It was a beautiful summer evening on south Lake Union, but Alan Tonelson could see dark clouds looming beyond Queen Anne.
"I suspect Boeing is seriously thinking about exiting the large aircraft industry," said Tonelson, a fellow at the U.S. Business and Industry Council and author of the book "Race to the Bottom," which warns that free trade is lowering American living standards.
The trends are disturbing, he said, watching the sunset earlier this summer after a day of meetings with the Society of Professional Engineering Employees in Aerospace, the union for engineers and technical workers at the Boeing Co.
Research and development spending at Boeing is down. The company is sending more work overseas, and its U.S. supplier base has been "outsourced out of existence."
There’s only one thing that can explain it all, he said. "Maybe they just want to become a commercial jet service and defense company."
Phil Condit also has a lake view from his office in Chicago — one of Lake Michigan. The Boeing chairman and chief executive officer says he can understand Tonelson’s thinking.
But Tonelson and the others who think like him, are wrong, Condit said.
Is Boeing getting out of commercial airplanes?
"Absolutely not," he said. "I can’t even imagine why, when you’ve got a $25 billion, $28 billion business — at the bottom of the cycle — with a tremendous investment and tremendous future, you’d ever want to get out."
The notion that Boeing has decided to pull out of the commercial jet business to focus on its defense business and other more-profitable ventures has become almost conventional wisdom in some circles.
A pair of researchers at the State University of New York at Buffalo published a paper on the aerospace industry last year, in which they argued that Boeing and other "key segments of the U.S. commercial aircraft industry are poised on the edge of market exit."
To support their notion, authors Alan MacPherson and David Pritchard pointed out that Boeing "has invested little in new manufacturing technology over the last decade or so." As a result, "the company’s capital stock is obsolete."
As Boeing’s jet-building tools age at home, foreign parts suppliers have invested in state-of-the art equipment, the researchers said.
That can lead to dramatic results, MacPherson and Pritchard wrote. Hyundai of South Korea in the mid-1990s purchased some of the world’s most advanced machine tools for riveting and milling wings, and within two years it was building them — the most-complex part of a jet — for Boeing 717s.
Companies such as Hyundai with more modern tools and cheaper labor enjoy an inherent advantage over their U.S. competition, the researchers wrote.
Boeing, in response, is putting increasing emphasis on high-profit aviation services, things such as "the re-marketing of used airplanes, flight crew training, airport routing, airframe maintenance and aircraft upgrades."
"Under this scenario," they wrote, "Boeing becomes a multinational services conglomerate with both military and commercial interests, but only limited involvement in commercial aircraft production.
"On balance," they concluded, "we find it hard to believe that significant production activity on the civilian side of the aircraft industry will remain in the U.S. beyond Boeing’s three- to four-year backlog."
Condit says he moved Boeing’s headquarters to Chicago two years ago so that he could spend more time wrestling with strategic issues.
At no time, he said, has bowing out of commercial jet building been part of that strategy. It’s never even been studied, Condit said.
"You can get there really fast just running the numbers in your head," he said.
Boeing at one point did consider spinning off its commercial division as a separate company, he said, but decided "there’s a real advantage to keep the business together."
There’s a market for military versions of commercial jets such as the 767 and 737, he noted. Design and production techniques pioneered on the 777 were refined on the F-22 and Joint Strike Fighter and now are being used on the 7E7.
Boeing’s earnings in the defense business are one reason the company can afford to invest in the 7E7 with the airline market so weak, he added.
Boeing’s strategy does include building up the company’s non-commercial divisions, adding more services and developing a greater defense business
"We said we would be broader, we would be global, and that’s exactly the path we’re going down," Condit said.
To Condit, the key word is "and" — as in Boeing will be a major defense and commercial airplane company.
"There’s a natural tendency of human beings to think in the world of ‘or’ terms rather than ‘and,’" he said. That leads to the thinking that if Boeing is building its defense business, it must be downsizing commercial.
But Boeing’s committed to commercial jets, he said, and the 7E7 Dreamliner represents its future, he said.
"It’s a game changer," Condit said.
Critics have made much of the fact that Boeing’s board of directors has yet to give its formal blessing to the 7E7. Boeing Commercial Airplanes executives must go back to Chicago this winter to win board approval.
In addition, The Wall Street Journal reported in April that two key members of the Boeing board — former McDonnell-Douglas chieftains John McDonnell and Harry Stonecipher — were opposed to spending the money necessary to develop a new commercial airplane.
Instead, the Journal said, McDonnell and Stonecipher want Boeing to do what they did at McDonnell-Douglas — shift emphasis to more profitable defense and airplane services.
The notion wasn’t well received by many in aerospace.
"I think I speak for many in this industry when I ask, with all due respect, ‘Harry Stonecipher? I thought he retired,’" wrote Richard Aboulafia, a widely quoted aerospace analyst from Alexandria, Va., in a note to his clients. "Why do you think a failed company provides a valid business model?"
Condit acknowledged the issue.
"There is a view that gets expressed that says there are people on the board who are trying to keep the plane from being launched," he said. "It flat is not true."
Condit said there is a business case for the 7E7. "We’re not looking for a reason not to launch it."
Aside from the fact that there’s a market for the 7E7, the program represents a major shift in how airplanes are designed, built and maintained, he said.
Condit said they are "revolutionary, not evolutionary" changes that can "reshape the industry in the years ahead."
One of the big advances is in digital technology that allows for the manufacture of parts far more precisely than is possible now.
Walk in the back doors of Boeing’s mammoth Everett factory, and you’ll immediately see a number of large metal structures scattered across the 98-acre concrete floor.
These "jigs" — some four stories tall — are the huge tools that hold airplane pieces in place while mechanics work on them, much the way the backyard craftsman’s tabletop vise can hold a couple of 2-by-4s.
It’s Boeing’s failure to update and replace these tools with modern equipment that MacPherson and Pritchard site as evidence that Boeing’s not investing in the future of commercial jet building.
But Condit said that with the new airplane, new design and production technology means the pieces can be so precisely made that massive jigs won’t be needed.
"The part can become the tool," he said. "That’s what’s really interesting about what they’re doing with 7E7."
That makes the researchers’ tooling arguments moot, and changes every assumption about the cost of launching a new airplane, Condit said.
"The thing that is exciting to me is to see the potential of a real breakthrough on the building of the airplane, how it’s designed, it’s built, therefore, how much it costs," he said.
And that will leap-frog Boeing back ahead of Airbus in commercial airplanes, he predicted.
All these changes do not seem to be widely understood, Condit said, inside or outside Boeing.
"Remaking a company of this scale is never an easy task, and lots of people worry about where it’s taking you," Condit continued. "But to be viable, you have to do these things."
Reporter Bryan Corliss: 425-339-3454 or corliss@heraldnet.com.
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