The FP Memo

How Boeing Can Stop Its Descent

The aviation giant must stop outsourcing its know-how and recapture the vision that made the company an industry leader.

MEMORANDUM:

TO: The Boeing Company Board of Directors

FROM: Douglas Gantenbein

RE: Flying Right

It is difficult to exaggerate your company’s importance to the United States — and the world. For more than half a century, ever since Boeing’s B-17s and B-29s became icons of the United States’ World War II effort, Boeing has been one of the country’s leading innovators and manufacturers. Today, many people across the globe know the United States for three things: Big Macs, Coca-Cola, and 747s.

The first two speak to consumer and pop culture, no doubt powerful engines of U.S. cultural hegemony. But Boeing’s 747s may say the most about the United States’ technological prowess, ingenuity, and will to lead. Moreover, at a time when the U.S. trade deficit reached a record $489 billion in 2003, your company is one of the country’s most reliable export machines, accounting for close to $20 billion a year in overseas sales.

But now, your company is in trouble with its finances, its ethics, and its customers. Airbus — the progeny of sclerotic European governments — is eating your lunch in the commercial aircraft realm. Airbus is nearly ready to launch its giant A380 jetliner, which easily outstrips the famous (and famously profitable) 747 for carrying capacity. The A380 is proving to be catnip to executives at airlines such as Singapore and Emirates who want the newest, biggest, and best jet to carry their fleets’ colors. Even bottom-line-obsessed Federal Express ordered 10 of the massive jets, yet none of the once favored freight version of the 747.

Even before September 11, 2001, which crippled your commercial airplane division, Boeing clearly had been drifting, hanging new chrome onto 30-year-old jetliners and hoping to fall into money with new Pentagon contacts that came with the acquisition of military contractor McDonnell Douglas in 1997. That merger has landed your company in an ethical swamp. First there was the January 2003 disclosure that company executives had stolen a missile-launch rival’s pricing proposals. Then, late last year came news that Boeing’s chief financial officer had been dangling a job in front of a Pentagon employee who at the time had influence over the Boeing bid to lease one hundred 767 jetliners to the military as refueling tankers. That scandal hastened the departure in December 2003 of your former chairman and CEO, Phil Condit, whose seven-year tenure was marked by one blunder after another, from botching production schedules to dismissing Airbus as a serious threat.

Still, the momentum of increased military spending and a recovering domestic economy, along with growth in the Asian airline market, is a big help. You have an important chance to correct course before new competitors emerge. Although China and India are gaining technological prowess, many years will pass before they can pose a real threat when it comes to the complex tasks of designing, building, and selling a commercial jetliner. But chances are, some day they will. Don’t squander the time you have now.

You can restore Boeing to its former prominence if you follow these suggestions:

Don’t Outsource Your Knowledge

Outsourcing has become a political flash point this year, and it could burn you in several ways. Take the 7E7 Dreamliner, your superefficient, mid-sized jet scheduled to debut in 2007. It may be the company’s best hope of halting the Airbus juggernaut. You’re betting that airlines want smaller jets so they can offer customers more direct flights, rather than hub-and-spoke flight patterns dictated by bigger aircraft such as the 747 or Airbus A380. The 7E7 also represents a more fundamental gamble — that you can maintain your leadership role in global commercial aviation without doing much of the hands-on work.

Once the 7E7 blueprints leave design engineers’ hands, Boeing will do next to nothing until major components of the jet arrive at the final-assembly plant in Everett, Washington. Then, as few as 800 people will bolt the big bits together, hook up a few wires, and send the new jet on its way. By pushing the manufacture of major fuselage and wing components onto subcontractors, you spread the financial risk of launching the $7 billion 7E7 and also win points in the home nations of major subcontractors, such as Japan.

But the approach poses hazards for the company. Your executives insist that Boeing’s "magic" is in conceiving an aircraft such as the 7E7 and overseeing its design, not in making its wings and other parts. In the case of the 7E7, Boeing is allowing subcontractors such as Mitsubishi to make the most important parts of the jet — in Mitsubishi’s case, the complex carbon-fiber wings. As a result, you risk losing touch with much of the knowledge that gets your jets into the air.

Outsourcing also poses political risks. First, you might become a punch line in some future presidential election (although this year you’ve even had U.S. Senator and presidential candidate John Kerry in your corner, calling for government intervention to fight off Airbus). Outsourcing can also link you with countries whose industrial practices may be less than squeaky clean. Airbus, for example, has been trying to get the 7E7 issue before the World Trade Organization by claiming that you’ve allowed Japanese subcontractors to take unlawful subsidies from the Japanese government while your company delicately avoids direct involvement. So far, Airbus officials haven’t made the accusation stick, and the United States and European Union (EU) may call a truce on the issue. But if the EU ever carries through, it could cause trouble.

It’s too late to suggest that Boeing keep more 7E7 processes for itself. But you need to consider the danger in giving away too much critical work, particularly if pursuing short-term profits creates a long-term competitor. One possible solution: Be more aggressive in launching new aircraft. Thirteen years passed between the launch of Boeing’s last commercial jet (the 777) and the decision to build the 7E7. It’s true the world doesn’t need a new commercial jet every two or three years. It’s also true that Boeing’s refusal to build a new jet for more than a decade led to ennui at the company, giving Airbus an open door. Today, Boeing engineers concede that the mere act of designing the 7E7 gave them insights into both engineering and customers that they otherwise might never have had.

