McNerney may seek retirement waiver: our view

Boeing’s Jim McNerney may seek a waiver to the mandatory retirement age of 65–he’s 64 this year–to continue as chairman and CEO.

As soon as the news was out, we got a call from one Wall Street analyst who opened the call by saying, “Short the stock.” We initially thought this was some solicitation call.

We’re not that pessimistic but we do have these observations:

  1. McNerney staying beyond 65 is good news for Charleston, where Boeing is increasing its presence at a rapid rate. McNerney has a clear affinity for South Carolina: its local, county and state governments seem to have an open check book for Boeing. And it’s non-union and has lower wages. As long as McNerney is CEO, Charleston will continue to grow rapidly.
  2. It’s bad news for the unions. He just doesn’t like them. We don’t really need to pontificate on this point. Boeing is cutting back on union jobs here and transferring the work to non-union locations.
  3. It’s generally bad news for Washington State. It’s pretty clear that McNerney isn’t a fan of this state, given it’s costly to do business here, wages are higher, environmental rules are stricter and the State hasn’t exactly been innovative when it comes to thinking up stuff with which to incentivize Boeing. Gov. Christine Gregoire, like Gary Locke before her, pretty much took Boeing for granted until the company used the proverbial 2×4 upside the head to get their attention. Gov. Jay Inslee, Gregoire’s successor, so far has offered up more of the same to “win” the 777X assembly: more workforce training, better infrastructure and faster permitting–all-in-all, not at all innovative or outside-the-box thinking.
  4. More blackmail for Washington: Boeing has always been good at prying concessions out of states and local jurisdictions. McNerney has elevated this to an art. Assemble the 737 MAX derivative in Renton? Of course, said Jim Albaugh, CEO of Boeing Commercial Airplanes. Not so fast, said McNerney, in a highly public and humiliating rebuke to Albaugh (who was gone within the year after this faux pas). Assemble the 777X derivative here? Don’t count on it, says McNerney. Assemble the 787-10 derivative here? Don’t bet on this, either. In the end, the MAX was located here, but we think that was payoff to labor (which also gave in return) in exchange for dropping the NLRB 787 lawsuit. Without this card, it’s up to the State to be blackmailed for more incentives (we really don’t think Inslee’s package is worth much on 777X).

We were pretty happy with McNerney’s ascension to chairman and CEO after the disastrous rule of Phil Condit and Harry Stonecipher. But McNerney’s performance throughout the 787 and 747-8 debacles was wanting, we (and many others) concluded. We think McNerney was slow to make changes in these programs, and he was on the Board of Directors who signed off on the McDonnell-Stonecipher-driven outsourcing approach on 787 that proved so disastrous. McNerney has been at war with the unions, who saved Boeing’s bacon during these programs. We certainly understand the need to control costs and we opined a lot on the medical and pension cost issues, generally coming down on the side of the company. But we can’t help but sense ingratitude from Chicago for all the hard and dedicated work performed here in Puget Sound.

Most significant, perhaps, is the thin bench there is to succeed McNerney. Shortly after he became CEO, McNerney said one thing that was his priority personally and professionally was to create a good succession plan. Who is there from within to possibly succeed McNerney in a year or 18 months? The answer is, at this point, nobody.

Ray Conner is well regarded, but he probably needs a couple of more years than a McNerney retirement timeline suggests. Pat Shanahan hasn’t any commercial sales experience. Dennis Muilenburg has no BCA experience.

McNerney may well have to get a waiver because so far he has utterly failed to have a succession path.

27 Comments on “McNerney may seek retirement waiver: our view

  1. Avoiding the unprintable comments almost required stitches in my tongue.

    The summation would be classic description of hubris along with the BA board of Directionless for NOT mandating training of two or three replacements.

    And for many years, I sort of thought that the old BA cliche- make a screwup that costs the company less than a Million $$ will get you fired. But if you can make a multi million ( now billiion ) fiasco due to incompetence, you are candidate for elevation into upper management ranks. Now it seems to be more like deja view all over again !!

    Consider that a 2013 shareholder proposal for Boeing to have separate executives in the CEO and Chairman jobs won a surprising increase in shareholder support – 42% – even though Boeing responded before the vote by giving more work to its Lead Director.

    And as to unions and layoffs and such- check what is happening on another company JIm is involved in – its called IBM.

    Perhaps the analyst had it right – at least consider shorting the stock if you have recently bought some at over $80-90. Used to be when it got that high, it split.

    My long ago purchased shares now have less than $10 cost basis :-)

  2. So I wonder why the delay on the announcement of where the 787-10 will be built? I think most people think it will go to Charleston.

    What are the odds Charleston gets both the 787-10 and 777-X?

    The checkbook is definitely open down there.

  3. Rudy Hillinga Why is filling out these two lines a new equirement every time I write somethingScott?

    RE: “Boeing has always been good at prying concessions out of states and
    local jurisdictions,” and “McNerney has elevated this to an art.”
    Whoopee, typical attitude of those who want most of the profits for themselves,
    to become ever more rich and to hell with those who do all the hard work, who
    produce those profits!

