Boeing Versus Airbus

by John Newhouse

  CHAPTER SIX

  Meltdown and Merger

  BY THE EARLY 1990S the effects of airline deregulation were taking hold. Air travel pricing had become increasingly irrational. The carriers were selling tickets below cost, and except for Southwest Airlines, all of them were operating in the red. Still, Boeing’s share of the ailing aircraft market held steady at 60 percent, and the company continued to make profits despite the serious downturn within the industry.

  Although Frank Schrontz and Dean Thornton were still in charge in the early 1990s, generational change was in the air. A gifted engineer named Philip Condit was second only to Schrontz in authority and was on track to become his successor; the question was when, not whether. Although Boeing had a pool of brilliant engineers, few were as creative as Condit, who also possessed other attributes, notably a glossy education and a wide culture, that had impressed various senior players who mattered, including T. Wilson. A well-honed operational skill helped.

  Condit was born in 1941 and graduated from the University of California, Berkeley. He obtained a master’s degree from Princeton in aeronautical engineering and another, in management, from the Massachusetts Institute of Technology. In 1997, he became the first Westerner to be awarded a doctorate from Science University of Tokyo. After joining Boeing in 1965, he went from strength to strength. Among Condit’s several distinctions was leading the team that launched the 777 and, in the process, finding a solution to a major design problem.

  Thornton, president of Boeing’s Commercial Airplanes group, retired in January 1994 and, as expected, was replaced by Ronald B. (Ron) Woodard, who had been executive vice president of that division. Woodard and Condit represented a new order at Boeing—a group of people in their middle years who were poised to take charge.

  A retired Boeing executive who worked closely with all of them says, “With Wilson, Schrontz, and Thornton, people understood that what the company did or did not do wasn’t about them, whereas in the case of their successors it was all about them.”1 By and large, the new top-tier people impressed some of their older contemporaries as arrogant and complacent—as having grown up in a company that had a 65 percent market share, which they considered a birthright. Hard lessons for them and the company lay ahead.

  It’s worth pausing over Condit and Woodard. Of all the personalities in the Boeing Company’s procession of senior managers, they may have been as omnicompetent as any who preceded or followed them. But they did the company more damage than any of the others, mainly because, whatever their attainments, both lacked judgment and perspective.

  Condit, the more consequential of the two, was very indecisive, whereas Woodard was often too quick to make a decision. A composite view of Condit by several colleagues would read: “a brilliant and innovative engineer who froze before managerial decisions and could only see fifty shades of gray.”

  Woodard, like most of the company’s senior executives then, was an engineer by formation, but was more generally seen as a high-energy, highly capable, hard-charging airplane salesman. He was described by some of his peers as “tomorrow’s leader.” Others, including at least one senior figure on Wall Street, described his operational style as “testosterone based.” In any case, he, like Condit, seemed certain to have a preeminent role, and he, too, would become deeply controversial.

  The movement of senior executives occurred while the 777, then under way, was creating the huge cost overruns noted before. Many years later, Alan Mulally, who succeeded Condit as program manager, acknowledged that the 777 cost $6 billion more than he first estimated.2 (The real number is thought to have been higher still.)

  The launch customer for the 777 was United Airlines. Its program manager for the airplane was Gordon McKinzie, who led a team of six to work with Boeing on design and related matters. “We were followed,” he says, “by an ANA team, then JAL [Japan Airlines]. We were involved in all the design reviews, and we did steer some of the decisions. We often met to try to take a common position.

  “We were always mystified by Boeing’s program costs. They might have spent $10 or $12 billion on the 777. Huge amounts were devoted to facilities. They built two bays for the assembly lines. The first bay still houses the active assembly line, but they never opened the second line. They use the second bay for storage.”3

  The 777 would be Boeing’s last new airplane for quite a long time. Innovation in the factory would become more important than product innovation. Curiously, the process of modernizing the factory floor would lag, too, despite the rising concern within the company about itself.

