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June 17, 2024
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Jim McNerney, Chairman and CEO of Boeing, issued a downbeat assessment of the US Aerospace industry at the Wings Club in New York November 11 when he expressed concern that the US industry may atrophy due to a shrinking labor talent pool.. In doing so, he cited the failure of the Boeing business model that delegated too much work to partners in an effort to share the costs and risks of the large scale development program for the 787. He is now concerned about competition from China, Russia and Japan.

The irony about the emerging competitors is notable because Boeing has long relied upon these three countries for outsourcing and stepped up the work in Japan and Russia for the troubled 787 and 747-8 programs. In essence, Boeing has had a major hand in creating its own competitors. (Airbus, Bombardier and Embraer also are guilty as well.)

Boeing’s path down this slippery slope began under the stewardship of former CEO Harry Stonecipher and the McDonnell Douglas-dominated Board of Directors. Harry and the McDonnells bought into the whole outsourcing/integrator concept for the MD-11 and MD-90/95, insisting on it for the 787 before the project would be approved. The die was cast in 2003 when the Boeing Board of Directors approved the 787’s outsouring model.

More irony: the purpose of the outsourcing was to spread the financial risk (a fat lot of good that did); and, according to a Wall Street Journal article at the time, one Boeing Board Member warned that too much focus on cost might backfire on Boeing and that Airbus could benefit from the outcome. The Board Member: James McNerney.

What were Boeing’s mistakes? In a nutshell, the basic mistake was a failure to take responsibility for the success of the 787 program, instead sharing financial and development risks with a series of international partners and subcontractors without having processes in place to ensure proper collaboration and quality. This fiasco cost Boeing, the only remaining US commercial aircraft producer, the opportunity to develop an all new narrow-body aircraft, instead ceding a major portion of the market to new competitors from China, Russia, Brazil, Canada, and Japan.

Why Outsourcing Doesn’t Work Easily

Outsourcing isn’t new, of course. The airframe manufacturers have been doing it for decades. But the 787 program took it to new heights (or new lows, depending on your point of view). Outsourcing requires a communication process, both before the job is done and after, to make certain it was done correctly. Airbus and Bombardier have successfully utilized international supply chains for multiple programs. For Boeing, the 787 was the first at this level, and it failed miserably.

The program has been plagued with inadequate planning and communications, shoddy work, missed deadlines, and the need to rework components that simply didn’t meet specifications required for a state-of-the-art aircraft. Compound those problems with the introduction of new materials never before utilized in airliner structures at this magnitude, and a new production method, dramatically increasing the complexity and need for coordination, and the potential failure points become obvious.

To Boeing’s credit, it has publicly acknowledged the obvious (which many CEOs won’t do regardless of the evidence) and admitted it was wrong in its approach. McNerney’s Wings Club appearance was as candid and forthright as he has been to date. Boeing is bringing 787 work back in-house, but challenges remain. The company bought out Alenia and Vought in Charleston (SC), but it still has enormous work to undo the deficiencies there, and a sharp learning curve to overcome. Tailwork for the 787-9 is going to be brought back to Boeing from Alenia, whose contract for the 787 tail assemblies runs only through airplane #150.

But McNerney and Co. still believe in outsourcing production to international suppliers. This remains risky on many fronts, with political and currency risks added to the risks of quality, performance, language, communications, and capabilities that would be found with any subcontractor, whether domestic or international. In Boeing’s case, problems occurred both domestically and internationally. This would indicate that the source of the problems wasn’t a language barrier, but flawed processes and poor management.

The Impact is Significant

The net result is that the 787 has recently had more cancellations than orders -it has garnered only a handful of new orders in over a year. Cancellations were due to program delays, perhaps compounded by the global economic environment; the lack of new orders stems from no delivery positions and a high degree of program uncertainty.

While the 787 will eventually become a successful aircraft and perform well in service, the delays have tarnished Boeing’s reputation, and with the difficulties at Rolls-Royce and a test flight fire, may not be finished.

