Boeing Versus Airbus

by John Newhouse

  Since Congress pays far less attention to the O&M budget than to the procurement budget, a leasing agreement can and usually does leave the consumer better positioned to buy new systems. In the end, it can and usually does require the government to pay more for the equipment than had it been purchased outright. But it’s a win-win arrangement for the buyer and seller. Only the public interest loses. The report from DOD’s inspector general, cited above, noted that the Boeing jet tanker deal, if it went forward, could cause the government to spend $4.5 billion more than necessary. Both the Congressional Budget Office and the Office of Management and Budget, when asked, reported that the lease would have cost more than a purchase agreement.

  Some leasing deals are more devious than others, and the one that Boeing and the air force were conspiring to make happen was at the high end, more so than most. They were structuring it in a way that would hide debt. Boeing would not have had to report the debt it was taking on in its financial reports. And the air force would not have recorded the lease as a line-item request in the president’s budget.

  The bad odor of the scandals didn’t reach Seattle, and people there began to think a little less harshly about the move to Chicago and to point out that no one involved in the jet tanker scandal and other defense-related misdeeds belonged to “old Boeing,” that is, to Boeing heritage; that without exception, the people responsible for behavior ranging from dubious to deplorable came with the merger.

  After the merger, Boeing began to reposition itself around the Pentagon. But management went too far. It blurred the line separating the company from the government and instead of concentrating on the hardware, as it once had, Boeing crossed the line.*3

  Among the stiff challenges confronting James McNerney, who assumed full control of Boeing within a year of the tanker deal’s demise, was how to rid the country’s second-largest defense contractor of its bad habits. Posting a code of ethics aimed at governing behavior wouldn’t do. Harry Stonecipher had tried that and was himself seen by the board not long afterward to have violated the spirit, if not the letter, of these precepts.

  McNerney took a more robust and ingenious approach. The setting he choose was Boeing’s annual leadership retreat. The time was early January 2006, with 260 of the company’s top executives gathered in Orlando, Florida. There, Boeing’s general counsel, Douglas Bain, who was also a senior vice president until he retired in 2006, delivered a savage indictment of reprehensible behavior routinely practiced. His speech was leaked to Dominic Gates and Alicia Mundy of the Seattle Times, and they quoted numerous passages.

  McNerney was in the audience, and Bain began by saying, “As I walked up here, I think I heard Jim McNerney mutter, ‘Here comes Dr. Death.’”21 No one there was in any doubt about who had staged this show.

  “Was there a culture of win at any cost?” Bain asked his audience. “We now know what that cost is.” Boeing, he noted, faced possible indictments by U.S. attorneys on both coasts, and the Department of Justice assessment of damages exceeded $5 billion. Also, Bain added, Boeing could be barred from government defense contracts or denied export licenses for both military and commercial sales. He reported that fifteen company vice presidents had been pushed out for various ethical lapses in recent years. “I found that to be an astronomically high number,” he said.

  “There are some within the prosecutors’ offices that believe that Boeing is rotten to the core,” Bain said. “The U.S. attorney in Los Angeles,” he said, “is looking at indicting Boeing for violations of the Economic Espionage Act, the Procurement Integrity Act, the False Claims Act and the Major Frauds Act. The U.S. attorney in Alexandria, Va., is looking at indicting us for violation of the Conflict of Interest laws. And both are looking to throw in a few conspiracy and aiding-and-abetting charges, for good measure.

  “These are not ZIP codes,” he said, as he read off the federal prison numbers of Darleen Druyun and Mike Sears. “How come in the year 2000 nobody said, ‘Should we really be hiring the relatives of our chief procurement officer of the largest customer we have on the defense side?’” Possible impending penalties, he said, include “a presumed denial of export licenses…both on the commercial and the government side,” as well as “loss of security clearances, a possible resuspension on bidding for space contracts or even total debarment from all government contracts on the defense side.”

