Mismanagement Keeps Boeing Trailing in Rival’s Wake
When Philip M. Condit quit Boeing Co., it looked a lot like a pilot ejecting during a nosedive.
The chairman and chief executive resigned a week after his chief financial officer was fired for ethically questionable conduct in the hiring of a former Air Force acquisitions official, who also was canned. But those shenanigans were only a distraction from the bigger, more important reality: The decline of Boeing as the world’s premier aerospace company is an embarrassment and a threat to U.S. industry.
Boeing, after all, isn’t just any old company. It is, as one marketing expert put it, “a global USA brand.” For years, it made most of the jets that any of us flew on and exemplified this country’s engineering and manufacturing skills. True, it still is one of America’s leading exporters -- sending $17 billion of jetliners to customers around the world last year. And with more than $50 billion in revenue, $28 billion of that from civil aviation, it still is hugely important to our economy, capable of spurring innovation in manufacturing and information technology merely by its orders for components, from landing gear to cockpit electronics.
But in the last decade, Boeing has been falling behind badly. Why? Mismanagement on a broad front.
The company made mistakes in the 1990s and continues to make them. It has cut back on investment in plants and equipment and in research and development. It has sharply reduced employment. It has turned its back on the Boeing legacy. Incredibly, it has failed to launch a new commercial airplane in more than a decade.
This is the company that rose to world leadership in the 1960s when management under Chairman William M. Allen bet the hangar on the 747, the huge aircraft that ushered in a new era in mass travel. In another bold move in the 1970s, under Chairman Thornton “T” A. Wilson, Boeing launched the 757 and 767 simultaneously -- discouraging then-competitors from pressing forward in commercial aviation.
Condit became CEO in 1996 and chairman the next year, succeeding Frank Shrontz, who had overseen the launch of the long-range 777 in 1990. And rising to greet Condit was Europe’s Airbus consortium, coming out of nowhere with its A330 and A340 models and luring away once-faithful Boeing customers.
Boeing tried to ramp up production and sell more planes at reduced prices in an attempt to push Airbus to retreat as McDonnell Douglas had done 20 years before. The plan fell apart when Boeing ran into production foul-ups that cost billions of dollars.
Airbus not only survived but fought back in a price war. That hurt both companies, but Airbus today is poised, for the first time, to deliver more commercial jets to the world’s carriers than its Chicago-based adversary.
Executives at Boeing were guilty of misjudgment as big as any jumbo jet.
“They failed to understand that Airbus was not an American company subject to shareholder demands for earnings and stock prices but a European standard bearer,” says veteran aerospace analyst Wolfgang Demisch, who runs his own firm in Greenwich, Conn. “Europe could back Airbus with a mere fraction of what it spends on the Common Agricultural Policy.”
Stunned, Boeing changed altitudes and in the late 1990s started making acquisitions in defense industries, including McDonnell Douglas, units of Rockwell International and the satellite operations of Hughes Electronics Corp. “It overpaid for every one of them and then spent years rearranging corporate offices,” says Robert Paulson, who then ran McKinsey & Co.’s aerospace consulting practice and now heads Aerostar Capital, a firm serving aerospace subcontractors.
The rearranging didn’t go too well, according to suppliers who say the Boeing bureaucracy grew dense. Recalls one: “With Boeing you dealt with 20 people, where with Lockheed you could do business on a handshake. At Boeing, they would give the handshake to the lawyers.”
Looking for a cure, Boeing in the last five years has reduced its workforce to 166,000 from 231,000 and cut spending on plants and equipment. But it did not cut wisely.
“Boeing failed to advance,” says Santa Monica aerospace investment banker James Montgomery. He offers as an example the fact that Boeing “still uses rivets, where Airbus uses continuous welds, which are superior and more economical.”
Is it any surprise that Airbus today can produce a plane for 10% to 20% less than Boeing? And please note that Airbus achieves superior productivity with relatively high-priced European labor.
At Boeing, it is management that is high-priced: In the last three years, Condit received bonuses totaling $4.1 million on top of a salary of $4.4 million.
Of course, not everything under Condit and Harry C. Stonecipher, the former Boeing president and vice chairman who last week took the CEO job, was negative. Return on shareholders’ investment rose in the late ‘90s, and Boeing’s stock price hit $70 a share in 2000. Wall Street evidently was impressed until some of the company’s shortcomings began showing up.
The stock closed Friday at $38 a share.
On Dec. 15, Boeing directors are scheduled to make a decision on whether to go ahead with development of the 7E7, a 250-seat plane with flexible range and, experts say, a host of advances in information technology for operating a flight system.
“This is a plane designed for airlines’ productivity,” Paulson says. “It could do well if they decide to go ahead.”
Big money is involved. A green light for the 7E7 would mean investing $8 billion to $12 billion over the next five years. Experts who remember Stonecipher as a master cost cutter wonder whether he’ll vote to go ahead. He really has no choice.
The 7E7 decision will determine whether Boeing, and a lot of the manufacturing industry, will revive a proud legacy or simply go on living off it.
James Flanigan can be reached at jim.flanigan @latimes.com
