Boeing Finally Hatches a Plan The aircraft giant has decided to become a tougher, leaner competitor. For that to happen, things have to get a lot less sleepy in Seattle.
By Kenneth Labich

(FORTUNE Magazine) – Boeing matters. It matters not just because its products carry more than three-quarters of all airborne travelers every day, or because it will build most of the new commercial airliners entering service around the world, at least for the near future. It also happens to be the largest U.S. exporter as well as the leading supplier to both the Pentagon and NASA. It stands at the center of an extended keiretsu of worldwide subcontractors, employing about 230,000 workers directly and perhaps three times that many through its related companies. Finally, Boeing is among the 30 U.S. companies whose shares are tracked in the Dow Jones industrial average, thus magnifying the importance of the ups and downs in the company's stock price.

All of which means that there are plenty of repercussions when Boeing stumbles, as it has so dramatically during the past two years or so. It's been a truly ugly story. Massive production problems led in 1997 to the unthinkable shutdown of two assembly lines and a $1.6 billion charge against earnings. Airbus Industrie, the European consortium that is Boeing's only commercial-airplane competitor, has successfully wooed several longtime Boeing customers and snatched market share. Boeing's operating margins, meanwhile, have continued to shrink, leading to earnings last year of a measly $1.1 billion on revenues of $56.2 billion. What's more, the company has announced that the earnings picture won't brighten much until 2001 at the earliest. Boeing--no surprise--was the dog of the Dow last year. The stock finished 1998 in the mid-30s, down more than 33% for the year, and it has loitered in that vicinity ever since.

By late last year, Wall Street was ready for a human sacrifice. Analysts were predicting that Chief Executive Phil Condit, 57, an amiable, brainy engineer and Boeing veteran, would be ousted in favor of President Harry Stonecipher, 62, the tough guy who came to Boeing in its 1997 acquisition of McDonnell Douglas, where he had been chairman. When Condit held on to his job after all, some investment pros decided they'd had enough. Says Bill Whitlow, manager of Safeco's Northwest mutual fund in Seattle, who recently dumped 67,000 Boeing shares: "I'm surprised that there hasn't been a change at the top, given the problems they've had. There have been nothing but disappointing announcements from this company, each one worse than the previous one."

Against this gloomy backdrop, Condit gathered his senior staff at a Southern California retreat for three days in January to plot a turnaround. Soon after his return to Seattle, he and Stonecipher outlined their new strategy for FORTUNE in an intense, hourlong conversation. Their plan has four goals: fix the commercial-aircraft division's production problems once and for all, grow the higher-margin defense and space divisions, regain credibility on Wall Street, and--perhaps the key to it all--scrap Boeing's paternalistic corporate culture. It's clear that the new Boeing will be a far more performance-oriented place. Even if Stonecipher, who cut his teeth as a manager at sink-or-swim GE, did not win Boeing's top job, there is no doubt that his views will greatly influence the company's future.

In terms of style and background, Condit and Stonecipher couldn't be more different. Condit is an engineer's engineer, a man who earned advanced degrees from Princeton and MIT and became the first Westerner awarded a doctorate from the Science University of Tokyo. A Boeing employee for more than 30 years, he is steeped in the company's traditionally warm and fuzzy management ethos. Stonecipher, a Tennessee Tech graduate, elbowed his way through the murky management thickets at GE to become head of that company's aircraft-engine division. He left GE in 1987 to become CEO at Sunstrand, an Illinois-based defense contractor, and then in 1994 he took over the top job at McDonnell Douglas. He seems more than willing to break the eggs for Boeing's new cultural omelet. Says Whitlow: "What's going on is sort of good-cop, bad-cop management, and Harry's the butt-kicker."

For all their stylistic differences, the two executives speak as one about changing Boeing's culture from warm, familial, and somewhat insular to tough, lean, and team-oriented. To demonstrate that the old Boeing is no more, Condit went outside the company for two key hires, plucking a new CFO from General Motors and a new human-resources chief from Burlington Northern. The president of the defense group is from McDonnell Douglas, and a veteran of Rockwell--purchased by Boeing in 1996--heads the space division.

Condit is also looking for smaller ways to signal change. After the recent mergers, for example, longtime Boeing workers were regularly referred to as "heritage" employees; Condit recently banned use of the term. Asked what's so wrong with his company's long-standing family culture, the Boeing chief has a quick answer: "It's about seniority, not performance." Stonecipher, characteristically, is blunter: "In a family culture, you never throw out a bad performer."