  4. Question-how have the shareholders done on market value added under McNerney ?That is a more objective question on his performance. If he has not done well,he has to go.Age cannot be a reason for him to go in my view.

    • vaidya sethuraman :
      Question-how have the shareholders done on market value added under McNerney ?

      They have done quite well actually. But that is short term value added. For the long term it is anything but certain. The 747-8I is not going anywhere. The 777X will be a huge investment, with a corresponding risk. I have serious reservations about the MAX potential over the long term. The 787 seems to be back on track, but it is still in a negative cash flow position, and will remain there for sometime.

      The 737 and 777 have a huge backlog, but as aircraft are delivered it will not necessarily renew itself automatically. In my opinion there could be a difficult transition period (cash wise) between the 777 and 777X, and later on between the MAX and NSA. Of course in the meantime the 787 will more than likely have fully recovered; but the irony is that when it will have reached positive cash flow it will be supporting the other programmes even though it might itself never break even as a programme.

      • But not as well as we COULD have done had McNerney and his gang not screwed up so badly. Yes the stock is currently at a 52 week high, but it could have been here years ago and gone beyond where it is today if they didn’t screw up the 787, didn’t constantly have senseless fights with labor, constantly make dumb decisions about sourcing, etc etc etc. Boeing has succeeded not because of McNerney, but DESPITE him. It’s actually a credit to the hard working people inside the company.

  5. According to Wikipedia, in May 1940 Prime Minister Neville Chamberlain was driven from office by among others, M.P. Leo Amery who said: “You have sat here too long for any good you are doing. Depart, I say, and let us have done with you. In the name of God, go!”

    Chamberlain was replaced by Winston Churchill. Who ya gonna call to replace McNerney?

  6. “McNerney may well have to get a waiver because so far he has utterly failed to have a succession path.”

    Some could interpret this failure to prepare a (some) successor(s) as part of a plan to make himself indisensable to Boeing so they have no choice but to keep him on. That, to me, should be grounds enough to get him out as soon as possible.

    Alhtough based on his comments in the article, it seems he is pretty well guaranteed to stay past 65. Stonechipher even came out or retirement to take control. Hopefully McNerney doesn’t fall like Stonecipher did.

    • Maybe the succession plan is to replace with a non-Boeing person. There are good reasons to go in-house and good reasons to go out. How about recruiting someone senior from Airbus (first one I looked at, Tom Williams, has a good spread of experience in related companies, civil and military. I assume I’d find others suitable if I looked any further)? Do that and they would bring knowledge of any areas that Airbus does better, and the new person would also be able to recognise areas that Boeing does better, fit the two together.

      • ROFL.
        Was Hans Dominik’s “Wettflug der Nationen” ever translated into english?

      • How much switching between the upper ranks of Boeing and Airbus/EADS has there been over the years?
        Anybody know? I cannot personally think of any.

      • Why the ROFL? Is it because you think Boeing’s board is too insular to consider it? Or their senior managers or other employees too insular to countenance it? Or Airbus top management unwilling to moving across? Just because it might be difficult is no reason not to try. Look at the facts. Airbus went from 0% market share to 50%+ in just over 3 decades and its programme mamanegement issues have been less than at Boeing. Any board member worth their salt would be keen to bring some of that advantage to their own company.

        As for the book, not that I know of. What is the gist of it?

      • see ( use google translate ) :
        http://leehamnews.wordpress.com/2013/06/18/mcnerney-may-seek-retirement-waiver-our-view#comment-42302
        in my interpretation Prof Eggers is drawn after Hugo Junkers.
        Eggers planes win the race and Eggers further on controls the US manufacturer.
        ( the feared drain of know how doesn’t come about as Eggers only raced his mature generation of planes ;-)
        Be carefull though, Dominik also wrote “Hitlerjunge Quex” so it paints quite a bit of hunnish jingoism. Then replacing “German” with “American” most readers would find
        it completely unremarkable in that domain ;-)

  7. Normand Hamel :
    They have done quite well actually. But that is short term value added. For the long term it is anything but certain.

    You appear to misunderstand share pricing there Normand. The market price is based fundamentally on expected earnings over a considerable period in the future. So, unless analysts and institutional investors have reduced volatility in their forecasts (eg they understand Boeing better, they think Boeing understands itself better, any economic slump is less likely to affect it), or they are expecting a takeover or breakup that would increae value, or they are being isnufficiently indpendent in their own forecasting, the share price rise is based on those longish term future earning expectations.

    • The market price is based fundamentally on expected earnings over a considerable period in the future.

      But these expectations are formed by often shortsighted assesments and strategic communications / astroturfing.

      See the fake report on Air Berlin buying additional 787 2 days ahead of the NTSB hearing.
      Stock jumped significantly upwards didn’t loose on the Friday NTSB hearing ( everything is well as airlines buy ahead of the hearing ) …

      I am not quite sure about other stock but Boeing stock has been in lala land for ages.
      A very well “managed” stock… and completely fake.

