How Boeing blew it.

Commentary about business and finance.
Dec. 5 2003 1:34 PM

Jet Lag

How Boeing blew it.

A wing and a prayer: Boeing needs to dream bigger
A wing and a prayer: Boeing needs to dream bigger

In 1997, near my home in Newcastle, Wash., I could look across a short stretch of water and see what I thought was an industrial miracle. Outside a giant hangar, scores of Boeing 737 aircraft were scattered like sea gulls, awaiting their final coat of airline paint before shipment to customers. The scene was similar 20 miles to the north, where a second Boeing plant could barely keep up with orders for huge 747s and was spooling up the assembly line for the then new 777.

Actually, what I was seeing was an economic debacle. Those airplanes shouldn't have been sitting around—they should have been in customers' hands. But because Boeing was trying to build too many aircraft too quickly, many of the jets were half-finished, awaiting extra parts or retrofits to correct factory mistakes. In the mid- to late 1990s, when Boeing should have been raking in money as airlines clamored for new aircraft, its screwed-up production lines instead lost millions of dollars on each aircraft.

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That's just one reason why Boeing finds itself the current poster child of bad management. Not only has its CEO, Phil Condit, been shown the door by a disgruntled board but its much-admired CFO, Mike Sears, has been sacked for hiring a Pentagon employee who may have helped Boeing land a lucrative air-tanker contract. Meanwhile, employees stole documents in order to get a peek at a competitor's bid for military satellite launches. Boeing's stature as the world's leading manufacturer of commercial airliners—the Boeing 747 stands with Coca-Cola and the Golden Arches as the best-known American products around the globe—has collapsed in a mere half-decade.

What explains Boeing's fate? In a word: greed. Or rather, two words: greed and hubris. Boeing was in many ways a perfectly successful company in the mid-1990s, dominant in commercial aviation with a thriving sideline in military and space contracts. But the company had also become arrogant and lethargic, unwilling to update production-line techniques that had barely changed since B-29s were built on the same Lake Washington site where 737 and 757 aircraft are made today. And Boeing was not about to acknowledge that upstart Airbus, the European-based jetliner maker, posed any real threat.

Against this backdrop, the newly arrived CEO Condit decided what the company needed was freedom from the boom-and-bust cycle prevalent in commercial aviation. The solution: Go after more government dollars by enhancing its military side, and let taxpayers foot the bill for product development, something Boeing has to finance itself when building jetliners. In 1997, Condit embarked on a buying spree. Boeing snapped up military contractors such as the aerospace and defense units of Rockwell Collins and merged with McDonnell Douglas. With McDonnell Douglas, Boeing also absorbed a different culture, one in which it was de rigueur to pull every lever to win military contracts, and annual profits were enshrined as the ultimate prize.

Boeing's foray into the military world led to its current status as a premier pork-grabber, with Exhibit A its highly questionable contract to lease 767 jet tankers to the military at a huge cost to taxpayers. On the profit front, it opted for short-term cash, gussying up its aging line of commercial jets in an effort to boost their sagging sales and avoid investing in new aircraft that could compete for decades to come.

Meanwhile, as Boeing managers tried to fit McDonnell Douglas into the corporate mix, Airbus took off. One story has it that an Airbus executive boasted in 1997 that his company's sales would easily surpass Boeing's by 2003. Phil Condit, attending the same meeting, laughed. Now Airbus holds a huge lead over Boeing in orders; in 2002 and 2003, Airbus commanded nearly 60 percent of the global market—precisely the dominant share that Boeing enjoyed back when Condit was so amused.

Boeing's plummet matters in a big way, and not just for Boeing. The company has long been a major exporter: A single order of 747s (most of which sell for around $200 million) is capable of putting a sizable dent in the U.S. trade deficit, which likely will surpass $500 billion for 2003. Those fat orders now are essentially gone. Sales of 747s have screeched to a halt since Airbus announced plans to build the 550-passenger A380, due to fly in early 2005.