  Boeing’s corporate arrogance had begun to coexist with a recognition that it was no longer as good at manufacturing as it had been. Its production methods were anachronistic, just slightly updated from those that were used to build B-17 and B-29 bombers during the Second World War.

  The recession that followed the Gulf War in 1990–91 seemed to be an opportune moment to fix the production system. By 1993, the trendy phrase chez Boeing was “world-class.” Senior executives were in curious disagreement over whether the company had ceased being world-class in its various parts or only in its manufacturing techniques. Schrontz and Thornton found the self-flagellation and autocritique that was under way lower down exaggerated. “I reject the notion that we are not a world-class company,” said Schrontz. “On manufacturing, though, we have a long way to go.”4

  Various colleagues took a darker view. R. Michael (Mike) Little, who supervised quality control of wide-body airplanes, took issue directly with Schrontz. “I do not think we’re world-class,” he said. “We are a marvelous company and have been for a long time. But we haven’t changed much in forty years. We are still using techniques that were refined after World War Two. Condit says if we don’t do a lot better, we are doomed. We want to stay in the phone book.”5

  Condit had been telling colleagues that “Boeing wouldn’t be in the phone book” for very long if it didn’t change its ways. The company, Condit said, “would have to slash its costs dramatically, a goal that would dictate halving cycle time—the period in which airplanes are built and delivered to customers.”6 Bob Crandall, the blunt leader of American Airlines, had gotten Boeing’s attention by telling Schrontz and Thornton that their airplanes “cost too goddamned much money.”

  Then, as orders fell off in the early 1990s, the pressure to change became stronger. “We thought airplanes were different,” Woodard said. “We had a romantic notion. But we are a manufacturing company like everybody else. We have to build a product that meets customer needs more cheaply than anyone. Our system was inflexible and complex. We’ve had databases doing back to 1958.”7

  A reinvention of Boeing was under way. Delta Point, a small consulting firm in Bellevue (a high-tech suburb of Seattle) that specializes in showing companies, including very successful ones, how to change with the times, was retained. For more than a year, the hundred top Boeing people, including Schrontz, Thornton, Condit, and Woodard, went through Delta Point’s program in teams of eight.

  Phase one was a seven-day seminar in which team members read large books about Japanese production methods, along with selective Harvard Business School literature. The executives had to take written tests to see if they were absorbing the stuff. The second and even more intensive phase involved two-week visits to Japan—specifically to companies there that were judged “world-class” by Delta Point; they included Toyota, Nippon Steel, Canon, NEC (Nippon Electric Company), and Mitsubishi. Each team visited eight to ten companies over a two-week period.

  A typical day began at 6 a.m.—on a bus that was actually a moving conference room with tables and video systems. Mornings consisted of presentations by the host company’s senior management. Informal discussions were held over lunch. Afternoons and evenings were taken up by factory tours and question-and-answer sessions. Notes were compared on the bus trip back to the hotel and then over dinner. The typical day ended at about 10:30 p.m.

  “Most of us were profoundly affected
by the experience,” said Mike Little. “Some of us came away angry, others frightened. We were angry at ourselves. There was nothing wrong with our products. It was our procedures that had to change.”8

  The hundred revisionists—the company hierarchy—had been imbued with a spirit of apostolic reform. They set about imparting what they had learned in Japan to the second tier—a pool of fourteen hundred or so executives who were responsible for making the airplanes. A four-day course called WCC, for “World-Class Competitiveness,” was designed and taught by those who had been through the full Delta Point program. Next came the labor force. Management decided to teach the same course to the factory floor to reinforce the lessons it had learned. An instructor’s manual was put together, and it cascaded down through the company.

  The major lesson drawn from the Japanese experience concerned how to manage inventory. Boeing’s leadership abruptly discovered that inventory is a cost; that on any given day the plant in Renton, where the narrow-bodied aircraft are built, would have $3.5 billion in inventory lying about. Doing something about it meant replacing the old system of storing items on the factory floor with the so-called just-in-time procedure, under which a supplier arranges for just the right quantity of an item to arrive at the plant within minutes of the time it is scheduled for use.