Is the 787 program now under control? Just when management got a handle on most of the issues, two “unknown unknowns” occurred to skew the schedule farther to the right. The explosion of the Trent 1000 on the test stand, followed by an in-flight explosion by the sibling Trent 900 in the same area on an A380 has raised issues that will likely result in delays for Rolls-Royce powered models, which are the first scheduled for production.

The electrical fire during flight test has resulted in additional delays, and while ground testing continues, test flights have stopped. Each day that goes by needs to be added on to the end of the program, as the slack in the test program schedule had already been decimated by prior delays and management’s decision to accelerate the process as aggressively as possible.

Production at suppliers was halted a couple of weeks ago to allow the line to “catch-up” with the required repairs to Alenia manufactured structures. These new events will compound the existing delays—likely with 10-12 month delays for most customers. Boeing needs an initial delivery in early 2011 to maintain credibility, and may force an airplane through the system, rebuilding it by hand if necessary to deliver it to ANA. But the ramp-up afterwards looks to be excruciatingly slow to airlines expecting deliveries.

The US Industry Should NOT be in Atrophy

To compensate, Boeing is aggressively selling its bread and butter 737NG series as rapidly as it can offer discounts and take orders. In 2010, Boeing has taken 480 orders, of which 432 are for 737s. The company can’t afford an all-new aircraft in the near term, until its 787 and 747-8 programs are completed, and can’t easily re-engine the 737 due to the larger fan sizes for new generation engines.

The result is the unthinkable. By the middle of 2011, Boeing will be the only major manufacturer in the world without a new narrow-body model that takes advantage of a new generation engine!

Airbus will offer the PW GTF and the CFM LEAP-X on its NEO. The COMAC C-919 will be powered by the LEAP-X, the Bombardier CSeries, Irkut MS-21 and Mitsubishi MRJ by the PW GTF, and by that point Embraer will announce its plans, currently rumored to be a re-engining of the EJets with the GTF and an all new aircraft in the 120-150 seat range.

The ONLY manufacturer without a new narrow-body offering for the 2015-16 time frame will be Boeing—who will rely on a model initially introduced in 1967 as the standard-bearer. Say that again to yourself out loud. For the first time EVER, since the Wright Brothers, no US manufacturer will be producing a aircraft taking advantage of new engine technologies pioneered in the US.

An on-time 787 would have provided Boeing the revenues necessary for a 777 replacement to counter the A350XWB and the financial wherewithal to design a 737 replacement to leapfrog Airbus and Bombardier, who will have the most efficient narrow-body aircraft in service within three-five years, and appear to be on target with their development program. Boeing will be selling a 170-seat 737-800 with higher seat-mile costs than the 130-seat CS300, and significantly higher aircraft mile costs. As an airline, I’d choose the new technology and fill my airplanes, happily turning away customers while undercutting competition flying larger 737s.

Can Boeing Come Back?

Of course. Look at Pratt & Whitney. After their domination of the industry with the JT8D, it lost its way and didn’t effectively compete with the CFM-56, which took the mantle of industry leadership. But PW continued R&D, and after 20 years, have a breakthrough in the GTF, which is poised to regain industry leadership. That breakthrough, however, took vision, determination, and working through a number of technical issues to produce what is a disruptive technology in the engine market. Boeing now needs to do the same for the narrow-body market, with innovative thinking and investment.

Boeing still has market share leadership, and can rely on the innovation of its engineers — trusting that it too can come up with a disruptive technology that will change the market, as it did with the 707, 747, 777 and hopefully 787. The key to its success in the past has been American ingenuity from a team of professionals in Seattle. To claim that America has lost its workforce or lacks the capabilities to produce aircraft is absurd.

The shrinking labor pool has resulted from poor management at Douglas that drove the company out of business, and outsourcing policies at Boeing that shipped jobs off shore. The CEO of Boeing, who helped caused that demise, can’t now credibly turn around and claim that a shortage of labor is holding them back.

