Douglas debacle
McNerney, a protégé of retired General Electric Co. CEO Jack Welch who also ran 3M Co., arrived when Boeing was reeling from the worst scandals, infighting and missteps in its 90-year history.
       Legislators and workers fretted publicly that Boeing had lost its moral compass. US Sen. John McCain, a Republican, called the second-largest defense contractor’s dealings with the Pentagon “sleazy” in a 2003 speech.
       Boeing’s 1997 acquisition of McDonnell Douglas Corp. set the tone for its turbulent decade, says Gordon Bethune, former CEO of Continental Airlines Inc. and a Boeing vice president from 1988 to 1994.
       The $16-billion purchase was meant to be a coronation as Boeing swallowed its last American plane-making rival. Instead, it exposed Boeing to distractions as everyone from executives to plant managers jockeyed for status in the combined company while a win-at-all-costs military-contracting culture prevailed, Bethune says.
       “What screwed Boeing up was the Douglas merger,” he says.
       In 2003, the US Air Force found that back in January 1997, before Boeing completed the purchase, McDonnell Douglas had hired an engineer from Lockheed Martin Corp. when the two were competing for a $3-billion rocket-launching contract. The engineer brought with him proprietary Lockheed Martin documents, which he shared with at least two other employees, according to a review commissioned by Boeing that former US Sen. Warren Rudman led.
       In October 1998, after Boeing had won 19 of 28 Air Force launches and completed its acquisition, employees tipped off Boeing’s legal officials about the documents. The Air Force stripped Boeing of $1 billion of launches in July 2003.
       That same year, Boeing CEO Philip Condit quit, taking the blame for a disclosure that chief financial officer Michael Sears had dangled a job to an Air Force official who was negotiating a $23-billion contract with Boeing for aerial refueling planes. Sears and the official, Darleen Druyun, went to jail. Congress killed the Air Force’s plan to buy or lease 100 of the planes.
       Adding to the indignities, the executive that Boeing brought out of retirement to restore its reputation, former McDonnell Douglas CEO Harry Stonecipher, left in 2005 after admitting an affair with a female subordinate.
       “We never thought in our wildest dreams, growing up in Boeing, that we’d ever see the Boeing name in the paper the way we saw it,” says Alan Mulally, who joined the company in 1969 and is now CEO of the commercial airplane unit.

Downward spiral
Amid the turmoil, France-based Airbus surpassed Boeing for leadership of the $60-billion annual jetliner market in terms of deliveries—a position Boeing forecasts it won’t recoup until 2008.
       Throughout Boeing’s downward spiral, some workers bristled at what they considered dictatorial management. During a 40-day engineers’ strike in 2000, union members stood on picket lines near a portable toilet labeled “Harry’s Office.”
       “With Harry Stonecipher, it was all about power-based interactions and intimidation,” says Bofferding, executive director of the Society of Professional Engineering Employees in Aerospace, which represents 22,000 workers at Boeing and other companies. “McNerney is not a flamboyant, force-it-to-happen kind of guy. He’s the efficient, help-it-to-happen-in-the-right-way sort.”
       Still, McNerney has never taken on a challenge quite as big as Boeing. When McNerney became CEO, Southwest Airlines Co. chairman Herb Kelleher recalls telling him the job would test him like no other.
       “He’d done an excellent job at 3M,” Kelleher says. “I thought that Boeing would give him the opportunity to utilize the full amplitude of his cornucopia of talents.”
       Investors are more comfortable with McNerney at the controls, says Jim Bitter, an analyst at Wilmington Trust Corp.
       And there are signs he’s making progress. In March 2003, Boeing’s shares tumbled to as low as $25.55. Since McNerney was named CEO on June 30, the stock has gained 35 percent to $82.99 as of May 25, outpacing the 6-percent rise for the Standard & Poor’s 500 Index.
       In April, Boeing reported that first-quarter net income increased 29 percent to $692 million, or 88 cents a share, from $535 million, or 66 cents a share, a year earlier. Backlog, a measure of unfilled orders that analysts say reflects future business, leapt to a record $213 billion, up 42 percent from the year-earlier period.
       “The thing the company has to get right is the 787,” McNerney said in a telephone interview. “Executing that program is our biggest opportunity and our biggest risk if we don’t do it well.”

