Boeing will leave Seattle: prediction

Update, April 27: It has been pointed out to us that The Everett Herald wrote that we advocated changing and cutting unemployment insurance and taxes during our speech to the Economic Development Council of Snohomish County. This is not correct. We took no position on the then-pending legislation in Washington State. What we did say is that we agreed with County Executive Aaron Reardon’s characterization that a change by the Legislature in 2005 to the 2003 Boeing 787 incentive plan was “bait-and-switch.” This concurrence apparently led the paper to conclude we supported the change proposed this year.

The Washington State Labor Council wrote us with this information about the 2005 change:

EHB 2255 was the bill in 2005 that restored UI benefits from four-quarter averaging (which it was changed to as part of the 2003 7E7 incentive package, a significant cut of up to $200/week for some workers) back to two-quarter averaging where it was prior to 2003.  There was only one business in Washington that testified in support of this restoration of benefits.  It was BOEING.  Bob Watt.  Check it out (under “pro”) right here:

Update, April 24: Bryan Corliss wrote a five page article for the May issue of Seattle Business Monthly that just hit the web. The article, entitled “Boeing, Boeing…Gone,” is an excellent analysis of the current state of affairs in the perennial controversy over the issues involved in Boeing staying in Puget Sound or moving elsewhere. We knew he was working on a piece–we’re quoted extensively in it–but did not know who else he was talking to. We note that other observers touched on virtually the identical points and came to the identical conclusions we discussed in our EDC presentation below. Corliss knows Boeing as well as any local reporter. He covered the company for years for The Everett Herald, leaving when he obtained a fellowship at New York’s Columbia University. Michelle Dunlop succeeded Corliss, who returned to the Seattle area after conclusion of his Columbia work to resume his coverage of Boeing for other publications.

Update, April 23: Michelle Dunlop of The Everett Herald, in her reporting of our EDC appearance, inserted this little reminder:

Last fall, during the Machinists’ strike, analyst Richard Aboulafia, with the Teal Group, predicted a Boeing exodus over the next decade.

“Over the next 10 years, (Boeing Commercial Airplanes) will move to southern states with weaker unions and right-to-work laws that diminish union power,” Aboulafia wrote in a briefing. “This move will likely happen in phases, with new programs … established elsewhere and the 787 line shifting locations.”

Update, 3:00 PM: In response to an analyst question on the Boeing earnings call, CEO Jim McNerney said a decision on ramping up 787 production beyond the goal of 10/mo (ie, this effectively means a second production line) will be made about a year from now.

Note: This is a 2,400 word report.

We were the speaker today (April 22) at a meeting of the Economic Development Council of Snohomish County, which is the county in Washington State where Boeing’s Everett wide-body production facility is located.

The meeting was scheduled before a flurry of press activity following the unauthorized release of a study by Deloitte Consulting about Washington’s aerospace competitiveness and a second study about Boeing’s impact on the Puget Sound (the greater Seattle area) economy. The second study was by the Washington Research Council (WRC).

The Deloitte study concluded Washington is not competitive with Texas, Kansas and some other Southern states due to its business climate deficiencies, labor issues and other factors. The Washington State Labor Council and the national headquarters of the International Association of Machinists (IAM local 751 represents thousands of Boeing workers in Puget Sound) dismissed the veracity of the Deloitte study because Deloitte has done work for Boeing in the past.

The validity of the WRC study was discounted by a close observer of Boeing because WRC officials have previous connections to Boeing.

Our view on the two studies is this: we don’t really care whether Deloitte has done work for Boeing in the past or not, or if some Boeing talking points were included in the study (which, generally, seems to be true). The underlying thesis that Washington hasn’t attracted significant new aerospace business is indisputably true and most if not all of the statistical data comparing states-to-states is publicly available. (How this is interpreted may be a different and legitimate issue of debate.)

Bottom line: there is something wrong in Washington where new business avoids this state.