Don’t Overdose on Government Contracts

The acquisition of McDonnell Douglas in 1997 has injected your company with laziness borne of the government procurement world. At McDonnell Douglas, doing the deal was more important than the product. Certainly, that mindset is evident in the recent 767 imbroglio. You have repositioned a jet that can’t find commercial buyers as a military craft and packaged it in a wildly expensive lease deal that no stockholder-owned airline would accept. But by lobbying hard and lining up congressional supporters, you may yet pull off a deal worth at least $17 billion to lease scores of the jets to the military, i.e., to U.S. taxpayers. Of course, as of early 2004, U.S. Secretary of Defense Donald Rumsfeld had delayed that deal while he reviewed whether it had already been tainted by the machinations of your employees.

Another cautionary tale about the military world came in late February 2004 when the U.S. Army canceled its contract for the Comanche helicopter, a craft in which Boeing had an enormous stake and that was supposed to produce at least $38 billion in sales. That deal also showed how the military world warps a company. Boeing engineers likely knew for years that the Comanche — designed as an armed reconnaissance helicopter to counter Warsaw Pact armies — could do nothing that cheap, disposable remote vehicles couldn’t do. The odds are good your military counterparts knew the same. But still the project continued, eating up billions and producing only two prototypes in 20 years!

The moral: There is good money in military contracts, and Boeing has plenty of solid products to offer, such as the F/A-18 jet and the V-22 Osprey. But military programs can be deceptive. They often look like easy money and can induce inertia that hurts the company’s overall performance; at the same time, these programs can disappear suddenly when lumbering government bureaucracies lurch into action.

Keep Your Executives Grounded

Your company became a world leader in aviation through innovation and hard work. Three of what are commonly seen as the 10 most influential aircraft in aviation history came from Boeing: the swept-wing B-47 bomber, which first flew in 1947 and remains the model for every commercial jetliner; the 707 jet, which proved that speed had value and erased more efficient but slower prop-driven aircraft from the skies; and the 747, which long before the Internet had done more than any other device to knit together the planet.

Your company has been too eager to distance itself from this important legacy. In 2001, then ceo Condit moved Boeing’s corporate headquarters from Seattle to Chicago. In some ways the move made sense — Boeing is no longer centered in the Seattle area. It has divisions scattered across the United States. Distancing the company from its core manufacturing facilities, you were told, would help Boeing look outward at customers and new opportunities. It was a bad call. Under Condit’s leadership, Boeing began to ignore customers, using corporate jets to fly executives who once boarded commercial airlines to see first-hand who used their products. Sending corporate bigwigs to Chicago merely accelerated that trend. Moreover, Boeing is a company that makes things, and there’s no good reason to put company executives in some rarefied locale where they can’t see and touch the reasons the company exists, whether it’s a 737 or an AWACS surveillance jet.

A few of your executives seem to understand the power of the company’s legacy. Walt Gillette, for instance, the longtime Boeing engineer who is spearheading development of the 7E7, has lined the walls of his team’s offices with huge photos of Boeing aircraft going back to its early mail planes. He understands that it’s inspiring to be part of a legacy. I’d suggest that the corporate office learn the same lesson. So ditch Chicago and move closer to a Boeing manufacturing facility — any Boeing manufacturing facility. Maybe even back to Seattle. Being a world-straddling business empire is well and good, but try to keep it real.

Inspire People

Back in the 1960s, you were the dot-com, biotech, and telecommunications industries all rolled into one — an exciting, intellectually demanding place to work where visionary designs came to fruition. Now the company is a backwater for the go-getters of today, a slow-moving enterprise that grows through purchasing other companies or milking aging aircraft lines for every last nickel. Moreover, Boeing’s risk-averse culture has cost the company market share. Designing and building aircraft is inherently perilous (the story goes that former executive Dean Thornton often sat bolt upright in bed as he contemplated the huge expenses associated with launching the 777). If Boeing is to generate excitement among customers, employees, and even stockholders, it must roll the dice on occasion.

One possibility: Within a few years, move ahead with plans for the fast "Sonic Cruiser," a jet the company designed in the late 1990s but shelved following the September 11 attacks. It was sleek and sexy, and those who saw a model loved it. If its design can pencil out with airlines’ cost needs, it would join the 7E7 and still-fresh 777 to give Boeing a formidable trio of aircraft. Barring that, move ahead with another idea you recently toyed with: the "blended wing," which eliminates the standard tube-and-wing design in favor of one in which the wings seamlessly flow into the fuselage, rather like the B-2 Stealth bomber. The design would offer both great efficiency and large cargo capacity. Four years ago, Boeing looked hard at this concept, which was highly praised by both engineers and customers. But you didn’t move ahead with it for reasons that are still not clear. True, the design had drawbacks — most passengers would not have window views, for instance — but it seems as if any hurdles could have been overcome.

Building either aircraft would show that Boeing is a company that’s still interested in being a leader. Your own focus groups have shown that the flying public loved the Sonic Cruiser simply because it looked like something that would fly. This concept seemed to surprise some of your executives, and they since have scrambled to incorporate that insight into the 7E7, through design features such as ethereal ceiling lighting that suggests the open sky. The lesson: Ideas matter, and they often lead to surprising results.

Many of the problems that Boeing faces are inherent in building a global conglomerate: how to outsource without forgetting what you do best, how to serve government clients without imitating them, and how to expand without losing touch and blurring your vision. Holding on to the qualities that got you where you are will be a good start in facing those challenges.

The U.S. economy and consumers around the world have a lot riding on the outcome.

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