  Bain ended with three questions: “Do we have a culture of silence? Where was management throughout this? Is the problem the rank and file? Or is the problem us?”22

  AFTER SERIAL SCANDALS someone had to go, and this time it had to be Phil Condit, although there was no evidence linking him to what had happened. Then sixty-two, he had survived, barely, other bad patches, notably the production meltdown in 1997, for which Ron Woodard was chosen—by Condit—to take the fall.

  Boeing’s reputation had suffered as never before on Condit’s watch. He probably should not have outlasted the misappropriation of Lockheed Martin’s documents, or that combined with the space systems debacle. He had to have been either miscast or indifferent to ethical standards. Whichever was the case, he should have been removed.

  Condit was a complex character whose behavior led, among other things, to indiscreet womanizing, a tendency that would have had no importance or relevance had it not become a public matter and, for the company and its board, an awkward one. Around this time he was going through a tough divorce proceeding, his third—this one with a first cousin who was likely to have the best of it in court.

  Curiously, it was T. Wilson, Condit’s polar opposite in just about every way, who made possible his early advancement. Wilson must have seen what various other executives saw—a gifted engineer, highly intelligent and more well-rounded than others in his peer group. These qualities, plus a collateral gift for climbing the corporate ladder, did the rest. They also attracted a kind of Condit group at Boeing Seattle, people for whom Phil was the smartest and wisest. They ignored or forgave his reluctance, or inability, to make decisions, a managerial flaw that curiously never seemed to get in the way.

  Although an odd couple, Condit and Stonecipher were able to work together, partly because they had similar views. They had skeptical attitudes about the commercial aircraft business. They wanted to make Boeing a preeminent defense contractor. And they wanted to diversify and acquire high-technology properties.

  They also shared the experience of having merged their two companies, although Stonecipher, who was hardly negotiating from a position of strength, drove the transaction; he had even managed to saddle Boeing with his company’s albatross, the commercial aircraft division. From then on, the McDac part of the enlarged company (a Stonecipher–Mike Sears nexus) drove the decision-making process. Numerous McDac people who had been expected to move on after the merger connected themselves to the enlarged company and, in many cases, acquired authority.

  A strong hint of what could lie ahead occurred on June 1, 1998, just six months after the company posted its first operating loss in a half century. A piece in the Seattle Post-Intelligencer reported Condit telling “stunned managers” that his second in command, Harry Stonecipher, “would be in charge of the commercial recovery.”23

  A cultural change, already under way, acquired momentum. Veteran Boeing watchers saw a company once run by engineers giving way to youthful products of business schools. “They understand process—which buttons to push,” said a senior executive with a major Boeing supplier. “But they don’t know shit. They don’t know what they don’t know. And there’s no passion. They would be just as much at home with Procter & Gamble making soap.”24

  Stonecipher decided to retire four years later, in June 2002. (He had wanted to leave a year earlier, but the board asked him to stay on for a bit.) He appeared to have wanted to take life easier, and as one of Boeing’s two largest individual investors, his influence was certain to continue radiating, especially with John McDonnell, the single biggest investor, still a board member.

  In any
case, Stonecipher wasn’t gone long. Fifteen months later, in December 2003, Condit left under a cloud, and Stonecipher was now president and CEO. As boss in his own right, he created several admirers as well as detractors—predictably. He had allies on the board other than McDonnell. His heavy stress on cost cutting did not go down well with a large part of a company that was unaccustomed to tight fiscal discipline. It did go down well—very well—on Wall Street and with shareholders. Boeing’s shares rose more than 50 percent on his watch.

  Stonecipher’s known misgivings about the commercial aircraft business caused concern. With him at the helm, would Boeing do something about its aging product line—at long last build a new airplane, maybe—or would he put the company’s chips elsewhere and thereby begin to edge away from the commercial business in small steps?