As for the WRC study, the conclusions contained therein are probably sound. Whether this study, or the Deloitte report, are orchestrated efforts by Boeing to send a message to the Legislature is hardly the point. There is a problem (a challenging business climate), solutions need to be found or there could be ramifications (the prospect of Boeing leaving Puget Sound in whole or in part). The nature of the solutions are the proverbial devil in the details.

The Snohomish County EDC asked us to make a presentation of our analysis of the situation and whether Boeing might locate the 787 production Line 2 in Everett or somewhere else. The EDC felt that since we don’t have a dog in this hunt (our Texas background is showing on this one), we could give an unbiased view, whatever it is, about this prospect.

We’ve gone on record previously saying that we think Line 2 and new airplane programs will be located by Boeing elsewhere. In this, we concur with the Teal Group’s Richard Aboulafia, a good friend with whom we often disagree on Airbus-Boeing issues. On this one, we align perfectly.

While some may question whether Deloitte and WRC are doing Boeing’s bidding, nobody can accuse us of being Boeing’s shill. Ever since we called for the firing of Phil Condit in 1997 as responsible for the production fiasco that year (BCA president Ron Woodward, also responsible, took the fall while Condit survived), we’ve been an occasional critic of Boeing (though not even remotely all-critic, all-the-time, as some suggest). Our criticism of Boeing has frequently gotten us sideways with the company.  Our relationship with Boeing can best be described as off-and-on. So on this issue, when we fundamentally side with Boeing, it won’t be possible for anyone to credibly dismiss our views as they attempted to do with Deloitte and WRC.

Our detailed analysis provided the EDC is based on our decades-long Boeing watching, our discussions with people inside and close to Boeing, other analysts and our own judgment. Boeing knew we were preparing this analysis for the EDC and had mixed feelings. On the one hand, we happen to agree with its overarching view of shortcomings in Washington business, labor and education issues (we did not, with the EDC, and do not now take a position any many of the particular issues advocated by Boeing, however). On the other hand, Boeing was uncomfortable with the idea that we were predicting it will pick up stakes and leave the state. This had more to do with our publicly suggesting the outcome and the political sensitivities than for any other reason. Why especially sensitive at this moment? The state Legislature is in session and bills advocated by Boeing are being considered. The prospect of Boeing leaving Washington is a particularly sensitive topic right now–one legislator even went so far as to introduce a silly bill aimed at denying tax breaks to any company threatening to leave the state, a bill that didn’t name Boeing but which was clearly aimed at the company.

We don’t profess to have any insider’s knowledge about whether Boeing will or won’t leave Washington. Despite our prediction that it will, we hope it doesn’t, especially with our own parochial, vested interest of living in Washington generally and Puget Sound in particular. While losing the traffic congestion would certainly be nice, our home value would plunge along with everyone else if Boeing were to abandon Puget Sound.

We think it is possible to pull a rabbit out the hat. But Washington politicians at every level have to wake up and smell the bacon, so to speak. So does labor. While we think labor has a lot of valid points, especially having been proved right about the outsourcing fiasco predicted with respect to the 787, Boeing CEO Jim McNerney simply believes in outsourcing and that’s not going to change. Furthermore, the reality of the cost Boeing faces of developing replacements for the 737 and 777 roughly concurrently is a financial challenge Boeing cannot face by itself. Outsourcing will be a must.

At the same time, Boeing management, if it is sincere about wanting a smooth working relationship with the unions (and many in SPEEA and the IAM believe Boeing wants to bust the unions rather than work with them), then management needs to get its head out of the sand. Management totally, completely misread the mood of the IAM 751 membership in negotiations last year. In the end, the IAM pretty well accepted the Boeing offer, but 88% voted to strike and slightly less than that voted to reject the contract. Management was stunned–they had no clue, and this is a sobering indictment of just how out of touch management was.

