollovers and promises of choice landing slots at Europe's busiest airports. Boeing's shareholders, observes analyst Richard Aboulafia of the Teal Group Corp. in Fairfax, Va., would never stand for the kind of discounts Airbus has offered. Much more dependent on raising capital from private shareholders, Boeing's executives have to provide good return on investments, or they will be shown the door.
Taking advantage of Europe's largesse, Airbus developed a family of planes with similar cockpits and the latest in computerized controls, making them favorites among pilots. By the 1990s, Boeing was beginning to founder, with a succession of planes that failed to make it out of the company's R and D program--most recently the flashy looking Sonic Cruiser, announced to great fanfare a couple of years ago, only to be dropped like a hot potato not long after.
While Boeing dithered about what kind of new plane to bring to the market, Airbus created a whole new ballgame with the December 2000 announcement of the A380, its 550-passenger superjumbo, intended for hops between major hubs where passengers can catch connecting flights [see photo, " Airbus Gamble"]. Airbus's obvious intention with the A380, which analysts say actually could squeeze in up to 800 passengers, is to start eating Boeing's lunch in what has been one of its most lucrative markets, that for the jumbo 747.
Boeing's answer, which it unveiled in 2002, is the 7E7, a midsize plane designed to carry between 200 and 300 passengers over so-called point-to-point, or nonstop, routes ranging from 6500 to 16 000 kilometers. Until this spring, Airbus was getting all the headlines, having secured orders for nearly 150 of the A380 jumbo jets, with plans for the first to take to the air in 2006. Under the circumstances, the 28 April announcement by All Nippon Airways Co. (ANA) that it had signed a $6 billion launch order for the Boeing 7E7 arrived like a stay of execution. Says analyst Aboulafia: "I would have been prepared to say, even two or three months ago, that there was a respectable chance of a stillbirth here, but with the ANA launch order of this magnitude, the stakes are way too huge now to back out."
Explaining the delay in introducing new airplane models, William Oberlin, president of Boeing's Korean operations, said, "Every time we've launched a new plane, we've gotten it right. And that was our intention here. We feel that with the 7E7 we've gotten it right again."
For The 7E7 To Succeed , it seems almost a given that Boeing will have to regain the confidence of the people who will actually design and build the plane. One key reason that poor morale continues to dog the company, as Boeing's engineers see it, is the way it has handled the paring down of its workforce and the disposal of its assets in preparation for becoming, essentially, an original equipment manufacturer in the commercial aviation business.
Debbie Logsdon, a 24-year employee at Boeing's Wichita, Kan., manufacturing facility, doubts Boeing can ever regain its workers' trust. "They're outsourcing our work. They're laying us off. They don't care." But Charles Bofferding, executive director of SPEEA, thinks that confidence could easily be rebuilt. "Most Boeing employees today really want to love their company and be part of something cool."
Boeing, of course, is singing an optimistic tune. Debbie Nomaguchi, a Boeing public relations officer whose focus is employee relations, insists that "having a good relationship with the unions is very important to Boeing." Asked whether Boeing--as it moves to its new role as a large-scale integrator--thinks trimming its workforce is necessary to fight off the challenge from Airbus, she said, "If we can make the changes that we need to make to be more competitive, then our products will sell, our market will grow, and jobs will be stable. It will probably be a smaller Boeing, but we'll be able to offer more stability. That's the goal." As to some Boeing engineers' suggestion that outsourcing and selling of manufacturing facilities is affecting the quality of planes, Oberlin said, "I am a longtime heritage [that is, premerger] Boeing employee, and one thing I can guarantee is a focus on quality. That is integral to what we hold dear."
SPEEA president MacKay notes that, despite Boeing's assurances, many employees still mistrust executives who came from McDonnell Douglas following the merger of the two companies in 1997.
Those include current Boeing chief executive Harry Stonecipher, whose critics--and they are not confined to union ranks--often argue that he and the board at McDonnell Douglas emphasized short-term profit taking over long-term investment, essentially starving the commercial jet business and returning cash to shareholders. The company went from a respectable challenger in the commercial aviation market to an also-ran as it focused on its highly profitable military aircraft business. Could a similar fate lie in store for Boeing? "If you do a comparison between [the old McDonnell Douglas] and us right now [at Boeing], we look almost identical," Logsdon worries.
Personalities Aside , the fundamental concern is whether Boeing is making the investments needed to be competitive in the commercial aircraft markets in the long run. In 1994, Boeing Commercial Airplanes spent nearly 10 percent of its revenues, or roughly $1.6 billion, on R and D and process improvements. According to the company's annual reports and other releases, R and D spending for the unit fell off dramatically after that--even as revenues surged upward before the 9/11 terrorist attacks. It dipped below 2 percent of revenues in 1999 ($1.3 billion) and hasn't topped 3 percent since. Last year's 3 percent investment in R and D totaled $672 million.
Though Boeing notes that R and D spending will bounce back in support of the 7E7, skimping on research has translated into a depressing work environment for engineers. Top-flight people want to be working on the latest technologies, says Boeing employee Logsdon, stating the obvious. But now, Boeing is running into problems "getting engineers to come work there right out of college."
So, even if the 7E7 means clemency for Boeing's commercial jet business and its R and D unit, it remains unclear whether an excessive frugality will hamstring efforts to beat back the Airbus threat, and whether the company can refurbish its reputation for delivering first-rate planes on attractive terms.