  Boeing Seattle had to worry. Eight months after taking charge, in an interview with the Seattle Times, Stonecipher laid heavy emphasis on his bottom-line focus: “The moment that we can’t make money in this [commercial aircraft] business, we will not be in it,” he said. “The only thing I do, the only reason I’m hired, is to make money.”25 In a company with a tradition of betting all that it had on a new airplane, talk like this was unsettling, at least to its commercial aircraft people and the city of Seattle.

  There was a new airplane—the 7E7—awaiting a decision on whether to build it. The board’s two most powerful members, Stonecipher and John McDonnell, were reported in the Wall Street Journal as having said this might not be a good idea. They expressed concern about the airplane’s cost and said they might move to block the project unless company engineers could develop it much more cheaply than previous aircraft.26

  But they could hardly do so, if only because the 7E7 (renamed the 787) would be designed around engines that did not yet exist and a combination of novel methods and technologies for building a long-range airliner. Stonecipher and McDonnell, according to the Journal, argued that Boeing “should focus on maximizing profit from its existing jetliner models and continue expanding its defense, aerospace and finance businesses.”27 According to Stonecipher, he keeps a copy of this piece in his desk and occasionally teases the reporter, Lynn Lunsford, about it, because, he says, “the piece was wrong, one hundred percent wrong. I told that to the editors of the Wall Street Journal whom I met with. I have been and still am a big fan of Lynn Lunsford’s. But he was dealing with people [at Boeing] who didn’t know what was going on.”28

  “Harry never teased me about the piece,” said Lunsford, who likes and respects Stonecipher, and regards him as among the strongest figures the industry has produced in recent years. “He did say, ‘I’d love to talk about this over a beer sometime.’ But that never happened. I was in the room with him in the meetings he had with our editors. He never told them the story was wrong.”

  Boeing’s board had not authorized a new model since it approved the 777 in 1989. A decision against going forward with the 7E7 would invite gloomy comment about where the U.S. aircraft industry was headed. The United States had pioneered commercial air travel and developed a dominant role, but nothing fixed that role as a permanent feature of international life.

  Signs had appeared that several of the big Asian airlines, including some that were already buying Airbus’s A380, were attracted to the smaller Boeing airplane. It, too, would be a double-aisle aircraft with improved comfort. And it would fly about as far as the A380 and do so point to point, rather than hub to hub. An airplane that would spare travelers the inconvenience and uncertainties of relying on connecting flights was certain to have broad appeal.

  In the fall of 2003 and the first part of 2004, experts disagreed on whose concept—Boeing’s or Airbus’s—the market would like best. “It’s not an either/or case,” said John Pleuger, president of the International Lease Finance Corporation (ILFC), the biggest lessor of wide-bodied aircraft. “But the major traffic flows will be between major city pairs—hub to hub.”29 Gradually, however, the argument for flying point to point became the more convincing.

  A voice to which close attention was paid was that of Steven Udvar-Hazy, chairman and CEO of the ILFC. In April 2003, he advised Boeing via the Wall Street Journal (and perhaps privately) “to leapfrog Airbus the way that Airbus leapfrogged them.”30

  A good argument for going ahead with the 7E7 was made not just by Boeing Seattle but also by some of the most carefully watched aerospace analysts on Wall Street. As they saw things, Airbus’s engineering and financial resources were tied up with the A380 program. This meant that in a renewed struggle with Boeing for the biggest share of the middle market, Airbus would be competing with its A330, which would be a middle-aged airplane when the 7E7 became available.

  In December 2003, Stonecipher and his board approved going forward with the 7E7 provided enough airlines from various regions ordered it. But in April 2004, Stonecipher points out, “even though we had only one customer for the airplane, we launched it.” The airline was All Nippon Airways.

  What actually happened was the following: The 7E7 team was frustrated. Its people knew the company had to find an answer to Airbus’s A330 or simply forget about the middle market. And they knew that whatever they did would have to be done in a way that satisfied Stonecipher. He told them, in effect, “You will have to cut development costs and manufacturing costs. You’ll have to get the airplane out the door smarter and faster.” The team responded by recruiting the 787’s risk-sharing partners: the three Japanese heavies, plus Alenia and Vought.