Labor has to come to the realization that they are going to lose jobs even if Boeing stays in Puget Sound. But management ought to be more open to in-sourcing than it is right now.

State and local officials need to create a Plan on the assumption that Boeing will be reducing jobs here whether it stays or not. Establishing a climate to attract new businesses where Boeing jobs might simply shift to other companies (like Boeing Wichita BCA was sold to become Spirit Aerosystems) at least will preserve Puget Sound jobs and revenue to local and state governments. This could help achieve McNerney’s goal of outsourcing yet still provide jobs to former Boeing employees.

In any event, below is the press release we issued concurrent with our EDC appearance. Here is the slide show that goes along with it: Boeing to Leave Seattle.

Issaquah, WA, April 22, 2009: Leeham Co. LLC, an aviation consulting firm, predicted today that The Boeing Co. will decide to establish a second production line for the 787 Dreamliner outside Puget Sound and that the replacement airplanes for the 737 and 777 will also be located elsewhere.

Scott Hamilton, managing director and founder of Leeham Co., made the prediction in a presentation before the Economic Development Council of Snohomish County. Boeing’s Everett (WA) wide-body production plant is the largest employer and the economic engine for Snohomish County. The 787, 777, 767 and 747-8 are produced or assembled at this plant.

The 737 is produced at the Boeing plant in Renton (WA) in King County (Seattle).

Hamilton made the prediction on the basis of four fundamentals:

  • Boeing management has had it with the poor labor relations with its two leading unions, the IAM 751 local and SPEEA, leading to strikes or threats of strikes each time a contract comes up for negotiation. Boeing customers are increasingly complaining about the uncertainties and reliabilities in delivery of their aircraft.
  • Like it or not, and believe it or not, Boeing’s complaints over decades about the business climate in Washington appear to be reaching a breaking point. Although the Washington State Labor Council and the IAM National attempted to discredit the recent Deloitte Consulting study about Washington’s competitiveness because Deloitte does work for Boeing, the fact remains that Washington has not attracted any new major aerospace business for years. The State Labor Council and the IAM National can dismiss the Deloitte report all they want, but they can’t dispute the failure to attract significant new business here despite tax breaks available to aerospace companies adopted by the State in connection with the 787 program.
  • Washington’s political leaders have engaged in decades-long benign neglect of higher education and specifically for aerospace engineering design schools. Washington has more aerospace engineers than any other state but graduates the fewest number. The top aerospace engineering universities are not in Washington, but are in Florida, Arizona and California. Washington universities don’t even make the Top 5, 10 or 15 lists. It is pathetic that this is the case when the tri-county Puget Sound area has 650 businesses associated with aerospace and a significant aerospace presence in the Spokane area.
  • Boeing’s CEO, James McNerney, is a rock-solid advocate of outsourcing for strategic and financial reasons.

Hamilton estimated that a decision by Boeing on when and where to establish a second production line for the 787 could come in late 2009 or in 2010 and be operational in 2013. This lead time is required to allow its industrial partners expand plants and acquiring tooling necessary to go beyond the current planned capacity of 10 787s a month by 2012. This gives stakeholders in Washington very little time to address Boeing’s concerns about the 787 Line 2 in a successful manner.

Once a decision is made to locate a second production line elsewhere, Hamilton believes it is quite possible 787 Line 1 could move to the Line 2 location.

If Boeing locates 787 Line 2 and possibly relocates 787 Line 1 outside Puget Sound, then the probably increases dramatically that the replacement airplanes for the 737 and 777 will join them. With projected service entries of these replacement airplanes in the 2018-2020 timeframe, this means that by 2020, Boeing production will either be a mere ghost of itself in Puget Sound or gone entirely.

Stakeholders have at best 2-6 years to make dramatic improvements before irrevocable decisions are made by Boeing about the future of the 737 and 777 replacement airplanes.

