Is Boeing Out of Its Spin?

By John Greenwald/Renton

Like a jetliner that keeps hitting turbulence, the Boeing Co. has been lurching through some stomach-churning rides. An embarrassing failure to meet delivery schedules helped force the Seattle giant to take a $178 million loss in 1997--its first red ink in 50 years--and to report a 90% drop in profits for the first quarter of 1998. The problem: shortages of parts and a production system that could not keep up with the largest surge of new orders in the history of the jet age.

The burden of too much business, however, may not be with Boeing long. Asia's financial crash has caused carriers across the Pacific Rim to cancel or delay billions of dollars' worth of aircraft orders. Boeing, which plans to build 550 jetliners in 1998, says the downturn may cost it some 90 deliveries--which could carry a value of $10 billion--over the next five years. In Europe, Boeing rival Airbus Industrie, pushing for a 50% share of the world's $65 billion-a-year jetliner market, is wooing long-standing Boeing customers and has been bargaining hard for a $3.8 billion order from British Airways. Just last week US Airways, which previously ordered 400 Airbus jets, said it would buy 30 more from the European consortium.

Is Boeing headed into a more or less permanent tailspin? The stock market has long seemed to be saying so, as it cut the value of Boeing shares 26% over the past year. But the company claims to be in a turnaround. Top executives say Boeing delivered 61 commercial jets last month, a record for June, and has finally broken through bottlenecks that delayed production of its so-called Next-Generation 737s, the fastest-selling new jets in aviation history. That news caused Boeing stock to climb $3.875 a share, to $48.437, last week, still well off its 12-month high of $60.50 a year ago. "We're getting into a normal production situation," says Ron Woodard, president of Boeing's commercial-airplane group. Notes analyst Peter Jacobs of the Ragen MacKenzie investment firm: "They appear to be working their way out of their problems."

Well, not entirely. While Boeing managers crowed about the production results last week, mechanics were rushing to complete 13 behind-schedule NG 737s parked outside the company's overstrained plant in Renton, Wash. Inside the cavernous building, workers struggled to avoid further delays even as Boeing was planning to speed up the NG 737 line from 14 planes a month to 21 to further clear the backlog. Says Boeing chairman Phil Condit: "We've still got some things to do." Like making money on the hot-selling 737s. Boeing has already written off $437 million after taxes against the first 400 737s in order to cover such costs as overtime charges and late-delivery fees. (Last week the Federal Aviation Administration ordered U.S. airlines to replace a supplier-built engine part on 23 NG 737s after an engine shut down on two European carriers during flight. Neither shutdown resulted in injury.)

How could this happen to the company that virtually invented the jet age? After all, Boeing has built no less than 55% of all the jetliners in service today. That figure climbs to 77% with the addition of planes from McDonnell Douglas, which Boeing acquired last year for $16.3 billion.

That's just the trouble. Boeing nose-dived while trying to meet the largest surge of aircraft orders in a half-century and at the same time striving to change costly and outmoded corporate practices. One of those problems has been a degree of fine tuning that seems more appropriate to the world of tailoring. Boeing managers like to describe a ship like the wide-bodied 747 as "6 million parts flying in close formation," and they have long stood ready to customize them not just for every airline but for every single order. Boeing offers the 747's customers 38 different pilot clipboards, for example, and 109 shades of the color white.

This lavish system worked fine when the buyer was the U.S. government or a regulated airline that could pass the entire expense on to its passengers. But such customization no longer flies in an era of deregulated fare wars. Says Robert Hammer, vice president in charge of bringing Boeing production techniques into the 21st century: "This is the largest, most complex business-redesign effort in the world. And we should not be proud of that. It's like saying you've got the biggest spring-housecleaning job in town."

With the goal of cutting the cost of building jetliners 25%, Boeing began by designing its wide-bodied 777 (rolled out in 1996) entirely by computer, eliminating countless drawings and mockups. The company also narrowed parts choices to standard options, much as carmakers offer automatic or manual transmissions, or six-cylinder or eight-cylinder engines. And Boeing has been consulting everyone from marketers to machinists on the making of its planes.

