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:: December 2003 letter ::

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Dear Fellow House Loungers,

Thanksgiving’s over, guests have left, and I’m enjoying a long weekend in the house, wearing pajamas, not shaving, and drinking leftover gravy straight from Tupperware. Totally relaxed in my slovenliness, I enjoy a nice breakfast beer and wonder why we can’t always live in this perfectly natural manner, without rules, formality, or hygiene. The reason we can’t, of course, is social pressure. We would soon lose the respect of our friends, colleagues, and loved ones. And I wonder whether this is Boeing Commercial’s 7E7 strategy in a nutshell.

I’ve got no proof for any of this, but let’s make some very realistic assumptions. Let’s assume that BCA’s eight-year new product development holiday resulted from a parsimonious and risk-averse headquarters and corporate board, now located in Chicago and completely indifferent to BCA’s legacy. BCA becomes a neglected and somewhat isolated asset, complete with vague rumors of a company spin-off. Let’s further assume that the stories about the board balking at 7E7 funding are correct, and at best, Corporate wanted to do it on the cheap with much of the risk and cost borne by “partners.”

With those assumptions, how would BCA behave? How would they get the corporate cash they needed to compete with Airbus? They might adopt a “social pressure” approach. BCA would make as much noise as possible about a splashy new product designed to replace an aging workhorse. In addition to negotiations with industrial partners and airlines, BCA would aggressively pursue concessions from local governments in an assembly line site selection contest. After this contest, failure to go ahead with the program would earn Boeing the lasting enmity of numerous politicians who fell over backwards to attract something that never happened.

This social pressure approach would lead to dozens of analysts, myself included, stating the obvious: that if the 7E7 doesn’t go ahead, BCA’s long-term future is toast. Questions would be raised about the company’s motives. The patriotic angle would come into play, with semi-spoken assumptions about the relationship between BCA’s eclipse and the diminished U.S. future in manufacturing (AIA’s John Douglass has alluded to this, calling the 7E7 “America’s Plane”). Someone would also leak rumors of the board’s reluctance to high profile publications. That Wall Street Journal story about the board’s division over 7E7 funding, accurate or not, came from somewhere.

Again, there’s no proof that this is BCA’s strategy. But social pressure sounds like the best way to coax Boeing’s board into approving a 7E7 launch. Imagine, after all of that talk, not going ahead with the 7E7. Back in those metaphorical terms, it’s the equivalent of the board going to work late on Monday wearing a bathrobe and slippers. Shelving the 7E7 would make the board look like a bunch of short-term greedbags.

Assuming BCA’s strategy does revolve around applying social pressure to the board, the situation just got weird. At first, I thought the tanker “scandal” would make Boeing re-think its increasing defense emphasis. After all, who wants to be totally dependent on a single customer? Doesn’t that make the company vulnerable to self-appointed “reformers” out to bolster their reputations? The best way for Boeing to prove that it isn’t some tax dollar-sucking leach would be to invest the company’s money in future products and jobs. Yet, all of the sudden, Harry Stonecipher is in charge. And some Boeing legacy folks regard their new CEO as if he was sporting a hockey mask and chainsaw. Are they right to be concerned?

Looking at events following Phil Condit’s removal, I’d say there’s cause for worry. Stonecipher’s initial statements reflect guarded support for the 7E7, with lines like “I’m looking forward to going forward with the plane.” Then again, as with the question of him staying for a while or merely being a caretaker, I’m reminded of some humorist’s quote that it was difficult to believe a man when you know that if you were in his position, you’d be lying. Stonecipher, after all, is the man who put his name to the phrase “If we weren’t in this business we’d be trying to get into it” while simultaneously strangling that business. Stonecipher said he would be one of Alan Mulally’s “cheerleaders as we present it [the 7E7] to the board.” Of course, Stonecipher himself is one of the eleven board members. If he means it, then mediocre corporate governance makes for inappropriate cheerleaders.

Also curiously, Stonecipher said the commercial side of Boeing was fine, but that defense needed attention. The company’s reputation with the government certainly needs repairing, but if you look at the steady stream of profits and program wins in the defense division, it contrasts sharply with a serious market share erosion problem at Boeing Commercial. This erosion will get much worse without the 7E7.

Boeing’s board will look at the 7E7 in a few weeks, so in theory, this letter might soon be overtaken by a commercial launch decision. Perhaps Stonecipher really likes the 7E7, or perhaps the social pressure strategy has gone so far that no one, even he, can stop the program without a tremendous loss of corporate prestige. Stonecipher might just realize that making peace with Seattle would be the hallmark of a good leader. But there’s a long list of rationales that could be employed to defer a launch decision—general corporate uncertainty, lack of KC-767 revenue, etc. It’s already clear that the site selection decision will slip into next year.

The 7E7 problem is simple: the money guys don’t reward long-term thinking and investment. A Boeing statement points out that MDC’s share price quadrupled under Stonecipher’s tenure. Not bad for a company that would have basically collapsed without someone rescuing it. Pre-merger Boeing, while not known for brilliant financial performance or phenomenal shareholder rewards, had no long-term worries at all. Clearly, investors face a tough choice: put money into new products that will pay rewards in ten years, or run the company for cash and buy a walk-in humidor. Against that kind of choice, social pressure can only do so much.

Readers of last month’s letter might recall that I promised to spend this letter highlighting aviation’s virtues, commemorating a century of inhabited, powered flight. Events have postponed this to next month, but I promised optimism, and I intend to deliver. Meantime, we’ve updated a bunch of Teal reports, including the F/A-18, F-14, Su-27, ERJ-145, AH-64, Falcon, E-3/E-737 AWACS, A.109, and BA.609. Enjoy those holiday parties.

Yours, ‘Til I Run Out Of Leftover Turkey,

Richard Aboulafia

 

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