Even if Boeing elects to remain in Puget Sound for 787 Line 2 and the 737/777 replacements, total Boeing employment here will decline because CEO McNerney is adamant about outsourcing and that the 787 production model will be the basis of the new airplane lines. (787 production execution has been the underlying issue for this program’s delays, in Boeing’s view.) The 787 line is to employ 800-1,200 at full efficiency and similar numbers can be projected for the 737/777 replacement airplanes. This means that thousands of Boeing assembly line workers will lose their jobs regardless whether Boeing remains in Puget Sound or not.

Action Required

Bold, detailed action is required to address the shortcomings in the business climate and labor relations.

  • The Washington Business Climate has to improve. Although the immediate focus is on Boeing, the reality is that this issue is not just about Boeing. It’s about attracting more businesses and jobs here, period. Boeing’s workforce is going to decline as more outsourcing is adopted for the new airplane models. Puget Sound and Washington State need a plan to replace these jobs when the time comes, and that time is coming sooner than has been recognized.
  • The long-standing hostility between Boeing labor and management has to come to an end for the benefit of these parties, Boeing’s customers, the indirect jobs and the overall economic health of Puget Sound and the State. An independent commission ought to be formed to oversee frequent meetings between labor and management outside of the inherently confrontational contact amendment sessions to discuss issues and work through problems before these become key points of contention during contract negotiations. If both sides are sincere in their claims of wanting better relationships, frequent high-level meetings are a must.
  • The Governor and the Legislature need to get serious about improving education in this state, from the high school level through higher education and culminating with the creation of a world-class aerospace engineering university and a world-class technical training center. Proposals to coordinate programs through the community colleges as the answer to aerospace engineering, R&D and technical needs are cosmetic, laughable, and on-the-cheap. We need to attract Embry-Riddle University to Puget Sound. Embry has the No. 1 and No. 3 Top-rated aerospace engineering universities (via the Florida and Arizona campuses) in the country, as ranked by US News and World Report in its 2009 annual survey. The University of Washington and Washington State Universities don’t make even the Top 15 lists. Having the presidents of these universities on the Governor’s new Aerospace Council raises the prospect that their parochial interests will override bringing Embry-Riddle to this state.
  • A new, centralized full-service technical school is required. The proposals to rely on community colleges is fine as a basis for the fundamentals, but a centralized training center where students can get hands-on training for systems, maintenance, repair, overhaul, engines, avionics and eco-aviation issues is necessary. Imagine the benefit to students if Boeing or an airline donated a retired aircraft so these students could get this kind of hands-on training. This is not an effective possibility at a community college. Additionally, a world-class technical training center could serve students from developing aviation markets where local facilities are in short supply. A Washington-based technical training center should be at an airport, suggesting that Boeing Field in Seattle, Paine Field in Everett or Grant County International Airport in Moses Lake are obvious candidates for such a training center. (Moses Lake is more or less a geographic center to the state and reasonably convenient to the Spokane aerospace cluster as well as Western Washington.)
  • Stakeholders have to convince Boeing CEO McNerney that in-sourcing makes more sense than outsourcing. This is a large task, because virtually his entire corporate career has been based on outsourcing-is-better for commercial, strategic and financial-risk reasons. This will be complicated by the very real prospect that Boeing will be faced with developing the 737 and 777 replacement airplanes on a more-or-less concurrent schedule at a cost of $20 billion to $30 billion (in today’s dollars). The financial risk alone requires that Boeing outsource much of this work. If Puget Sound had a solid base of engineers working for other companies, outsourcing from Boeing to local firms is still outsourcing but it is outsourcing here, not in India, Russia, China, Japan or Italy. This has to be a key goal for stakeholders.

Disclaimer: Predictions are based on conditions and information as of April 21, 2009.

14 Comments on “Boeing will leave Seattle: prediction

  1. Lots of sound reasoning in your report, but it lacks a sense of ‘lessons learned’ from 787 outsourcing.

    Look at the debacle that that has become, just on those components, and multiply that by a factor of no less than ten times, as we are talking about total programs now, not just pieces.