      • Uwe :
        But these expectations are formed by often shortsighted assesments and strategic communications / astroturfing.

        No they aren’t. Analysts build models to assess likely future earnings and cashflows under different scenarios and assess which are the most likely. They are trained to rummage through filings to find hidden details, to read any propaganda/publicity/PR materials with a critical eye, and to use other sources to build a pretty clear picture of the state of the business. All of these assessments are over as long a horizon as feasible.

        All widely held market caps are subject to volatility due to rumors etc., but the Air Berlin announcment will not have changed analysts’ models or therefore the reports they provide. The mkt cap jump at that time may also have been due to a completely unrelated issue and without looking at how many shares were traded and by what sort of investors it wouldn’t be possible to see if the two go together or what long term effect there is on the key institutional investors. Small and day investors often jump on bulletin board news.

        As for Boeing stock being well ‘managed’, unless you are suggesting illegality, the only ways for such a widely analysed stock to be significantly misvalued by a strong majority of analysts are if there is a herd mentality, (which can of course happen), the well tried rules of finance and economics are badly wrong, or they all use software that is flawed. My guess is that at the present time though the models all do point toward strong earnings and cashflow to support the market cap. Remember, Boeing is not just civil airliners.

      • More of your conspiracy theories, really it does get so old. You need a new schtick. Vaudeville is dead.

  8. Woody :
    Analysts build models to assess likely future earnings and cashflows under different scenarios and assess which are the most likely. They are trained to rummage through filings to find hidden details, to read any propaganda/publicity/PR materials with a critical eye, and to use other sources to build a pretty clear picture of the state of the business.

    The 2008 meltdown clearly demonstrated that this is not always the case. Far from it.

    • The 2008 ‘meltdown’ was a macro-economic issue that snook up because of political issues and overly complex financial engineering. Analysts are not politcians or financial engineers and aren’t paid to assess macro-economic issues. They rely on others for that info and plug it into their models, which are fundamentally about getting a clear picture of that specific business or industry, not a country or the world. When the macro-economic situation shifted they certainly would have updated their models (unlike the situation with Air Berlin).

      • “Snook up”, forthoth,
        trying to rewrite history ?

        OK, the housing bubble grew for quite a time ( pampered with care )
        But warnings about a collapse ( taking all the leveraged structured dept and stuff
        with it ) go back to before 911. Just like we saw for the 787 supervisory stops
        had been removed or defanged with exceptional care.
        Even the collapse seems to have be craftily managed in a way.

      • Woody :
        The 2008 ‘meltdown’ was a macro-economic issue that snook up because of political issues and overly complex financial engineering.

        Is greed a macro-economic phenomenon? Is greed a political issue? Is greed caused by overly complex financial engineering?

        The 2008 meltdown can be explained in one simple word: GREED. Actually the vast majority, if not all, the financial crises can be explained by greed. Business analysts are generally very smart and rational individuals. But greed can quickly turn them into irrational beings. There is actually a term for this kind of behaviour, it’s called irrational exuberance. And it is the root cause of all the financial bubbles.

  9. Back to Jim McNerney ; Boeing is owned by stockholders ; if they think, he is not up to it , they should get rid of him. Period. We can all sit on judgment on whether he is chalk or cheese , that does not matter .
    Let the stockholders decide if he gets a “waiver” or not.
    I have a feeling that Boeing stockholders are going to do well with 787 tech and project issues are behind (touch wood).

    • Vaidya Sethuraman :
      Back to Jim McNerney ; Boeing is owned by stockholders ; if they think, he is not up to it , they should get rid of him. Period. We can all sit on judgment on whether he is chalk or cheese , that does not matter .
      Let the stockholders decide if he gets a “waiver” or not.
      I have a feeling that Boeing stockholders are going to do well with 787 tech and project issues are behind (touch wood).

      You do not understand about shareholders. The shareholders do NOT have the power or authority to fire anyone. The closest they can come is thru a massive PR effort which at best has a low chance of success. Shareholder proposals re firing or changing employment terms are considered ‘ ordinary business’ and NOT subject to shareholder voting or approval.

  10. Pingback: Boeing’s “exodus” from Washington State a tad overblown–so far | Leeham News and Comment

  11. Jim McNerney seems to be doing a fine job of holding down the fort and expanding Boeing’s manufacturing infrastructure for the future. I believe the success of Boeing will depend on if they invest in future projects or just try to suck profit out of the existing line up. They can’t wait too long. 2017 is the deadline to launch a new airplane of some description, above and beyond whatever they do with the 777.

    • TC :
      I believe the success of Boeing will depend on if they invest in future projects or just try to suck profit out of the existing line up.

      TC, which side do you think McNerney lean on? Future projects, or sucking profit? Does he want to stay because he intends to push new projects, or for “increasing shareholder value” as they say? Unless he is staying because he wants to finish his “extermination” job with the unions.

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