Dec. 22, 2020, © Leeham News: If you get a chance over the next few weeks – in between binge-watching The Queen’s Gambit, putting up the 79 extra feet of Christmas lights you ordered this year and figuring out how to buy surprise Christmas gifts for your spouse when you have a joint Amazon account – you should take 90 minutes to watch this video from our friends at the International Association of Machinists District Lodge 751.
The Machinists on Dec. 8 hosted (on Zoom, of course) a high-level panel discussion about the state of the aerospace industry and Washington state’s role in it, featuring a whole bunch of Brand-Name People Who are Smarter Than Me(c).
They shared their insights for those of us coffee-drinkers who are trying to read the tea leaves to divine what Boeing’s next moves should be as it tries to get back on its feet – and what the implications are for its home state.
The problems for Boeing are obvious, and the solutions are pretty clear – but doing the smart thing would require a major cultural shift from an executive team that’s locked into a 1990s vision of how business gets done.
A consensus seems to be growing – at least among the punditry — that Boeing’s next jet should be a straight-up 757 replacement: a single-aisle jet in the 200-to-240 passenger class, with a range somewhere around 5,500 nautical miles. (Think SEA-NRT, or LGA-TLV or MEL-BOM.)
This plane should take advantage of the technological advances in engines and systems that have taken place since the last ‘Five-Seven came off the Renton line in 2005. It might benefit from having a 777X-style composite wing.
The smart thinkers believe that Boeing should commit to this program in the 2022-23 time frame, with an eye toward a 2028-29 EIS – which would time nicely with the expected post-Covid recovery in air travel and aircraft demand.
And the obvious place to build it is in Puget Sound – probably in one of the Everett final assembly halls that will be emptied out by the end of the 747 program and the departure of the 787.
But while this is the obvious solution to the biggest problem staring Boeing in the face, it’s far from clear whether CEO Dave Calhoun and his board of directors will make the smart move.
“The exam answer is really clear for Boeing,” Richard Aboulafia of The Teal Group said during the call. “The necessity is really clear for Boeing and the mode of doing it is pretty clear for Boeing. It’s just, do they have the leadership and wherewithal to do it.”
The two sides are in a difficult place: Washington, by every relevant objective measure The Teal Group could think of, is categorically the best place for Boeing to keep its commercial operations. And Washington, by every subjective measure that Boeing uses, is absolutely a terrible place for Chicago to run its business the way it wants.
Since the 1997 McDonnell Douglas merger, Boeing adopted the Jack Welch/GE management model. Former CEO Harry Stonecipher was a Welch acolyte. So was his successor, Jim McNerney. Current CEO David Calhoun spent 26 years at GE, sitting on that company’s board of directors for eight years and rising to the rank of vice chairman.
The GE model is based on a foundation of ruthless competition, among suppliers, among employees and among communities where a company bases its business units. Welch famously once said his dream would be to put factories “on a barge” where he could move them – or threaten to move them – to lower cost sites that are “more competitive.”
That business culture clashes severely with the traditional Seattle culture, which is heavily, maybe obsessively, based on consensus building and “win-win” solutions. It also views unions favorably. (The state has one of the nation’s highest union densities, almost double the national average.)
As a result, Boeing senior management has been frustrated with being stuck in Washington, because it’s a high-skill, high-wage environment where none of these latte-sipping, tofu-eating tree-huggers seems to get that they must compete to earn the right to be part of the Boeing world.
Increasingly, Washington state elected officials and community leaders have become frustrated with Boeing, because look, fellas, we keep giving you what you say you want, and then you keep coming back to demand more and more.
Washington Gov. Jay Inslee may be Exhibit 1 in this category. During his first bid for governor, in 2012, he went around the state talking about building up the aerospace industry by investing in infrastructure and workforce training. In 2013, he sided with Boeing to urge local Machinists to give up guaranteed pensions to ensure the 777X would be fabricated and built in Everett.
But, during his presidential run this year, he said he felt like he’d been “mugged” by Boeing. After this fall’s decision to move 787 production to Charleston, he vowed to review Boeing’s Washington state tax breaks.
Boeing leadership responded by threatening to sell the BCA headquarters complex in Renton.
There is always a chance that Boeing is doing all of this on purpose, and that Calhoun and the board have decided to follow the glide path of McDonnell Douglas and allow shareholders to extract as much value as possible out of the company while it slowly coasts into oblivion. (Boeing-watchers of a certain age will recall this was an oft-discussed theory in the second half of Phil Condit’s reign at the company, before the launch of the 787 on its shoe-string budget.)
If that’s the case, Boeing should do nothing about a 757 replacement.
But we’re assuming that the intention is to keep Boeing as a going concern in commercial aviation.
In that case, Boeing needs to get the new ‘Five-Seven launched, and soon. And it should just go ahead and build it in Washington state.
