June 23, 2015, c. Leeham Co: Dennis Muilenburg has been named chief executive officer of The Boeing Co., elevating him from president and chief operating officer, the company announced today. Jim McNerney, chairman and chief executive officer of The Boeing Co. since 2005, was named chairman of the board. He will leave the company next February.
McNerney leaves a legacy of bitter fights with Boeing’s biggest labor unions, a runaway cost overrun on the 787 and 747-8, sour relations with the supply chain and settling to be second fiddle in the single-aisle sector to Airbus.
He also leaves a legacy of attacking costs that had to be cut, increasing production rates to record levels and restoring Boeing’s stock price from a low of 2009 during the depths of the 787 program difficulties to more than $150.
Last January we posted a think piece about the challenges facing Muilenburg on the assumption he would become CEO.
Ascension to Chairman
CEO McNerney became chairman and CEO after two successive scandals in the CEO’s office. Phil Condit resigned after a massive scandal in 2001 involving a proposed lease deal for 100 KC-767 aerial refueling tankers for the US Air Force. We’ve written many, many stories about this (and so have hundreds of others) so we won’t recap the events here except to say the chief procurement officer for the USAF and the chief financial officer of Boeing went to jail. Condit resigned in connection with the scandal.
His successor, Harry Stonecipher, resigned following an internal sex scandal. He held the office only a few years. Other than his scandal, Stonecipher was known for launching the 787 program (at the time called the 7E7) and for his ruthless cost-cutting, including the approach toward the 787 that came back to haunt the program.
Then-Chairman Lew Platt led the search for Stonecipher’s permanent successor; then CFO James Bell had assumed the presidency on an interim basis. Ultimately, fellow board member McNerney, then CEO of 3M Co., was selected. Ironically, McNerney had warned of too much emphasis on 787 production cost cutting, according to an April 2003 article in The Wall Street Journal by Lynn Lunsford.
Restoring honor to the office
McNerney’s initial focus was to restore honor to the chairman’s office and a new commitment company-wide to ethics. At an early leadership meeting following his appointment, McNerney famously flashed the prison number of the former CFO.
McNerney was raised, so-to-speak, in the corporate culture of GE, where he held several executive positions in several divisions. He was responsible for the exclusive engine supplier deal between GE Aviation and Boeing for the 777-300ER, the 777-200LR and the 777F, a relationship that continues to this day and which gave GE the inside track to retain this position on the 777X.
McNerney’s ties to GE were said to have been instrumental in rejecting a recommendation by Boeing Commercial Airplanes to dual source the 737 MAX’s powerplants to GE’s CFM for the LEAP and Pratt & Whitney’s Geared Turbo Fan, according to multiple sources we spoke with.
The GE heritage shaped McNerney’s own cost-cutting philosophy. As CEO of 3M, he cut research and development funding in the name of increased profits and shareholder value. Once he became Boeing’s CEO, McNerney set about cutting costs and diminishing the clout of Boeing’s two principal unions, the International Association of Machines and its engineering union, SPEEA. The IAM has several districts, with 751 the primary “touch-labor” union at Boeing’s Renton and Everett plants; and 837 at its St. Louis defense operations.
Terrible labor relations
McNerney became CEO of Boeing on July 1, 2005. Three months later, 751 walked off the job over what would become familiar issues: cuts in the pension plan, give backs on other economic issues. The stage for this strike was probably set well before McNerney took office and it’s likely there was little he could have done to avoid a strike other than give IAM everything it wanted.
Boeing narrowly avoided a strike in 2002, when 751 members failed to get the super-majority votes they needed to walk out then.
It was in the interests of everyone to avoid strikes in the future. A 2008 book, You Can’t Order Change, was a highly sympathetic biography of sorts about McNerney (who, according to the author, didn’t cooperate in the writing). In the book, the author devoted a chapter to McNerney’s “improving” relations with IAM.
Not hardly. Within days of the book hitting the stands, 751 struck for what would be 57 days, coinciding with the global financial collapse. If there had been any hope of improved relations, those were gone: McNerney’s relations with Boeing’s unions began a long, downhill slide with that 2008 strike.
Relations with the engineers union weren’t good, either. Weaker than 751, McNerney could outsource and transfer jobs easier than with 751. And he did. But moving touch labor jobs wasn’t out of the question, either.