More impressive now
A Midwesterner who earned an American studies degree in 1971 at Yale University, and then an MBA from Harvard Business School, McNerney knows the industry. In his last job at GE as head of the $11.9 billion-a-year aircraft engines unit, he supplied engines to both Boeing and Airbus. Later, he served on Boeing’s board for four years en route to the planemaker’s top job.
       “GE is first and foremost about making the numbers, and McNerney is definitely of that school,” Bitter says. “But managers like McNerney who come out of GE are not about doing it in a crass, step-on-people kind of way. They make things happen but still play nice in the sandbox.”
       Airbus sales chief John Leahy, an American who’s based in France, negotiated alongside McNerney for airline deals at General Electric’s engine division and remembers him as one of the best in that role. “Unfortunately, he’s more impressive now,” Leahy says. “It’s a shame he’s running our major competition.”
       Workers and investors say McNerney has won their respect by starting with a few simple messages, some borrowed from Welch’s playbook at GE and McNerney’s own tenure at 3M. He says employees must focus on customers, and ethics must come first. To make sure that happens, McNerney spends a lot of time evaluating Boeing’s leaders.
       “It’s not as if this company hasn’t thought about leadership before,” McNerney says. “The thing I wanted to do differently is to have one definition of what leadership is across the company and I wanted it to be fundamental.”
       Of course, McNerney isn’t the only catalyst for Boeing’s recent turnaround. He took over just as airline profits began to recover from the 2001 recession and as Boeing started selling its 787 Dreamliner.
       Moreover, fixing the company isn’t just about changing its culture. Part of Boeing’s trouble is that, for all its years of sales leadership, it has never turned in financial results to match. In the 25 years through 2005, Boeing’s operating profit as a percentage of sales never exceeded 8.1 percent. GE got a 21.6-percent margin from its aircraft engine division last year.
       In April, Boeing forecast that companywide margins would exceed 10 percent in 2007. “I don’t want to stop there,” McNerney says.
       Just as GE boosted profit by selling maintenance and spares to engine customers, Boeing is targeting a bigger share of the $60 billion-a-year market for airplane parts and services. Boeing’s services revenue increased 9 percent last year, twice the 4.5-percent rate of the aircraft division. On May 1, Boeing agreed to spend $1.7 billion for Aviall Inc., a Dallas-based parts distributor. “Aviall is just the beginning,” McNerney says.

Previous stumbles
Boeing has stumbled before when it looked unbeatable. In 1997, after clinching exclusive supply contracts from AMR Corp.’s American Airlines, Delta Air Lines Inc. and Continental, Boeing had its first loss in 50 years. It racked up $2.6 billion in cost overruns when it tried to double production.
       This past February, when an analyst asked McNerney at a Cowen & Co. conference in New York if anything keeps him up at night amid the rosy outlook for orders, he replied, “Maybe it is the outlook.”
       He says Boeing’s task is easier this time because the production ramp-up is more gradual; Boeing expects to boost deliveries by about 50 percent to as many as 445 planes in the three years through 2007.
       Weber says Boeing’s engineering workforce may not be able to deliver everything it has promised on time. “They come from a long period of internal stagnation,” he says. “If there’s anything that can really trip Boeing up, it’s the ability to work these challenging products at a quick pace. Not that it would be fatal, but it would be very costly.”
       Boeing’s stumbles in the past 10 years have come as such a surprise partly because of the company’s long history of success. Founded by Bill Boeing, who built his first wooden seaplanes on Seattle’s Lake Union in 1916, Boeing became a staple of business books.
       Jim Collins and Jerry Porras extolled Boeing in their best-selling Built to Last (HarperBusiness, 1994). They said Boeing was able to bet the company again and again and win with new aircraft—from the B-17 Flying Fortress bomber to the 747 jumbo jet.
       Condit’s 1997 acquisition of McDonnell Douglas changed Boeing’s psyche. The purchase added such military businesses as the C-17 transport, propping up profits during the slump in airline purchases that followed the 2001 terrorist attacks.
       Condit moved Boeing’s headquarters to Chicago in 2001—partly, he said, because Seattle was too parochial for the broad-based aerospace company he was creating. Yet instead of forcefully establishing a single culture, Condit agreed to share Boeing’s top job with McDonnell Douglas’s Stonecipher.
       Bethune, then Continental CEO, says he told Condit at the time that the move was a mistake. “That’s a culture that was foreign to Boeing,” Bethune says. “You look at the issues, they’re all Douglas people.”
       When Condit quit in 2003, Boeing first sought out McNerney, who turned the offer down, according to accounts by both him and the company. McNerney’s record at GE and 3M had made him a highly regarded executive, says New York headhunter Gerard Roche, senior chairman of Heidrick & Struggles International Inc.
       Roche says he regularly fields calls from board members seeking a “McNerney type.” The 3M chief changed his mind about the Boeing job two years later, after Stonecipher resigned.