Boeing was phasing in these and other reforms when aircraft orders, which had been no-shows at the start of the decade, suddenly arrived in droves. With cash-rich economies fueling air travel in the U.S. and Asia, carriers took off on a buying binge. Boeing suddenly faced the task of transforming the way it builds planes while furiously ramping up production of new jets. "I've described it as trying to change the tire on my car while going 60 miles an hour," says Condit.

Not surprisingly, the wheels came off. Boeing simply lacked the parts and labor to more than double its production as planned. Suppliers in 60 countries--who provide roughly half of Boeing's components--had also scaled back during the lull and couldn't accelerate quickly enough. The Renton line was crippled by "travelers"--jobs that got skipped for lack of parts or other problems and then had to be done out of sequence. That often required ripping out finished work, a costly process that worsens delays and helps make "traveled" jobs five times as expensive as installing parts in the right order.

Things got so bad that Boeing halted its 737 and 747 lines for nearly a month last October to clear up the snarl. The time-out eased congestion at the huge 747 factory in nearby Everett, Wash., which had raised its production from 3.5 planes a month to 4. But executives have been holding their breath as Renton strained to produce even 14 NG 737s a month before ratcheting up to 21 this fall.

None of this has kept Boeing from going full-throttle on its factory reforms. At the 747 factory, whose 98 acres of floor and 114 ft. of height make it the world's largest building by volume, manager Bill Yoakum went sleepless near Seattle while the plant phased in software that consolidates mountains of manufacturing data. The people who need it include rows of shop-floor engineers, whom mechanics can summon for help by flicking on a light. (Yellow indicates a question, and red is "urgent.") At the same time, Boeing is switching to the Japanese practice of lean inventory management that delivers parts and tools to workers precisely as needed. At a 500,000-sq.-ft. parts plant in Auburn, Wash., assembly teams build everything from wing parts to landing-gear doors in self-contained "cells" that replaced assembly lines that snaked from wall to wall.

Impressive as all that is, some critics doubt that the transformation alone will have much impact on Boeing's bottom line. Wolfgang Demisch, a managing director of the investment firm BT Alex. Brown, calls Boeing "hugely overstaffed" and ridicules its price war with Airbus. "The commercial-aircraft industry should be enormously profitable because it is a fortress franchise," Demisch says. He argues that with just two manufacturers selling to about 450 airlines, "I see no reason at all why prices [of planes] are as bad as they are. Neither competitor has any real notion of price discipline."

The fact is that airlines have grown skillful at extracting deep discounts from Boeing and Airbus by holding out huge contracts and bargaining hard on terms. In its latest solicitation, British Airways took bids from Boeing and Airbus for 100 jets with a total value of some $3.8 billion. British Airways has never bought a plane from Airbus, and Boeing doesn't want the streak to end. So the jetmakers have been battling over everything from prices to innovative leasing deals that British Airways wants on highly favorable terms.

The manufacturing archrivals are also locked in a bet-your-company stare-down over the immediate future of air travel. Airbus foresees a market for a superjumbo successor to the 747 that can haul anywhere from 555 to nearly 1,000 passengers. (The largest 747 carries as many as 568 people.) Working with some 20 airlines, Airbus is spending $9 billion to develop a plane it calls the A3XX and promises to roll out the monster by 2004. Boeing says its own "medium-large" 767s and 777s can easily connect cities such as Cincinnati, Ohio, and Frankfurt, Germany, eliminating the need for superjumbo jets to gather passengers from around the country at hub airports like New York City's J.F.K.

Boeing is thus staking its future on efficient manufacture rather than on developing flashy products that fly ever higher, faster and farther, the usual mantra for new aircraft. "For years we were able to raise the price of airplanes based on technology," says vice president Hammer. "But we can't do that anymore. If I want to make a profit, I've got to lower the cost."

For now, many airlines would settle for lowering the waiting time on the jets they have already ordered. The uncertain arrival of new 737s recently caused Southwest Airlines to delay adding a new city to its route map. And Continental had to wait more than a month for five overdue 737s. If Boeing can ease the frustrations of its most loyal customers, fight off new challenges from abroad and deal with a possible air pocket in new business from Asia, it can resume flying in clear air.

--With reporting by Aixa M. Pascual/Renton and other bureaus

With reporting by Aixa M. Pascual/Renton and other bureaus