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Wed 2 Dec 2009 04:00 AM

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Boeing’s billions

Boeing chairman and CEO Jim McNerney tells Arabian Business why, when the going gets tough, Boeing gets going.

Boeing’s billions
Boeing’s billions
Etihad has 35 Dreamliners on order.
Boeing’s billions
Boeing’s headquarters in Chicago, US.
Boeing’s billions
Seattle trade unionists led a two-month strike against the jet-maker in September 2008.

The global aviation industry might be in a tailspin, but one jet-maker is still sitting on a $260bn order book. Boeing chairman and CEO Jim McNerney tells Arabian Business why, when the going gets tough, Boeing gets going.

Jim McNerney barrels into the office, jacket undone, wide smile, sentences tumbling out of his mouth as he tells me how much he likes Dubai, that it's his third visit, how the weather is fantastic, but not - he races on - quite as cool as he'd like. He throws himself into a chair, resettles his tie and grins. "So. What can I do for you?"

Well. My first question could be why, in the current market, the chairman and CEO of Boeing is so bouncy.

Aerospace companies don't come much sturdier than Boeing. But if Wall Street has taught us anything in the last year, it's that the bigger they come, the harder they can fall. True to form, then, the US titan has taken an unprecedented battering in the last year. From the much-hyped but much-delayed 787 Dreamliner, to the death-spiral of the global aviation industry; the hits just keep on coming. And the damage shows. Boeing was an $87 stock last May. At the time of writing, it trades at a bruised $51.

Yet McNerney, here to press the flesh at Dubai Airshow, is as charming and chipper as ever. Fresh from third-quarter results that wiped $1.6bn off Boeing's balance sheet, he is, incredibly, already talking of tentative green shoots. Pummelled though it is, the aviation industry has been in worse shape, he says.

"To be honest with you, [financing] has been tight, but not as bad as I thought it would be," he says lightly. "I expected worse. I just think that there are so many stimulus packages and rescue packages being injected around the world, that the financial system is just a little healthier.

"More airplane deals are being done; less backstop financing from us than I anticipated. I think real demand..." he pauses. "We are beginning to see real demand pick up."

Results from this month's Dubai Airshow disagree. Despite being billed as the richest show in the industry, sales of commercial aircraft at the event slumped to their lowest in six years. Just 42 planes, worth a paltry $5.6bn, were sold during the biennial event; a far cry from the 2007 show where orders for commercial aircraft topped $100bn. Dubai's Emirates alone placed orders for 143 new aircraft from Boeing and Airbus, at a value of nearly $35bn.

This year, the only substantial commercial order came from Ethiopian Airlines, which placed a $2.9bn deal with Boeing's arch-rival Airbus, for twelve A350 XWB aircraft. The world's airlines, it would seem, are not in a buying mood.

"Obviously, we are not immune to the downturn," McNerney allows. "On our commercial business, the Boeing commercial planes, obviously our customers are under duress. Their load factors, their passenger miles are down significantly and their ability to get price is impacted."

According to industry body IATA, global airline losses will total $11bn this year; $500m of which will be incurred in the Middle East.

"That puts pressure on us in terms of a deferral here, a deferral there, and orders being down," McNerney says.

Adding to Boeing's gloom is the news that the Pentagon is slicing its defence budget; cuts that could take a chunk out of the firm's military business. Defence orders account for about half of Boeing's annual sales, and around 80 percent of these are completed in the US.

McNerney shrugs. "The Obama administration has a very heavy domestic agenda, and there is somewhat less available for defence. So we're feeling that pressure."

Still, by far the biggest thorn in Boeing's side is the 787 Dreamliner. The ‘Dream-on-Liner', as the aircraft has been dubbed by some in the industry, was first unveiled to the world in July 2007, with a promise of a maiden flight that September.

More than two years, six delays and a slew of technical setbacks later, the 787 has stayed resolutely earthbound at significant cost to Boeing. Both in terms of dollars - the Chicago-based firm has said it will swallow a $2.5bn charge on the plan - and reputation.

McNerney is rueful. "Look, this is the price we pay for being on the bleeding edge of development," he says. "There's a price to pay; I don't know how else to say it. Our customers appreciate that we're trying to push the envelope and give them something they've never had before - in terms of environmental benefit, productivity for them and passenger experience. And yet they're not happy with us for being late. We sort of live by that sword, and we die by that sword."

Boeing has more than $15bn in 787 orders from Gulf airlines, but at least two - Oman Air and Qatar Airways - have threatened to rescind their orders in the wake of the delays. Boeing, for its part, has made tentative promises the jet will be airborne by the end of the year, with first deliveries in late 2010.

I get the impression that much of McNerney's time in Dubai will be spent smoothing the ruffled feathers of Dreamliner buyers.

Still, recession or no recession, Boeing is in a far better position than most.

First, it remains a 150,000-employee, $36.71bn colossus, with an order list stretching to more than 3,000 planes, worth an estimated $260bn in sales. The firm expects to deliver around 480 of them next year. By any measure, it's an enviable position to be in. Just ask Boeing's rivals.

Second, it has cannily navigated its way through worse. When McNerney took the reins in June 2005 - following stints at 3M and GE, under the great Jack Welch - it was on the heels of a three-year binge of corporate scandal. Highlights included the jailing of Boeing's former CFO, the indictment of a manager for allegedly stealing 250,000 pages of proprietary documents from his former employer Lockheed Martin, and a class action suit that accused the Chicago-based firm of paying male employees more than women. McNerney, you could say, has a track record for riding out storms.

