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:: May 2003 Newsletter ::

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Dear Fellow Printed Matter Fans,

What’s on my Oh-My-God-I’m-Crammed-Into-A-Middle-Seat-In-The-Back-Of-A-757-What-Do-I-Do reading list? Well, most recently I breezed through the short, rewarding, and slim (fits into the three inches between your knees and the next seat row) The Myth Of Market Share, by Richard Miniter (Crown Business, 2002). Its well-argued premise is that market share is simply over-rated as a metric of business success, compared with profitability. There’s a good section on Boeing, only slightly marred by the appearance of such non-search-engineable characters as “Ron Woodward” and “Randy Bessler.”

Despite the misprints, the book makes an important point. Boeing may have lost market share, but it has succeeded in maintaining profitability through some of the toughest times ever. Looking across the border at Bombardier provides a good illustration of what happens when market share always comes first.

Yet it’s kind of a slippery slope down to my next reading item, The Wall Street Journal’s April 21 article on Boeing’s 7E7 launch debate. This Page One feature claims that two key board members—Harry Stonecipher and John McDonnell—are resisting a launch decision, because they want to avoid big commercial product investments, and instead continue emphasizing defense, space, and aftermarket. They want 7E7 development costs to be brought down to some laughably tiny (and untenable) figure, in the $3 billion range.

The 7E7 is touted as the key to Boeing Commercial’s renaissance. And I have no doubt that they’d get it right, as with all Legacy Boeing 7-Series jets. Unique among the world’s past and present jetliner makers, Boeing has never produced a market disaster. Trouble is, the company has no excuses to not do the 7E7. They got out of the 747-X because of the market, barely big enough for one and already seized by Airbus. They got out of Sonic Cruiser because the phrase Premium Airline Passenger now makes airline executives spastic with nervous laughter (and because the technology was speculative).

But with 7E7, the market is there, and the technology is there. Also, if Boeing doesn’t launch it, they are putting the world on notice that they will probably never again develop a new jetliner. Even debating the issue casts doubts on their commitment to their current products, which would result in customers fleeing to Airbus, a company with a real commitment to new products (profitability being a purely secondary issue). As customers left, Boeing Commercial would be reduced to just the 737 and 777 by 2010.

For Boeing, scrapping the 7E7 wouldn’t be a decision to de-emphasize market share; it would be a decision to abandon a huge chunk of business (and revenue) in pursuit of higher margins. That’s quite another story. In 2002, the company still retained 60% of the market, by dollar value of deliveries. This would fall to 30% by 2012 with a decision to coast on the 737 and 777 alone.

I think I speak for many in this industry when I ask, with all due respect, “Harry Stonecipher? I thought he retired. Shouldn’t he be golfing in some retirement community in Florida?” If the Wall Street Journal story is true (I should note that a Boeing source maintains that the board “is supportive of where we are [with the 7E7] at this point”) then Boeing faces a crucial test.

I’ve got a bunch of questions for anyone advocating a McDonnell Douglas-based strategy for Boeing, but there’s really just one important one: Why do you think a failed company provides a valid business model? Still, as part of the discovery phase of any future trial of Messrs. McDonnell and Stonecipher (and bearing in mind that Mr. Stonecipher did do some good work in helping Boeing stay profitable), I’d like to ask the following:

One. At what point did McDonnell decide to coast on Douglas’s legacy jetliner products, without any renewed investment? Did anyone at MDC think the jetliner battle might be over by the early ‘90s? What kind of financial bath did the company take with the half-assed, warmed-over MD-11 and MD-90 products as a result of this decision to short change new product development?

Two. Doesn’t a de-emphasis on non-contract R&D hurt all product lines, even defense? (Remember the lamentable McDonnell Joint Strike Fighter design, with the words “Please Eliminate Me From The Competition” stenciled boldly on the wings?) Even with DoD’s recent cost-plus attitude towards development contracts, an engineer-unfriendly corporate posture is going to show up in all kinds of ways, in all kinds of products.

Three. Doesn’t an emphasis on basically one customer (in terms of having your sales and engineering departments cater to the US Government) produce a thoroughly non-competitive business culture? Was this culture responsible for the long string of McDonnell Douglas market disasters (the F-15 UAE campaign, the SAS MD-95 campaign, etc.) in the mid ‘90s?

Four. What if US defense spending (which is indeed cyclical) heads down again? What if your US defense market competitors—notably Lockheed Martin and Raytheon—start to clean your clock?

These, of course, are long-term concerns, and an emphasis on profit is inherently short-term. So, in short, my airplane reading has led me to a scary conclusion: the line between “a smart de-emphasis of market share” and “short-sightedness and greed” is actually not all that thick. And to conclude on a supremely cynical note (again, assuming the article is accurate), Messrs. Stonecipher and McDonnell should realize that this time, there might not be a healthy company to come along and rescue them from a sinking ship.

May’s Aircraft supplement includes the Regional Aircraft overview, plus updates of the C-130, Hawk, UH-60, MH/SH-60, P-3, A300/310, and the Fairchild Dornier products and ex-products. Enjoy your spring.

Yours, ‘til The Scourge Of Misinvestment Is Vanquished From The Land,

Richard Aboulafia
(703) 385-1992 ext. 103 (office)
raboulafia@tealgroup.com
www.richardaboulafia.com

 

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