When it comes to a decision on building the plane, one can make any number of arguments about how Boeing has essentially ceded the middle of the market to Airbus and the A321 Neo and therefore must respond.
But the argument that will be most-persuasive to Calhoun and Boeing’s board is the one made by analyst Ron Epstein from Bank of America: Wall Street expects it.
Epstein said during the Dec. 8 discussion that about two-thirds of the players on the Street think Boeing must move on a new mid-market aircraft. A like percentage of them support the kind of investment necessary to bring a new aircraft to market.
For a management team that for two decades has been focused on pleasing Wall Street above all else, that should be reason enough.
Boeing also should utilize its existing resources to build the plane, the panelists said. That means staying in Washington state.
The cost of standing up a new factory is not prohibitive, Aboulafia said. (We know Boeing spent at least $750m in Charleston to get the 787 tax breaks; the actual cost for property, plant and equipment was likely double that. In the context of a $30bn airplane program, a new building would amount to another 5% added cost.)
But “all the drivers of competitiveness tend to say (stay) with us, in terms of workforce, in terms of infrastructure,” Aboulafia said.
The bigger issue is risk, said panelist Kevin Michaels of AeroDynamic Advisory.
Aerospace has always worked best when design and manufacturing operations are integrated, Michaels said. “It is a much higher risk if you produce in a location that is geographically distant from where it’s developed, than if you’re developing and producing in generally the same area.”
That is the strongest argument in favor of building the next jet in the Northwest, he said: Boeing already has engineers and factories in place, and key suppliers are here too.
“With all of the risks that we’re talking about with this new aircraft program,” Michaels said. “We’ve got market risk. We’ve got financial risk. We’re going to have to take technology risks to get the operating economics.”
He continued: “If you add on top of that ‘Oh, by the way, we’re gonna build it in a new location which hasn’t built jetliners before and we’re gonna train up the workforce to do it and trust us, it’s going to be OK’ — you’re adding a whole new layer of risk to what’s happening. And as we’ve learned, something that seems small can quickly grown to $10bn and $20bn.”
We should also point out that there also is the issue of time. If the program’s to be launched in time to catch the industry recovery projected for 2022-23, Boeing doesn’t have time for a full-blown site selection search, with all public shake-downs and closed-door arm-twisting of elected officials that has always entailed. Nor does it have much time to get factories permitted and built, tooling ordered and installed, and workers recruited and trained at newly-stood-up schools. All this argues in favor of using existing facilities.
But the panelists also argued that Boeing is going to need a major shift in corporate culture if it’s going to thrive, or even survive.
“Is the company going to make the changes required to take it to the right place?” Epstein asked rhetorically.
The pandemic, Epstein said, has been a “great amplifier.” For companies like Boeing, the pandemic has exposed and amplified their weaknesses.
The strong focus on providing returns to investors brought Boeing to the crisis it now faces, Epstein said.
“Were the decisions that were made, did they take the company to the right place?” he asked. “The position they were in, and the weak position they were in going into the pandemic, you can blame on how the company was run, and the culture of the company.”
The relentless pressure on suppliers and workers alienated both, Michaels said.
“Boeing burned bridges with many of its leading suppliers even before this crisis,” he continued. Suppliers create 70% of the value of each Boeing aircraft, and yet Boeing has abused them with “unilateral price concessions, revised payment terms and other demands.”
Boeing also has been at war with its unions for the past two decades, even though labor accounts for about 5% of the cost of building an airplane. “Even if you cut pay by 20%, that’s still only 1%,” Michaels said.
Boeing needs the support of suppliers and workers both to rebuild the 737 MAX and launch the next new airplane. It’s time for a change in the way top management approaches both.
The panelists didn’t have much explicit advice for moves Washington state could make to ensure Boeing builds its next plane in state.
“The state of Washington and the workers have done everything they can, as far as I can tell,” Michaels said.
But they did provide enough insight for us to build an action plan for Inslee and Washington’s Legislature to address starting in January.
Wings – It’s quite likely (but not certain) that the new mid-market aircraft could have composite wings, Michaels said. If that’s the case, the obvious move would be to fabricate the wings at Boeing’s new composite wing facility at Everett. It’s hard to transport wings over long distances, so composite wings would mean final assembly would need to be nearby, he added.
So for state and local officials, we believe it should be a priority to fund further Puget Sound transportation improvements, which would give Boeing the option of assembling the new jet in either Everett or Renton.
Suppliers – There’s more to aerospace than Boeing final assembly plants, Michaels said. The trend in manufacturing is away from ‘90s-style global assembly lines shipping parts around the globe, in favor of compact regional supply chains. Eastern Washington, in particular, is home to “a massive aluminum cluster,” he said, along with a number of aerostructures plants.
In addition, Washington is home to a large number of companies that supply interiors components that need to be near the final assembly site.
Eastern Washington – with its cheaper land and lower labor costs – should be an attractive alternative for aerospace companies.