What's more, building a modern jetliner is an ambitious technical undertaking, which requires engineering skills that benefit the entire economy. Earlier this year, for instance, two University of Buffalo researchers declared that commercial aviation is "the single most important sector in the U.S. economy in terms of skilled production jobs, value-added [to products] and exports." And the sheer visibility of Boeing's products has a kind of halo effect, enhancing America's status in a way that hamburgers and soft drinks do not. The sight of a European or Asian airport packed with 747s and 777s says one thing about the United States. Those same airports crammed with Airbus A340s—and, before long, with mammoth A380 superjumbo jets—say another. Boeing's diminished clout in commercial aviation is also bad news for the U.S. airline industry, which may soon find itself with only one viable source of aircraft: Airbus. Goodbye to all the sweet deals the airlines extracted from Boeing or Airbus when the two were fiercely competing.

Can Boeing fix itself? Certainly, jettisoning Condit—who presided over a host of misjudgments, including moving the corporate headquarters from the Seattle area to Chicago for no apparent good reason—is a step. The trouble is that his successor, Harry Stonecipher, is very much of the short-term-profits school. The company he headed in the 1990s, McDonnell Douglas, also had largely abandoned commercial aviation in favor of military loot, which was one reason it had to find succor in Boeing's arms. Still, McDonnell Douglas' military strengths at first seemed a good fit for Boeing, and Stonecipher brought some needed fiscal discipline to Boeing when he arrived in 1997. But he also has created more fear than respect within company ranks. As one aircraft worker told a Seattle newspaper reporter after hearing the news of Stonecipher's accession: "We are doomed."

To save itself, Boeing needs to accomplish two feats. One is to mend fences with the Pentagon and save the deal under which it will build 100 767 jets to serve as midair tankers (the only hope for the aircraft, which no commercial customer now wants). That may not be terribly hard; the Air Force really, truly wants those tankers, and even John McCain's blustering over the deal isn't likely to impede it.

But the other more important challenge for Boeing is to get back to basics in commercial aviation, which after all is what built the company during the 1960s and 1970s. Whether Boeing is up to the task is far from clear. After fiddling in recent years with notions for a supersized 747 and a fast jet called the "sonic cruiser," Boeing has decided its savior will be a jet called the 7E7 "Dreamliner." This twin-engine, 220-seat jet is supposed to give airlines a comfortable, superefficient plane that dovetails nicely with the move away from hub-and-spoke airline flight patterns and toward the point-to-point flights preferred by customers.

Yet it's basically a variation on the tube-and-wing model used by every commercial aircraft manufacturer since Donald Douglas created the DC-3 in 1936. It bears scant resemblance to the inspired engineering moxie that led Boeing to work up a balsa mock-up of the B-52 bomber in a hotel room in 1948. Or that in a mere 16 months took the 747 from a design concept for a failed military transport plane to a flyable commercial aircraft that literally changed the world by making possible cheap mass global travel.

What really is needed is a shot of that old-time engineering nerve. Ironically, says Paul Czysz, a professor emeritus of aeronautics at St. Louis University, that might have been found in the McDonnell Douglas archives. During the 1980s and 1990s, engineers there developed what is called the "blended wing"—a variation on the flying-wing model used in the B-2 bomber. Basically, a blended wing is simply a fat wing with the engines and tail fins attached to it—no long skinny tube with the wings stuck on the side. It's an ideal design for commercial aircraft—even more fuel efficient than the proposed 7E7, capable of carrying huge loads, easily switched between passengers and cargo and back. Should any U.S. aviation company actually build a commercial version, says Czysz (full disclosure: He's a former McDonnell Douglas guy), no other airliner could compete. Boeing toyed with something a little like the blended wing with its proposed sonic cruiser, but scrapped that in the wake of Sept. 11 and the collapse of commercial aviation.

The 7E7, offered in its place, is certainly a safer bet. But if the Dreamliner isn't a winner—and there is no clear evidence that it will offer airlines something that Airbus can't—the odds are good that Boeing will be out of the commercial aircraft business in 10 years. To leapfrog Airbus, Boeing needed to roll the dice. Instead, its new culture of soaking the taxpayers for military goodies while playing it safe on the commercial-aircraft front may have cost Boeing its future and blown a hole in the U.S. economy that never will close.

Douglas Gantenbein is the Seattle correspondent for the Economist.

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