  The model for how to do that, along with various ways of streamlining the assembly line, was Toyota. It drew unqualified raves from all the visitors. “The most refined concepts, the sharpest edge,” said Little. “Truly world-class in everything they do,” said James Johnson, an executive vice president who was running the wide-body division then.9

  Boeing people saw two Toyota models—the Camry and the Lexus—going down the same assembly line. At some fairly advanced stage, the various units became one thing or the other. The visitors were impressed, so much so that they began to feel an offstage presence—Toyota. During the visit, they heard Eiji Toyoda, CEO of the Toyota Motor Corporation, say: “We’re in the transportation business. It’s our destiny to be in the airplane business.”

  A comment in the instructor’s guide for a “World-Class Competitiveness” course developed by Boeing read: “Their [Toyota’s] long-term goal includes not only cars, but all forms of transportation. Also, their long-term goal is not to be the best transportation company in the world. It is to be the only one.” (As recently as August 2004, a senior Boeing VP said, “Boeing is still sending people to look at Toyota. And it has empowered teams to redesign workplaces. They openly call it ‘the Toyotaization of Boeing.’”)10

  Boeing’s exact goal then—cutting its costs by at least 30 percent—lay well ahead. “We are not even close to completing this reform,” said Condit. “If we cut the cycle time in half, we’ll cut it again.”11

  Woodard concurred. “We are still grabbing low-hanging fruit,” he said. “But we are on our way to amazing things.” None of those things would be an appreciable reduction in cycle time; that lay well ahead. But Woodard and others were giving a different tone to what had recently been a self-styled “engineers’ company.” Anticipating and satisfying customer needs had become the focus of a company that once upon a time designed an airplane (like the 747), sold it to one customer (like Pan American World Airways), and then persuaded that airline’s competitors that they needed it, too.

  In designing the 777, Boeing brought in engineers from eight customer airlines: American, United, Delta, ANA, JAL, Cathay Pacific, Singapore Airlines, and Thai Airlines. “They all wanted the inside of the airplane to be different,” said Little. “The differences turned on the size and shape of the seats and on the location of the galleys and lavatories.”12

  “The lavs and galleys are designing the airplane,” said Alan Mulally, who was then a vice president and one of the company’s other highly regarded and upwardly mobile engineers. He had succeed Condit as manager of the 777 program.13

  “ANA,” he continued, “contributed 215 ideas, of which 160 were incorporated. Inevitably, one involved the lavatory, in this case the toilet seat. ANA worried about the ‘problem hit sound’—the falling seat. A rubber bumper on the seat, they felt, wasn’t good enough, and they recommended a mechanical bumper.” Boeing agreed, but designing one that did the job and satisfied all requirements was a massive problem and required a lot of engineering and testing before the task was completed. “In other days,” said Mulally, “the conversation would have been about flutter, drag, and takeoff. Now it’s about this kind of thing.”14

  Mulally was echoed by Woodard, who cited the long lead time for designing the lavatories—longer than for other components—mainly because they were being designed by the customers, clearly a sore point. Completing them, he said, could take as much as eighteen and a half months; just moving the Kleenex box a few inches, he added, means reengineering the entire unit. He favored switching to modular standardized lavatories. Airbus, too, was customizing airplanes at that time. Its catalog of options was about as thick as Boeing’s.

  Boeing, Woodard said, “had done a lot of technology for the sake of technology. Technology fascinates engineers. We would custom design airplanes for carriers. We are through custom designing the product line for each carrier,” he declared.15 Woodard was determined to streamline procedures. It was, of course, the right goal, but he would break a lot of crockery trying to reach it.