Lastly - and a fact lost in the turbulence over the 787 - even delayed, Boeing's Dreamliner is set to be a game-changing aircraft. Not only is it a quantum leap in technology (the fuselage is made from lightweight carbon composite rather than aluminum), offering unrivalled fuel efficiency it's also the test case for a whole new way of building airplanes.With commitments for 840 planes from 55 customers, at an average list price of $178m each, the Dreamliner is the fastest-selling new aircraft on record. Despite the fuss and froth over the ‘seven-late-seven' delays, the firm has ceded just 70 cancellations. All, says McNerney, from airlines that had "failed business models. It's not that they didn't want the plane."

In part, this is because Boeing's timing has been good. Many of the carriers most frustrated with the delays are quietly gleeful that the 787 hasn't stuck to schedule. With little immediate cash, they would have struggled to secure financing in the current credit climate, had Boeing delivered on time.

That said, few carriers want to ditch an order for an all-new plane that, if Boeing is true to its word, will fly faster than the competition and cost substantially less to run and maintain.

"And that, really, is the point," McNerney says, bracing his hands on the table. "Planes will be made this way for the next 80 years. We went through the pain of doing it this way, but once we get out the other side, we'll be a generation - two generations even - ahead of anybody else. These planes are 20 percent lighter, they have a smaller environmental footprint, and they go a long, long way. It will be more than worth it."

He stops to grin. "I only hope I live long enough to enjoy the ‘worth it' part, for as long as I've enjoyed the ‘getting-it-done' part."

Despite threatened cuts at the White House, Boeing's military business is fast making up ground abroad. International sales have more than doubled in recent years to around 20 percent of Boeing's defence business. In the Middle East, the aerospace giant is making a mint. For the first time, its military trade has the potential to outstrip its commercial business.

"Over the last five to ten years, it's [the Middle East] become a big deal," McNerney says. "Not a little deal, but a very big deal. And not just on the commercial side but the military side. The order book on the commercial side is somewhere in the five to eight percent range [of Boeing's total order list]. On the military side, the size of the opportunities we are pursuing here are probably somewhat more than that. For four or five relatively small countries, that's a lot."

In its Seattle stronghold, however, the aerospace giant is facing turbulence. Boeing and the International Association of Machinists and Aerospace Workers, which represents 25,000 workers in Washington state, have been at each other's throats for much of the past decade.

The union has shuttered Boeing factories four times in 20 years, including a two-month strike in 2008. Last month, following a high noon stand-off with the union, Boeing announced it was blowing town in favour of building its new 787 Dreamliner factory in South Carolina.

It is the company's first full production line outside the Jet City, where it employs some 54,000 people. The move has partly been forced by the pressures of the financial crisis, and Boeing's need to drive a harder labour deal. But the lure of South Carolina's trade laws - which limit the power of unions - and the promise of an up to $400m incentive package are likely to have sealed the deal. McNerney, however, insists that the bottom line is competitiveness.

"There is no doubt that this industry is globalised, and there is no doubt that China and other countries will be far bigger factors, and that Boeing and Airbus will not be the only games in town," he argues. "We have to assume that'll happen, and I believe it will.

"That also means at the end of the day we have to address our costs in the States, and that gets into having a diversified labour base, which is the course we've chosen in the US, to not build forever, all in one spot, with one labour force.

"Any business that pursues an ever more globalised market has to be mindful of globalising both their presence and their costs.

Does he think the trade unions in Seattle understand that?

"I think - the quick answer is not always," he says, sitting back in his chair. "They're fighting for the jobs of their people, and trying to get the best deal possible. So there is natural tension there."

The recession has taken its toll in other ways. Boeing has sliced 8,000 workers off its payroll this year, and is set to lose another 2,000 in the first quarter of 2010. McNerney expects to shed more, as the year goes on.

"We've talked about the 10,000 and then maybe some more [in 2010]," he admits. "Not in the magnitude of another 10,000, but there will be a continuation of the trend lines through to the end of the year."

In the grand scheme of things, Boeing is sitting pretty amid the recession-plagued aviation industry. If it can stick to the current 787 schedule and get a plane in the air by the end of the year, it will go a long way towards soothing disgruntled buyers and buying back goodwill. And, as McNerney knows, all will be forgiven once Dreamliners start rolling off the production line.

Looking back now, I ask, does McNerney wish he‘d handled the 787 differently?

He sighs. "It was just a bridge too far," he says. "[We] had an overly ambitious schedule and an overly ambitious partner strategy."

For the first time, Boeing outsourced almost the whole production of a plane.

"We could have done a new material, and kept the old partnership structure. Or changed the structure, but not changed the material to make the plane. We tried to change it all at once and...it was just a bridge too far."

There is a moment's pause before he brightens. "Still," he says. "We learn from it. Next time, we'll do it better."

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Hugh Jampton 10 years ago

"We learn from it. Next time, we'll do it better." After the next maiden flight delay, which is apparently imminent, I suspect that there won't be a next time.

flier 10 years ago

Given all the misinformation Boeing released about the 787 Dreamliner since its inception McNerney sentence "We sort of live by that sword, and we die by that sword", should read, we sort of live by those words and we die by those words. As to the promised rosy performance of the 787 that has yet to be seen ?????

flier 10 years ago

Well, that's Yankee spin for you, but out of control? The tragety is that everyone around the globe followos suit no matter what they do.