So, for state and local officials, we believe it should be a priority to find ways to bolster the supply chain, through workforce development, state R&D funding and, potentially, a restoration of the lower Business and Occupation tax rate for aerospace suppliers that was part of Boeing’s recently repealed 787 tax incentive package. State and local agencies also should pay particular attention to potential manufacturing sites east of the Cascade Mountains, and to continue to invest in road and rail links along the Interstate 90 corridor that links Seattle, Moses Lake and Spokane.
Competition – Fifteen years after Vought and Alenia first opened for business in Charleston, the site still struggles; Boeing delivered zero 787s last month in large part because an undisclosed number of planes have been held back for rework due to Charleston quality issues.
Boeing’s adherence to the GE model of chasing low wages around the world no longer makes sense, Aboulafia said. For the company’s new aircraft, “it doesn’t have to be some kind of new start up or new zone of production like Charleston for it to make sense,” he said. “It’s not like there’s a giant sucking sound toward completely new aircraft production facilities. In terms of building aircraft, it’s been the traditional high-skill, high-wage areas that have been extremely successful.”
For state and local officials, we believe that when Boeing makes the inevitable announcement of a site-selection process for the next aircraft program and begins complaining about the high cost of doing business in Washington, the main thing should be not to overreact. Do make a deal, but don’t pressure the workforce into further concessions that make Boeing jobs less attractive than working in the service sector, and don’t give away any incentives without getting job guarantees in return.
Yet Boeing and the aerospace industry do need care and feeding if they are to thrive.
We’ve outlined some ideas in the past – increased funding for aerospace engineering training at the University of Washington, for example, and rebranding the department as the Bill Boeing School of Flight.
Inslee also should raise the profile and funding for the Governor’s Office on Aerospace. One audacious way to do that would be to approach former top BCA executives (paging Ray Connor) to form an advisory panel or task force to make specific legislative recommendations. Boeing has a history of hiring high-profile Olympia insiders to negotiate with the state; it’s time for Olympia to show it can play that game too.
Boeing itself also could use a cash infusion, and soon. This is trickier: tax breaks are out, after the long-drawn-out ruling from the WTO, and Washington’s state constitution forbids direct cash payments to any private company.
However, state law could allow for one of the state’s port districts to do something bold. (Port districts are local economic development agencies authorized by the state to spend tax dollars to build and operate facilities that promote industry or tourism; the Port of Seattle, for example, operates Sea-Tac airport; the Port of Newport runs a shortline railroad and the Port of Walla Walla runs a winery incubator.)
Boeing has floated the notion of selling the Longacres office complex in Renton and moving BCA headquarters to Everett. The Port of Seattle could conceivably buy the site from Boeing and use it as an incubator for tech start-ups, or maybe lease it to a tech giant like Amazon.
Speaking on behalf of Washington taxpayers, however, we find that idea a little dicey. The pandemic has sparked a sea change in Seattle’s tech industry, with remote working becoming the norm for tens of thousands of workers for the indefinite future. Companies are walking away from corporate offices, and with the region seemingly awash in empty Class A office space, so buying the Longacres campus seems like a risky investment of public resources.
But what about the Renton factory?
It would take an act of the Legislature — current law limits these kinds of deals to $500m and, based on current prices for Renton industrial land, this could be about a $3.5bn deal. But the Port of Seattle or other agency could then buy the Renton factory, lease it back to Boeing, and then use Boeing’s lease payments to pay off the bonds issued to purchase the site.
This could be a win-win for everyone:
Pulling off this kind of deal would give Boeing and the state of Washington confidence in their ability to work as partners – something that hasn’t really happened in a long, long time. But will it happen?
For any of this to work, however, we’ll have to see major changes, primarily from Boeing.
With the benefit of 20/20 hindsight, we can see that the road to where we are today was paved the day in June 2005 when the Boeing board chose McNerney to be CEO, thus embracing the ethos of ruthless competition and rejecting Alan Mulally’s brand of “Working Together” leadership. Mulally went on to guide Ford through one of the greatest crises of its history; McNerney’s tenure led Boeing to … this, a situation so bad they’ve sold off the corporate yacht.
Now it’s on the shoulders of Calhoun, who joined the Boeing board just in time to endorse the decision to put the 787 second line in Charleston. Can he change the culture that he himself did so much to create?
“I wish I could be optimistic about this,” Aboulafia said on the Dec. 8 call. “The approach at Boeing for many years was … focus on the share price, the rest we don’t have to worry about.”
Boeing’s share price is down a third since December 2019 – about a hundred dollars a share. It is shedding market share, it has hundreds of undelivered planes in inventory and its credibility – with regulators, customers, financial markets, suppliers, elected officials and employees – is in shreds. The only thing for Calhoun to worry about is everything.
The first step to getting yourself out of the whole you’ve dug is to stop digging. The equivalent for Boeing is launching a 757 replacement to be built in its home state.