Boeing Co.'s defense Chief James F. Albaugh has never cared much for the trappings of power. In 2002, shortly after he took over Boeing's (BA) military aircraft and missile unit in St. Louis, he closed the office's executive dining room. Albaugh wanted to create an open culture, where engineers could voice their ideas to senior executives anytime, anywhere -- even if it meant interrupting a bigwig's lunch. That's how it was in Albaugh's early years as a hard-driving engineer at Rockwell Aerospace, which was acquired by Boeing in 1996. And that's how it had to be, he believed, to make Boeing a formidable contender in the defense business. "I don't want to create barriers," says Albaugh, 54.
The unpretentious Albaugh has been a steadying anchor for a company that's still reeling from a string of scandals. Albaugh's former boss, ousted Chief Financial Officer Michael Sears, is expected to enter a plea shortly as part of a U.S. government investigation into allegations that he improperly offered a job to a senior Air Force procurement official while she was deciding whether to buy Boeing's 767 tankers. The official, Darleen A. Druyun, pleaded guilty to one count of criminal conspiracy in April. She is expected to be sentenced in September. Meanwhile, the U.S. Air Force penalized Boeing for possessing stolen documents from Lockheed Martin Corp. (LMT) by pulling out of $1 billion worth of contracts and giving them to Lockheed. The scandals forced Boeing Chief Executive Officer Philip M. Condit to resign in December.
Amid the turmoil, Albaugh has quietly emerged as one of a handful of candidates to take the top spot at Boeing when its current CEO, Harry C. Stonecipher, retires in 2006. It's easy to understand why. Albaugh's division, Integrated Defense Systems (IDS), is the only Boeing unit that's living up to the promise Condit laid out when he acquired McDonnell Douglas Corp. in 1997: to boost profits by pursuing services, aerospace, and defense. In 2002, Albaugh was charged with integrating Boeing's military aircraft and space units, which had been cobbled together from the Rockwell and McDonnell Douglas mergers, as well as from a 2000 acquisition of Hughes's space division. While Boeing has lost its lead in commercial jets to Airbus, Albaugh has made up for the shortfall by leveraging Boeing's diverse technology expertise to push it beyond shrinking programs such as building fighter jets.
It's working. In June of this year, the U.S. Navy picked IDS to build antisubmarine jets -- a contract potentially worth $44 billion. And in August, the U.S. Army accelerated a project called Future Defense Systems, for which IDS will develop advanced communications networks -- a job now worth $21 billion. IDS, whose major operations are in St. Louis and Southern California, booked $51 billion of new business in 2003, up from $38 billion in 2002. In the first half of 2004, the unit's revenues jumped 14% over the same period in 2003, to $14.6 billion, and it swung from a $398 million operating loss to a $1.4 billion profit.
Albaugh has many more hurdles to cross, though, before his path to the CEO's suite is secured. He has not been implicated in any of the tanker misconduct. But as the Pentagon considers other options to replace its aging fleet, Albaugh will have to persuade Secretary of Defense Donald H. Rumsfeld and lawmakers in Congress that the 767 tanker is still the best choice. Furthermore, he has to figure out how to turn around IDS's commercial satellite arm. The business has been plagued by cost overruns and a collapsing market, prompting a $1.1 billion writedown last year. As for the new military contracts, Albaugh will have to deliver networking technology that Boeing has never been called on to develop before. "It's one thing to market and another to execute," says Loren B. Thompson, COO of the Lexington Institute, a defense think tank.
Execution will determine whether Albaugh rises above other strong CEO candidates, including Alan R. Mulally, who now heads Boeing's commercial airplanes unit. While Mulally is more outwardly aggressive, Albaugh has more experience on the defense side, which now accounts for over half of Boeing's sales.
In the face of so much pressure, Albaugh remains unflappable. An engineer and history buff with a penchant for collecting Italian wine, Albaugh prefers to fly under the radar. Beneath the 6-foot, 5-inch former basketball player's imposing frame is a supergeek who savors the scientific challenge of building rockets and assembling complex communications systems. "Jim really is a rocket scientist," says Boeing CEO Stonecipher.
Albaugh has called on that expertise in his role as chief architect of Boeing's plan to become the world's leading provider of next-generation defense technologies. One of his biggest wins was the contract with the Army, which tapped Boeing to create an information network that will connect tanks, planes, and armored troop carriers with soldiers on the battlefield. To lock up the deal, Albaugh mixed talent from disparate divisions that had not been inclined to work together before. He matched up Boeing's experts in data mining with Hughes engineers, who know how to integrate data with communications systems. Then he threw in professionals who had worked on the Apache helicopter, because they understand how the Army thinks about battle management. Such integration will be crucial to bringing in more defense contracts. "Albaugh is way ahead of the curve in terms of understanding how to shape and grow these new markets," says Richard L. Aboulafia, vice-president of analysis for consultants Teal Group Corp.
Albaugh has been training for this challenge his entire life. As a boy in Richland, Wash. -- home of the Hanford nuclear site -- he was surrounded by scientists, including his father, who worked as a chemist at the facility. Albaugh took an early liking to science and dreamed of building dams. But by the time he completed his engineering education in 1974, most of the country's dams were already finished. So he took a job as an engineer with Rockwell Aerospace. "Rocket science has a lot in common with building dams," he explains. "But instead of dealing with fluid flows, you have gas flowing through rocket engines."
Although albaugh was a talented engineer, he also built a reputation as a shrewd turnaround specialist. He made his biggest mark in the early 1990s, when he was appointed fix-it man for Rocketdyne, a division that built rocket engines. Rocketdyne's factory was over budget, so Albaugh reorganized the assembly line and trained workers to improve their efficiency. Colleagues remember him as a somewhat obsessive manager. Rick Baily, the former head of the Rocketdyne factory and now a vice-president for IDS, recalls that Albaugh once left him a Post-It note with a cigarette butt stuck to it -- a reminder that efficiency includes sweeping the floor.
Maybe those neat-freak tendencies will help as Albaugh attempts to clean up Boeing's commercial satellite business. Two years after Boeing bought Rockwell Aerospace in 1996, Albaugh was named head of the space and communications unit. He championed the plan to acquire Hughes's space division, hoping it would boost Boeing's expertise in satellite communications and network defense systems. Now he's racing to update Hughes's antiquated manufacturing procedures and improve design flaws that caused some satellites to fail. "Hughes left us with a bunch of bad programs," Albaugh says. "I'm accountable."
The woes in the satellite business once led Boeing's board to consider dumping Albaugh. They even tried to make a list of possible replacements. Then the military contracts started flooding in, and all they came up with was a blank sheet of paper. "We concluded that this guy is really good," Stonecipher says. As he works through each new challenge, Albaugh is getting closer to turning Boeing into a defense powerhouse -- and to securing his own meteoric rise to the top.
By Stanley Holmes in Seal Beach, Calif.