Ron Woodard, chief of the commercial-aircraft division during the calamitous 1997 shutdown, was among the first victims of the company's new standards of accountability. He was fired last autumn, along with several lieutenants, in favor of Alan Mullaly, like Woodard a Boeing veteran. And the company has announced substantial layoffs in the division--38,000 workers will be chopped this year, and another 10,000 will go next year.

All that bloodletting is just an early step in what is sure to be Boeing's toughest challenge: streamlining the horrifically inefficient commercial-airline group. The long-term goal is to get net earnings up to 7%, but there is a long way to go: On 1998 revenues of $35.5 billion (63% of the company's total), the division made a mere $63 million, a margin of 0.17%. Nobody who grasps what's involved underplays the magnitude of the undertaking. "You're talking about one of the greatest industrial transformations in U.S. history," says Pierre Chao, Morgan Stanley Dean Witter's aerospace equities analyst.

The workers who stay can expect to face increasingly rigorous production standards. Stonecipher rails against what he calls "crutches" that delay production--particularly the use of expediters who are called in to fix things when a part is missing or assembly-line workers can't figure out an engineering spec. He also wants to abolish so-called green and blue assembly lines, separate areas where planes are reworked because parts were unavailable or put in wrong the first time around. Says Condit: "The automobile guys used to roll cars off to the side to fix things they didn't get right on the assembly line. Go look at production lines at Ford or Toyota now--that doesn't happen anymore."

Over the longer term, however, the company will have to go beyond merely making the current procedures work more smoothly. It will have to totally revamp its production methods. Boeing's time-honored practices, designed for the pre-deregulation era when airlines blithely passed costs along to passengers, have allowed customers a nearly limitless selection of options for each aircraft ordered. Airlines could choose from more than 100 shades of white paint and nearly as many cockpit designs. Up to now, any carrier ordering a new 777 has been offered a mind-boggling 20,000 different options about galley and lavatory design and placement, each decision sparking a flurry of new engineering drawings and reams of computer printouts. The solution to this morass is to move to more modular manufacturing, offer customers fewer choices--say, a couple of hundred 777 galley and lavatory options--and stop trying to make each plane coming down the line a unique creation. That could help cut the time it typically takes to produce a new plane from the current 12 to 16 months to ten months or so.

Tom Gallagher, managing director for aerospace at CIBC Oppenheimer, argues that the company can't stop there. Instead, it should gradually outsource more and more components, letting low-cost subcontractors take the brunt of the manufacturing process. Says Gallagher: "Boeing ought to focus on what it does well--conceptualizing and designing things that fly. It's less good at making a lot of the stuff that goes into the plane."

Just how much cost can be wrung out of the system--and how soon--is a touchy subject around headquarters these days. During Woodard's reign as division president, the company signed dozens of contracts, including long-term deals with American, Delta, and Continental, that promised prompt delivery of a large number of planes--354 in 1997, 563 in 1998-- at mostly rock-bottom prices. Boeing's profitability in the deals was based on the assumption that production costs could be slashed quickly by 25%. In reality the company never came close to those savings, and projections today call for margins to stay thin for a while--2% to 3% this year, 1% to 3% in 2000. Stonecipher, who runs the production overhaul day to day, studiously avoids the grandiose promises of prior years. "Every good manufacturing organization in the world expects to get 4% to 5% productivity increases every year," he says. "We should too."

Business is much healthier at Boeing's military aircraft and missile group. The defense businesses, based in St. Louis, turned a nifty profit in 1998 despite flat Pentagon budgets, posting pretax earnings of $1.3 billion on revenues of $13 billion. Among the group's best performers: the F/A-18 strike fighter flown by the U.S. Navy and Marine Corps, the C-17 Globemaster cargo plane flown by the U.S. Air Force, the new F-22 Raptor fighter jet, and the AH-64D Apache Longbow helicopter. All are early in their production life and should turn a nice buck for Boeing for years to come. On top of all this profitable hardware, Boeing has broken into a promising new service business: aerospace support. Boeing has recently won a series of contracts, some totaling more than $1 billion, to handle ground maintenance and logistics support for various U.S. military flight operations. The military division's one big drawback is that flat defense budgets around the world will limit revenue growth for the foreseeable future.

That's where the space and communications group, based in Southern California, could be crucial. The division's operations include such fast-growing areas as commercial-satellite launches, missile defense systems, and the high-profile international space station. One particularly intriguing project: Sea Launch, a joint project with Norwegian and Ukrainian partners to employ a converted oil-drilling platform as a mobile, seagoing satellite launch pad. Overall, the group's 1998 operating earnings--$248 million on revenues of $6.9 billion--were relatively meager. But Condit and Stonecipher believe that the division's revenues will double over the next five years, and as development costs drop off, margins will gradually increase as well.