    It’s very clear to me that outsourcing on such a scale is unmanageable, especially by Boeing. The costs associated with such a strategy would essentially, bankrupt the company. But I can see them trying anyway, losing money is a specialty with the chicago boys.

    Further, I think the training and education issue is a red herring.

    Or are you trying to maintain it’s better in Texas, Alabama, or South Carolina? I really doubt that.

    As for Union issues, I agree with the Unions that the strategy is to break them, not to get along, though this changes nothing. Boeing holds all the cards. I don’t think there is any level of concessions the unions could make that would satisfy Boeing. Boeing wants them dead and buried. And when someone is trying to kill you, you can either fight or die. This situation COULD be resolved to everyone’s satisfaction, but it would require both parties to come off of their current positions. This will not happen unless Boeing agrees that the Unions will survive in some capacity, and then agrees to make firm commitments in exchange for deep concessions.

    This is NOT, I repeat NOT GM vs the UAW. Speea and the IAM are rather benign by comparison, as are thier contracts. But I don’t think that matters because of the Anti Union bile that runs like a river in Boeing HQ.

    I agree that Boeing will leave eventually. I also predict that they will run out of money before the move is complete, and smoothly functioning production on all programs is re-established. The costs associated will be too high for the company to sustain. Years of losses and poor stock prices will precede the inevitable.

    Many suppliers will go down during the process, unable to afford the demands BA will place upon them, ot to make similar moves.

    Thus Boeing is and will be a poor long term investment, though there will be money to be made trading the pops and drops. Of those there will be many, while things play out over the next decade or two. The Boeing saga will play out as a rolercoaster ride of good and bad news; high volatility. But eventually, it’s going to come off the rails.

    It will because cooler heads will not prevail. All parties concerned are locked into their respective idiologies.

  2. I don’t think Boeing wants its unions “dead and buried”. However, they (and their customers) do need assurance that they won’t be facing a strike every time the contract comes up for negotiation. I still maintain that it is in all parties’ best interest to negotiate a compromise whereby the union and company agree to some sort of binding arbitration in exchange for locating the next aircraft assembly line in WA state and the union agrees to an extended no strike clause. The union would have to post bond to protect the company in the event some of the members decide to take matters into their own hands and wildcat; said bond to cover not only direct, but indirect costs of the strike as well.

    Failing that, I could see the 787 line, the 737RS, and the 777 successor line relocating to southern climes. The Japanese auto transplants have been quite successful in keeping out the UAW. The IAM would not find easy going should this happen.

  3. I think it is strange that Boeing is talking about the 2nd 787 line now or making a decision on it in a year’s time. This time next year they will just about be starting to deliver the first 787s (provided everything plays out to the best possible scenario from now till then). The decision must be based on one thing alone, the ability of suppliers to deliver. Up to now it has been the weakest link in this program, so until they get to grips with this, the strategic decision of where to put the FAL doesn’t even come into it. I suspect this is just sabre rattling for the local politicians.

  4. One cannot cook down the Boeing problems only to trade union issues and business attractivity of WA state.

    Other problems of Boeing weigh in much heavier.

    Nine out of ten of the last grave passenger airplane crashes involved Boeing airplanes,
    despite a shrinking share of Boeing airplanes
    in the total of airplanes in service.
    Boeing airplanes have silently aquired an image of being ‘insecure’ in comparison with Airbus and Bombardier airplanes.

    The 474-800 program does not fit market needs.
    It is very questionable, wether Boeing ever will be
    able to earn money with this program.

    The 787 has become a ‘7-late-7’. In aviation circles throughout the world it has already
    gained the somewhat disrespectful surname ‘Late-Liner’.

    All this cannot simply be fastened to trade union issues and local business-attractivity.
    These are mainly management, investment, design, and construction problems.
    It is easy to hold the workshops responsible
    for it, as they are weak in defense and low in the pecking order, but it simply isn’t true.

