Boeing's McNerney: 'Digging Out of a Hole'

After a long silence, Boeing CEO James McNerney admits the company may have moved "a little too far, too fast" on the 787 Dreamliner

by Judith Crown

Scott Carson, president and CEO of Boeing Commercial Airplanes at the Third Aviation and Environment Summit in Switzerland on Apr. 22, 2008 Justin Hession/Getty Images for ACI

As Boeing (BA) has suffered repeated delays on its much-ballyhooed 787 Dreamliner commercial jet, some company insiders and Wall Street analysts have wondered why CEO James McNerney hasn't been more visible. In fact, this week McNerney took an unusual step, writing a heartfelt memo to employees on Monday, Apr. 21. In it, he acknowledged the company may have gone out a "little too far, too fast" on the advanced-technology jet, and talked up a visit he made last week to its assembly line in Everett, Wash.

The Boeing chief was known for working behind the scenes before he took the top Boeing job in 2005, and it won him high marks in previous positions as CEO of 3M (MMM) and before that as head of General Electric's (GE) aircraft-engine division.

Supply Chain Changes

But the critically important 787—a fuel-sipping plane for which Boeing has more than 900 orders—is proving to be an entirely different challenge, and McNerney may have to do a lot more to persuade investors and others that he has the program under control. A big test came on Apr. 23, when McNerney discussed Boeing's first-quarter results and how the 787 delays will hurt future earnings. Boeing reported a 38% gain in net income, to $1.2 billion or $1.62 a share, on 4% higher revenues, or $16 billion. The earnings beat Wall Street estimates, sending the stock up 5% to 82.50 in midday trading. Its backlog of commercial jet orders is at an all-time high. However, analysts say Boeing eventually could face from $2 billion to $4 billion in penalties to airline customers because of 787 delays, as well as reduced profit margins over the next decade.

Chief Financial Officer James Bell said in the conference call that the scope of penalties won't be determined until next year. He said the company won't book profits for the first 25 Dreamliners to be delivered next year, but added that the 787 will be profitable over the long haul. Boeing said it expects to earn between $6.80 and $7 per share next year, in line with the analyst consensus estimate of $6.87. The company also reiterated that it expects to earn $5.70 to $5.85 per share in 2008.

In his memo to employees, McNerney acknowledged Boeing is already changing the way it manages the 787's global supply chain, including the demands it is placing on partners. A series of shortages and breakdowns in that supply chain, which reaches Europe and Japan, led to the current 15-month postponement of first deliveries to airlines. The most recent delay (BusinessWeek.com, 4/9/08), announced Apr. 9, moves the first jet delivery to the third quarter of next year.

McNerney said in the call that Boeing learned it's necessary to have technology in place to get frequent, up-to-the-minute readings on inventory levels and work in progress for companies three or four steps down the supply chain, "so that there's a global understanding of how things are coming together." He said: "While we are deeply disappointed in our performance to date, and the impact our delays will have on our customers, the new plan reduces our schedule risk significantly. We will get through the start-up of this innovative program, and when we do we will be delivering a breakthrough new product, years ahead of its competition, and one that will offer substantial efficiences and value for our customers."

Absentee CEO?

McNerney has been barely visible amid the questions about the 787 delays. Some analysts said they were surprised that McNerney wasn't on an Apr. 9 conference call outlining the third postponement, which was left to Scott Carson, president of Boeing's commercial operation, and project manager Pat Shanahan. It was Carson who paid a visit on Apr. 10 in Tokyo to All Nippon Airways, or ANA, which is to receive the first 787s, according to an ANA spokesman.