In 2009, McNerney decided to locate the second 787 assembly line in Charleston (SC). He’s used threats to locate new airplane derivates outside the Seattle area twice since to gain concessions from 751.
Musical chairs at Boeing Commercial Airplanes
With huge, multi-billion dollar cost overruns on the 787 and 747-8 program, McNerney was slow to make drastic changes at Boeing Commercial Airplanes. He lost BCA CEO Alan Mulally in September 2006 to Ford when Mulally was passed over, a second time, to become president of The Boeing Co. McNerney named Scott Carson, a finance expert but with no engineering background, as Mulally’s successor. Carson’s lack of engineering expertise was viewed by many as a detriment.
Carson unceremoniously retired in 2009 when the 787 once again was delayed over design and production issues.
Jim Albaugh, CEO of Boeing’s Integrated Defense Systems unit, became CEO of BCA. An engineer, Albaugh was an enigma to 751 and SPEEA. He was considered to be aloof and rather imperial in nature by 837 members. But Albaugh’s engineering background helped get the 787 program on track. Still, his personal and management style earned critics, one of whom characterizes Albaugh as the worst CEO of BCA in memory.
Albaugh also got crosswise with McNerney, including an unusual public spat. When Boeing finally launched the 737 MAX program in July 2011, Albaugh told employees at the 737 Renton plant the MAX would be assembled here. McNerney was quick to issue a public rebuke, saying this wasn’t a given. McNerney used uncertainty over the siting to extract new concessions from IAM 751 and win a dismissal of their complaint to the National Labor Relations Board over siting the second 787 assembly line in Charleston.
After a few more set-tos, Albaugh unceremoniously retired. He was succeeded by Ray Conner, who by all accounts, was just as surprised to get Albaugh’s job as the company and observers were to see Albaugh leave.
Muffing the single-aisle sector
Boeing had been dawdling for months whether to launch a new, clean-sheet design to replace the aging 737 or to re-engine the airplane. Albaugh was widely believed to favor a new airplane design. The Board of Directors, still looking at a 787 program that was billions of dollars over budget and at the time still awaiting entry-into-service, was widely believed to be adverse to the risk of a new airplane program.
The launch of the 737 MAX came when Airbus, in perhaps the most successful sneak attack since Pearl Harbor, was poised to win a huge contract from American Airlines for the A320ceo and A320neo. Boeing had no clue discussions were even going on. According to those familiar with the situation, McNerney stepped in and launched the 737 MAX with 48 hours of learning of the Airbus coup at American.
Airbus has since consistently outsold Boeing for the neo/MAX sector, currently retaining about 60% of the backlog.
McNerney last year said there will be no more “moonshots,” or new airplanes, a statement that probably got more attention than it deserved since the Airbus Commercial CEO, Fabrice Bregier, said much the same thing six months earlier. Still, with a marketplace believing Airbus then had the upper hand in the single aisle sector, McNerney’s statement proved discouraging for Boeing partisans and its BCA employees.
Then came the soft-launch of the A321 long range in October 2014. McNerney subsequently said Boeing won’t proceed with a 737 replacement until 2030, thus signaling that Boeing is content to play second fiddle to Airbus in the single-aisle sector for the next 15 years. Airbus formally launched what is now known as the A321LR in January 2015.
What will Muilenburg do?
With McNerney’s ascension to chairman, the question now is, will Muilenburg stick to the McNerney strategy or abandon it and launch a 737 replacement sooner than later. The 737-7 MAX is a niche airplane with just 65 orders. The 737-8 is a solid derivative but still trails the A320neo by some 500 sales. The 737-9, like the 737-900ER before it, pales to A321ceo/neo sales and despite what the Boeing public relations and marketing departments claim, the Airbus is the more capable airplane. Customers are buying the A321 on a ratio of 2.6:1. Muilenburg also faces decisions about what to do with the so-called Middle of the Market airplane, the production rates for the 747-8 and 777 Classic and whether and how soon to abandon the 747 altogether.
Muilenburg’s views are unknown. He came into the presidency from the defense side and hasn’t said much about commercial. What he has said doesn’t stray from McNerney’s party line, nor would this be expected as long as Muilenburg was No. 2. What course he will chart as No. 1 will be watched closely.