Boeing must respond, and respond quickly once it completes its existing developments. Two programs are needed: a 777 replacement to compete with the A350XWB, and a 737 replacement to compete with the new “International Five.” Both need to be leapfrog designs, innovative enough to make a difference without taking undue technical risks. A short-medium range twin aisle aircraft would be innovative in a 2+2+2 configuration, finally meeting the airline needs expressed two decades ago by Jan Carlsson of SAS. A 777 replacement taking advantage of GTF engine technology and second generation materials could leapfrog the A350XWB.

What does Boeing need to do to regain a position leadership? The answers are straightforward. First, return to the 777 business model for aircraft development within the United States, and second, obtain the external financing required to fully fund the new Y1 and Y3 programs (code named Yellowstone internally) needed to sustain the company over the next two decades. If Boeing can come through the difficulties with the 787 and 747-8 programs without further delays, it is still possible for Boeing to compete with a new program in the 2017 time frame, assuming a five year development cycle launched in 2012.

The result could determine whether long-term industry leadership stays in Seattle or moves to Toulouse, or eventually Tianjin. Boeing management can recover – but the works needs to begin now, not 10 years from now. Boeing shareholders and the market would not likely object to a bit of dilution through an additional public offering if those proceeds were used for development of new aircraft programs that will increase market share and profitability. The question is whether the Boeing board has the vision, ambition, and frankly the “stones” to maintain a leadership position in commercial aviation. Time will tell.

11 thoughts on “Was McNerney Unduly Pessimistic at Wings Club?

  1. Tony, it’s small print but before you “Read More” for the rest of the post, if you look after the tags you will see it was posted by Ernie Arvai.

  2. Ernie, that’s certainly a thorough analysis. I do digress on a couple of points though. First, I don’t believe Boeing will be capable of doing Y1 and Y3 simultaneously, or similar to what they did with the 757 and 767. 2nd, it’s not realistic to assume that a Y3 with EIS in, let’s say 2020, would leapfrog the A350 (which could also be outfitted with a large 2nd/3rd generation GTF). Also, which A350 model are we talking about? If Boeing should optimise a Y3 with a base model with roughly the same size as the A350-1000, a shrunken Y3 would have a hard time competing with the A350-900. Remember, the A350 wingspan is just short of 65m (ICAO Category E). A bigger Y3 will in all likelihood have a Category F wingspan. (exceeding 65m; in fact, it may may even exceed 70m) This means that a larger Y3 can’t fit as easily in to the current ground infrastructure at most airport.

  3. What can be done about the shrinking talent pool in the aerospace industry? Well, *nothing* that would come into effect in time for a Y1 or a Y3. We watched the the talent pool shrinking since the mid 1990s, partly due to other industries being more attractive, partly due to declining aerospace R&T budgets, partly due to willful and/or foolish management misconduct dubbed “cost cutting’ or ‘overhead reduction’.
    Russia’s talent has all but dissipated (as an economy Russia actually is pretty small and just cannot sustain her aerospace & defense industry), China and India are still ‘wannabes’. Not sure about the Canadians, but the Japanese and the Brazilians look to have had a better hand in nurturing their talent base.

  4. If other countries are “fat” with technical resources why has out sourcing failed so dramatically and why is EADS having the same type of problems as Boeing? If Boeing is to survive, the political component of their technical and manufacturing decisions must be secondary. Boeing needs to bite the bullet, do what it needs to be successful and forget being an international ambassador of goodwill.

  5. Technical resources have been and continue to be short throughout the world. Anyone paying attention knew that was the case when the 787 was launched. The single biggest issue facing Boeing suppliers during development was the fact that Boeing kept stealing their best talent.

    No supplier maintains the skill set required to do development like this. That was one of the facts that Boeing management failed to consider or account for in their plans, or any of the repeatedly unsuccessful recovery plans.

    Unfortunately, the other element missing from this analysis is, that despite McNerney’s acknowledgement of significant management errors, the same thinking that created these problems still dominates. The whole second 787 line in SC demonstrates this pretty clearly. Stay tuned for a significant drain on cash and resources from that quarter.