  ALTHOUGH AIRBUS was still being described in Seattle as mainly a jobs program, it was drawing more of Boeing’s attention. According to an article in BusinessWeek in 1992, Airbus had begun to threaten Boeing. Airbus had some advantages. “It didn’t have Boeing’s long history of doing things one way,” said Boyd Givan, who, as noted, was the company’s chief financial officer for most of the 1990s. “It was more adaptable and was doing the thing better. Boeing liked the snap-in-place assembly technique.”16

  Airbus, too, was streamlining procedures, reducing costs, and watching the Japanese carefully. It adopted seamless laser welding of fuselage assembly, instead of using rivets, and that helped with weight. Competing against Boeing was seen in Toulouse as being partly about improving technology and partly about lowering costs. “We can reduce our costs by a certain measure every year,” said Airbus executive Gerard Blanc. “That is how you stay competitive. It is all about mind-set. We employ fifty-five thousand people, who, along with our suppliers, must share a vision. That is the strength of the Japanese. They are so good at convincing themselves and then being followed.”17

  “The Airbus factories and manufacturing processes are more modern than Boeing’s,” said James Womack, a management analyst and the founder and CEO of a nonprofit corporation called the Lean Enterprise Institute, in Brookline, Massachusetts. “Airbus,” he said, “uses more automation than Boeing…. It uses more robots than people to build fuselage shells at its plant.”18

  Womack wrote a book with Daniel Jones called Lean Thinking for the Massachusetts Institute of Technology; it sold six hundred thousand copies. The book is based on the Toyota model and describes a business system for the twenty-first century. Among the companies examined by the authors was Pratt & Whitney. “If you could fix Pratt, you could fix anything,” they said.

  Between 1995 and 1997, Womack spent eighteen months as a day-rate consultant to Boeing, under an arrangement made by Ron Woodard. His efforts, he said, “were aimed at halving production time, halving costs, and eliminating many of the mistakes.” He favored getting rid of half of the company’s vice presidents and a vast amount of factory space. How much, he wondered, would it cost to reconfigure the company? He discussed Boeing’s problems with Woodard shortly after arriving in Seattle. “I tried to get a sense of Boeing’s numbers,” he said. “But I couldn’t. Instead, I got engineering metrics—lift weight, lift drag, et cetera. But no cost data. I became the first guy to tell them the sky is falling. That’s hard.”19

  The arrangement never came close to working, partly because Woodard and others were being told things they didn’t want to hear and partly because Womack is descri
bed as having exercised little restraint or discretion in saying what he had to say. One basically sympathetic executive characterized some of it as close to “inflammatory.” In any case, Womack failed to dent management’s thinking about its problems, and Woodard ended the arrangement. As for the Toyotaization of Boeing, nothing much was happening, and there would be no discernible progress for another five or so years.

  Dean Thornton’s departure in 1993 turned out to be more of an event than it may have seemed at the time. Thornton had been a so-called T. Wilson man, and under his leadership, the line was held at Boeing on business economics. “He balanced revenue and costs,” said a colleague and admirer. “He was respected by sales and production people alike. He had self-control and resisted temptation to cut prices if that meant cutting production costs.”20 Thornton’s focus was broad. Woodard’s focus was sales.

  “In the old days, there was a checks-and-balances system,” said Larry Clarkson, a versatile former senior vice president. “Corporate had to bless production rates and other key decisions. But Phil, when he became chairman, did away with checks and balances. And he put a salesman in charge of the commercial side.”21

  Thornton’s legacy included a strong product order base, more than strong enough to convince the Condit-Woodard tandem that all was well with Boeing. Woodard began to live off this order base, which stretched three to four years. Then, after riding it for a while, he created his own base. In doing so, however, he got the cost-price equation upside down. First, he decided, as he put it, “to reach the point of having the product in the configuration the customer wants in six months. I believe our competition can’t do it. We will sell more airplanes if we can bring orders closer to the customers.”22 At the time, according to Woodard, it took fifteen months to produce a 757, seventeen months for a 767.