  The process of financing and developing the 7E7 got under way. Not going forward with it would have amounted to a signal that Boeing was indeed exiting the commercial airliner business, a move that would have made the U.S. government very unhappy. Stonecipher was well aware that the government would go to great lengths to avoid having the country pushed out of the commercial airliner business. It’s a symbol of American primacy that reaches into its past. The United States and its airline industry might have recoiled from the prospect of being at the mercy of one supplier.

  Nor is it lost on various government agencies that the aircraft industry operates at the cutting edge of more high technologies than any other and its product historically earns more foreign exchange than any other single U.S. export. Given Boeing’s dependence on Washington, starting with the Pentagon, Stonecipher had to think very carefully about the 7E7, especially in the light of the mess that his company had been making of its military programs.

  Fifteen months later, in March 2005, Stonecipher had left again, this time involuntarily. The board told him to step down because of his “improper relationship” with a female executive of the company. “The board determined that his actions were inconsistent with Boeing’s code of conduct” was the statement’s starchy conclusion.

  The code had been put together as part of a broad effort dictated by Stonecipher and aimed at mainly discouraging behavior of the sort that had gotten the company into trouble with the Pentagon. Moreover, the woman in question did not report to Stonecipher, and their affair—consensual—had been of brief duration.

  At first, the board seemed to have overreacted and in doing so made itself look foolish, if not hypocritical. Within much of the company, many people, whatever their view of their leader, were incredulous. “This news is awful,” said one executive in an e-mail to a friend. “It will make us look foolish, which we are, and puritanical…. If you want your CEO to resign over an issue like this, why not be a bit more dignified about it and just state he resigned for personal reasons? Why crucify him with his pants down?”

  As more of the story dribbled out, it appeared that the board had actually been left with no other alternative. Highly explicit e-mails between Stonecipher and his inamorata, written on Boeing computers, bore a risk of being intercepted and embarrassing the company. It was a harsh end to a career that lasted had forty-five years, during most of which Stonecipher had operated at the center of various large companies’ affairs.

  Stonecipher was to the
executive suite born. He was smart, capable, and resourceful. He was decisive and opinionated. Along with Airbus’s John Leahy, he was one of the two most widely talked about of the industry’s figures. He was his own best PR director. The press liked him. He was brutally frank and used the top job as a bully pulpit from which to tell all interested parties how to think about the issues affecting the airline industry.

  BusinessWeek Online carried a long article on the sacking of Stonecipher under the headline “Why Boeing’s Culture Breeds Turmoil.” The article cited Boeing insiders as describing “an ongoing culture of unrestrained excess that dates back to the Condit years. The lack of restraint also led to rampant political infighting among senior managers…. Executive-suite shenanigans and infighting are hardly unknown in Corporate America, but the degree to which they pervade Boeing is rare. For a company that must negotiate with governments and take responsibility for the safety of the flying public as well as sensitive military contracts, the distractions are particularly troubling.”31

  Stonecipher operated in what he saw as being the tradition of Jack Welch. In emulating Welch, some of what he did helped Boeing. Welch, for example, had created a management development institute in Crotonville, New York. He recruited a number of professors from leading business schools and paid them corporate salaries. GE executives who were judged to have potential were required to attend the course. Shortly after Boeing’s merger with McDonnell Douglas, Stonecipher set up a similar institute with the same sort of people running it. Executives from both GE and Boeing are convinced that management in both places has been strengthened by the training that these institutes provide.

  THANKS TO SALES OF aircraft by Airbus, its parent company, EADS, was able to record its best ever financial performance in 2005. And operating profits were expected to grow by more than 12 percent in 2006, given a forecast of “sustained high deliveries” by Airbus.32