  6. RE 737 and 777-300ER replacements, the question is not when Boeing can deliver, but when they announce the programs with credible delivery dates. If they announce the 737R replacement in 2013 for delivery in 2020, that may hurt the A320NEO and other competitors badly depending on how quickly Boeing can ramp up production. The same is true for the -300ER, altho here Boeing does not haves the competitioln that faces the 737. They may opt for a major refresh before a replacement.
    Problem is that there are so many “know unknowns,” including:

    Will Airbus re-engine the A320? AerCap claims Boeings improvements to the 737 negate re-engining advantages. See http://www.Leeham.net. If not, or if other customers agree with AerCap, then Boeing will have a lot more time to do the 737 Repl, while continuiing to get large orders for the 737 Improved.

    Will Airbus ever issue the 350-1000 specs? If Airbus issues them this year and Boeing announces a major -300ER refresh for delivery in 2017, to be followed by a new plane in 2025-30, who will buy the -1000? Again, it will likely depend on thre airframers’ production capacities.

    Will Rolls be able to fix Trent 900 and 1000, and also supply reliable engines for the A350? Worst case, Rolls can’t and goes into banckruptcy re-org, and its ability to supply engines across its product line is impaired. Who will take up the slack, when will the A350 be delivered since Rolls is its onluy supplier, and when will ANA get its 787?

  7. MDC (St. Louis and McDonnell’s) destroyed Douglas, then themselves and now they have done the same to Boeing. But then our inexperienced business leaders and book MBA’s did not help. Too much koolaid and no hands on training.
    Engineers on the 787 knew in 2004 that the program would not make it’s goal because of the MDC plan. I believe that is why Alan and Walt left the company they were so instrumental in building.

    Boeing selected the WRONG leader when Stonecipher. Look at what Ford has done with Alan Mulally’s knowledge, experience and leadership. All from a person that did not know underpinnings about the auto industry. All Boeing got was a Jack Welch clone, but then so was Stonecipher.

    Boeing is no different than many of the large US corporations run on ego’s and blinded inexperienced MBA’s. They have no experienced leaders and have destroyed the foundations of what made the US a great industrial nation. If you don’t know how it is built and put together your leadership had better find people that are. Boeing don’t have them.
    Will the 787 be a good airplane? Yes. Will it meet the original expectations, maybe only time will tell.
    Will Boeing survive? Maybe. But not by minimizing their expertise and giving away the technology they created just so the Boeing “Brand” could be spread. Base the name on quality products not some little logo and Jack Welch mantra.
    Bottomline: Poor leadership, 42 Longs (koolaid drinkers with no experience or leadership capabilities) and Marketing will continue to degrade its capabilities and its future.
    Boeing picked the WRONG leader!

  8. The basic analysis is certainly right. Ten years ago Boeing management set the course for trouble. And it wasn’t Harry Stonecipher alone. I still can hear Phil Condit promise financial analysts again and again that R&D expenses would never go beyond 3.5 % of the companies revenues. A technology company castrating itself to please the “market” – and Wall Street applauded.

    On the other hand there are signs of change in Seattle. It’s a new culture, which has been injected by the 2 Jims – McNerny and Albaugh.

    The C-Series if it deliver to its promises is certainly a wake-up call. The Chinese ambitions are as well. (Russia is no danger in any respect.)

    Will Airbus become the permanent #1? I doubt. I know many people working with Airbus in various management positions as well as on shop level. I never have seen a company with a broken system like this. Never. Managers have become cynical, engineers and workers are frustrated. Whenever you meet one of them (or even their spouses) and they realize that you are from the aviation industry the first thing they will tell you is the latest shocking stories, which they or their colleagues have experienced. This is not a winning team. This is a company which only can survive in a duopoly and with state money.

  9. I’m here in Everett and I can tell you that management is NOT changing at all; we are still hell-bent-for-leather heading for the cliff of outsourcing & a bad business model like so many lemmings. Contructive criticism is not acceptable so everyone keeps telling the “Emperor McNerney” that his clothes look great!

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