That sort of growth would help ease the company's reliance on the cyclical commercial-airline business--and quiet some of Boeing's Wall Street critics. But Condit and Stonecipher are aware that the last piece of their turnaround puzzle, regaining credibility on the Street, could prove elusive. Last December, after Condit announced that earnings would stay slim through 2000, nine equities analysts immediately downgraded the company's stock, and the share price plunged. The Boeing chief now hopes that he might eventually earn points for candor, and he takes comfort from the likelihood that he won't be getting hammered quarter by quarter for disappointing the analysts. "That's the worst," says Stonecipher. "It's death by a thousand cuts."

Yet there are still some angry clouds on Boeing's horizon, and they have the power to overturn all Condit's and Stonecipher's plans. Most ominous, management faces potentially troublesome labor negotiations this spring. A repeat of the 1995 negotiations, which resulted in a ruinous 69-day strike, would be a disaster. Says Peter Jacobs, aerospace equities analyst for Ragen Mackenzie in Seattle: "Boeing simply can't afford a work stoppage right now. Management is going to have to be creative and address the concerns of labor in some meaningful way."

That won't be easy. Health-care costs, a sticking point four years ago, could cause trouble if management wants workers to start picking up some of the payments. "I can understand cost containment, but not cost shifting," says Charles Bofferding, head of a union local representing 25,000 Boeing engineers. Stonecipher says he'll be looking for various work-rule changes with an eye toward slicing into overtime costs, and that, too, could stir up resentment from workers already bristling over layoffs and tough talk from management. Says Bofferding: "They speak about changing from a family culture to a team culture, but it's really family vs. dictatorship. They've thrown down the gauntlet, and I think they're in for a tough negotiation."

Boeing competitor Airbus Industrie likewise has no intention of letting the company rebound gracefully. After buying out McDonnell Douglas, the third player in the market, Boeing's chiefs tried to send a message to Airbus by slashing prices and achieving a dominant market share. But the plan backfired in multiple ways. It ate into Boeing's profitability and helped tie up production lines with hundreds of new orders. And it also spurred Airbus to answer back with a furious--and highly successful--global marketing push of its own. The company's European chiefs have long sought market parity with Boeing, and that goal is gradually coming into sight. Says Airbus sales chief John Leahy: "We're confident that our market share will stabilize at 50% over the next few years, when we introduce our new 100-seater and a jumbo to compete with the 747." In an obvious slap at Boeing's failed strategy, he adds that "we have no long-term goal of dominating the market with 80% or 90%."

What's particularly disturbing to Boeing is that Airbus has stolen some of the U.S. company's best long-term customers, airlines like United, TWA, and British Airways. Airbus marketers were particularly exultant about their recent British Airways campaign, which involved parking one of their A319s nose-to-nose with a new-generation Boeing 737 on the tarmac at London's Heathrow Airport. They invited BA chairman Bob Ayling and his top staffers to tour the two planes and do a little comparison shopping. Result: BA ordered 188 A319s, the first time it has purchased Airbus products.

On the plus side, demand for commercial aircraft looks to hold steady for several years down the line. New division president Mullaly says that global GDP and traffic-growth projections indicate that the world's airlines will be buying some 600 to 800 new planes each year for the next decade. One key reason for the strong demand: New models are vastly more efficient to operate. Gallagher, for example, cites the case history of an international airline that replaced an aging 747 with a new model on transpacific routes. The old plane, plagued by high maintenance costs, actually lost $8 million for its owner during its last year of operation. The new jumbo, which carried more passengers and cargo and required less downtime, netted $3 million during its first year, despite higher financing charges.

Another sign of clearer skies for Boeing: Over the next few years, the company will likely earn at least half its revenues from space and defense. Says Jacobs of Ragen Mackenzie: "That's one of the best things about the company. Down the line, you're going to see a much smoother earnings stream."

Boeing's management team also gets points for tackling its production problems head-on and shaking up the corporate culture. Morgan Stanley's Chao describes himself as a "closet bull" about Boeing's prospects. Continental Airlines Chairman Gordon Bethune, a former Boeing operations executive, is positively effusive. "The future is golden," he says. "They've stopped the dive, and they're gonna start the climb."

Such enthusiasm seems premature, but Boeing's chiefs have mapped out some reasonable fixes for the company's immediate problems. And the company's travails have clearly sharpened top management's focus and energized the ranks; there are no signs of complacency around Boeing these days. To paraphrase Nietzsche, that which hasn't killed this company may in the end make it stronger.