Giant plane skeletons
At Boeing, McNerney has had to be more heavy-handed. He set the tone in January at the annual management retreat.
       On the first day, at a hotel in Orlando, Florida, McNerney challenged executives to stop “hiding in the bureaucracy.” The next day, he had general counsel Douglas Bain address the elephant in the room: ethics.
       Many in Washington were convinced the company’s culture was broken beyond repair, Bain said. He displayed numbers on a screen. “These are not ZIP codes,” he said, telling the managers they were looking at the federal prison numbers of Sears and Druyun.
       “It was just sobering,” says Mulally, who was in the audience. “You have to make ethics just as serious as the business plan, as serious as performing on a program. I think that can be one of the lasting contributions he makes.”
       In January, McNerney dropped the capitalized phrase “world headquarters” from Boeing’s building in Chicago and its web site, explaining that he preferred the less grandiose “corporate offices.”
       In March, he rewrote the pay rules for managers, tying more of their bonuses to profits instead of the stock price. Managers must also submit to performance reviews by subordinates, who will rate them on how well they “inspire others” and “reflect Boeing values.”
       McNerney makes no bones about the consequences for people who don’t pass muster. “If certain people are only able to measure up well on ‘delivers results,’ they will soon find they have no future at Boeing,” he said at a conference in La Jolla, California, last April.
       Some executives Boeing passed over for McNerney’s job are buying into what he’s doing. Mulally is in charge of a companywide cost-cutting initiative called Lean Plus.
       The jetliner chief had already reduced jobs in his unit by half and shuttered Seattle-area factories. Now he’s driving home the need for productivity gains of at least 3 percent to 5 percent each year.
       Boeing closed its books in five days after the first quarter, down from 20 in previous quarters, and channeled spending into areas where it’s likely to get the biggest returns. For instance, Mulally has scaled back research into planes seating fewer than 100 people, which Boeing doesn’t make.
       Defense unit chief James Albaugh, another CEO candidate, leads an effort to eliminate duplication and get better prices on everything from titanium to paper in Boeing’s $4.2-billion annual procurement budget.
       It’s hard to miss Boeing’s new spirit in a visit to the 737 jetliner plant in Renton. In the 1990s, this factory was at the center of the production overruns responsible for Boeing’s first annual loss in 50 years.
       Back then, workers openly grumbled about chaos on the assembly lines. Under Mulally, the plant has sped up production. Instead of sitting in one place, the giant skeletons of planes move forward on a track at 2 inches per minute. Everything from tool bins to garbage cans is on wheels. Engineers and managers watch the line from three stories of offices above. Giant plasma TVs show the status of each job.
       Every 50 yards or so, technicians cluster around a “pit boss” sitting at a bank of computer screens. When a mechanic encounters a snafu, the screen flashes yellow. Unless the pit boss gets a response plan from an engineer within 30 minutes, the line will stop.
       One day in February, pit boss Al Warren sees a yellow flash from a mechanic who is missing a part. He alerts a parts purchaser and clears the issue within minutes.
       Warren, 57, a 26-year company veteran, laughs when he’s asked how long it might have taken in the 1990s to resolve a similar problem. “Weeks, probably,” he says. “Lots of furor, smoke and mirrors. It’s amazing what’s been accomplished.”

The unpredictable
Since 1997, Boeing has trimmed the average time to build each 737 in half, to 11 days from 22. With the 787, it aims to assemble each in three days. Profit margins in the unit climbed to 10 percent in the first quarter from 8.2 percent a year earlier.
       Now comes the hard part for Boeing, which needs to deliver its promised orders and produce the 787 without letting costs soar. A leaner Boeing that buys most of its parts depends on its suppliers. Keeping them in line may be a challenge.
       “The unpredictable is what you have to be mindful of,” says Michael Bair, who heads the 787 program.
       Bair got one surprise in April, when a supplier near Seattle was making a mold to form part of the 787’s fuselage. Unlike aluminum planes, the 787 is created from strips of carbon fiber and resin that are cured in an oven to form a solid piece.
       The supplier inadvertently left a wooden stool in the oven, Bair says. “Let’s say we had a campfire,” he says. “We found a way to recover, but it wasn’t the plan.”
       Corralling far-flung parts makers, meeting promises for the 787 and delivering GE-style financial results all figure into McNerney’s strategy, a massive agenda given Boeing’s history. So far, investors and employees give him a shot at pulling it off. “I haven’t heard anything bad about him,” says Bofferding, the engineering union leader.
       As Boeing moves to distance itself from its scandals, that’s a good start.