  5. Scott, What I am hearing here is just re-enforcement of what I have heard you say before, basically Boeing needs less MBA’s and more PE’s. If the institutions that hold 70 percent of the stock would just take action and get both McNerney and McDonald off the board, replace McNerney with an Engineer, it would be a step in the right direction. The Conde Nast article made real sense of the whole mess, stating givens that the employees of the company have known for a long time.

  6. Scott, interesting link. An interesting quote from the article dealing with the development cost, “Mulally was told that the plane’s projected development costs would have to be 50 percent or more below the 777’s”. 777’s budget is estimated to be $10billion (in early 90’s cost). What kind of new plane was Mulally able to develop for less than $5billion? So they then invested in a risky venture with unreliable suppliers promising high returns… sounds like subprime mortgages all over again.

  7. CoyoteBMW said:
    “The Conde Nast article made real sense of the whole mess, stating givens that the employees of the company have known for a long time”

    “The Downfall of a Great American Airplane Company – An Insider’s Perspective”

    Judged by what can be established with Google, it was first published in 2003.

  8. The link to the statement by the unknown engineers at pprune illustrates my point on the education canard.

    I final to understand why Boeing complains of lack of local educational support. They apparantly make little use of it.

    They never used to have any problem attracting engineering talent from wherever engineers are produced, and they seem to not want more of them anyway.

    As far as hourly workers, they seem to have no hiring problems. After all, they have been laying off hourlies so new to the company, they haven’t recieved their first paycheck before they recived their pink slips.

    There has been a slow, Boeing imposed dissolution of it’s brain trust for a long time.

    Boeing is just chock full o’ excuses for it’s failures in the last decade or so.

    I re-read the earnings call transcript, and realized that McNerney in particular, does whatever he can to shun responsibilty, going so far as to pretty much balame Alan Mulally for all the the 787 program’s failures.

    The failure of Boeing management to execute on 787 and 747-8 is bad enough. Failing to accept responsibilty for it represents lack of charachter as well as ability.

  9. To add some color to the education debate:

    First, readers must put in context our remarks and presentation to the EDC of Snohomish County and recent actions by the Governor and Legislature. This was a very localized speech on the topic of keeping Line 2 for 787 production in Everett. We expanded the topic to the Big Picture, which included the education issue.

    One of the recommendations out of the Deloitte study was to create a centralized education center, and a local Snohomish County legislator had introduced a bill to create a centralized technical training center.

    The Governor, in announcing the creation of an Aerospace Council (another Deloitte recommendation, patterned after one in Texas), put the presidents of the University of Washington and Washington State U on the council. In response to a media question at the press conference, the Governor rejected the idea of centralized engineering or training schools, instead favoring reliance on the community colleges throughout the state.

    Our discussion of education was in this context. On this basis, we looked up the US News & World Report annual rankings of aerospace engineering colleges, and we also consulted other lists, and found that no Washington college or university was in the Top 15, let alone the Top 5, as rated by US News. We also researched Boeing’s views on education to 1991 (we didn’t go back further because we simply didn’t), and that’s how Boeing’s previous positions wound up in the presentation.

    Boeing outsources engineering because it wants to, but the absence of quality engineers in the US generally and Washington specifically is a shortcoming for US aerospace. That Seattle is the epicenter of US aerospace and our educational system sucks (to borrow a phrase from Alan Mulally) is simply pathetic. That the UW’s aerospace engineering program doesn’t rank in the Top 5 (or 10 or 15) also is an embarrassing fact.

    One additional point: The subject of education (as well as Washington’s business climate) is not just about Boeing. It applies to the broader aerospace industry here in Washington and all other industries as well. Fundamental changes have to be made to our business climate and educational system in order for the state to compete effectively in the 21st century. And for decades, our state and local governments have failed miserably to get this job done.

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