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Boeing's Commercial-Jet Chief Bails Out

Scott Carson's retirement follows a succession of delays and production problems with Boeing's new-generation 787 Dreamliner

When Boeing (BA) disclosed on Aug. 27 that its long-awaited, long-overdue new jet, the 787 Dreamliner, would make its first test flight by yearend—and would be ready for delivery beginning in 2010—the manufacturer tried to portray the news as a minor delay on the path to what will ultimately be a game-changing aircraft.

But if there was any doubt how the latest setback played with the myriad airlines who have repeatedly rebuilt their flight schedules around the endless 787 delays, doubt no more: Boeing surprised Wall Street on Monday, Aug. 31, with news that the executive overseeing its commercial-plane programs, Scott E. Carson, will retire at the end of the year. The news came roughly two months after customers learned of yet another holdup for the next-generation aircraft—and four days after Boeing laid out its latest schedule for test flights and production. The fact that Boeing would switch oversight of the Dreamliner so close to the launch date suggests the depth of unresolved problems plaguing the project—and the financial risks to Boeing if the project slips further.

In a call with Wall Street analysts, Boeing executives said that Carson, 63, had decided to retire a year ahead of schedule. Executives said they waited to announce the news based on Carson's desire not to step on the earlier story. "The decision to retire was Scott's, and he said it was based on many factors, the most important of which was resetting the 787 schedule last week and giving his successor a clear path forward on the program," Boeing CEO W. James McNerney Jr. told analysts Monday. "And so it just naturally flowed that this will be the week we'd talk about organization."

Costly Prototypes

For all of its innovative features—or perhaps because of them—the Dreamliner has been plagued by a series of delays caused by everything from parts shortages, labor strikes and, not least, structural flaws in its carbon-composite design. In a move that Boeing said was designed to speed up development—but was equally intended to muster orders from state-owned carriers—the Chicago-based manufacturer farmed out big chunks of the design and production to a global network of suppliers, which would then deliver the components for final assembly at Boeing's factories in Everett, Wash. But that approach now appears ill-conceived, with the difficulties in fitting the components together putting the Dreamliner two years behind schedule.

What's more, Boeing said on Aug. 27 that it will take a $2.5 billion charge for the cost of producing three of its first six test planes—an indication that airlines are well aware of how many design changes Boeing has made to the 787, and refuse to buy any of the prototype models. (For its part, Boeing says it remains confident it can eventually remarket the test planes as VIP aircraft.)

But that may only be the beginning of the financial pressures facing Boeing. According to industry consultants, many of those global suppliers—who have shelled out billions in development costs, and with no revenues coming in—are now hounding Boeing to cover upfront costs, which the company has so far refused to do. If Boeing were forced to pay, some analysts think that could change the economics of the 787 enough to push the break-even point for Boeing further out into the future. And even if Boeing can ramp up production of the 787 line in 2010 and beyond, some analysts fear that the aircraft giant might have to scale back production of the 737, 747, and other models to compensate. Further delays with the 787 "increase the possibility that airlines that have orders for the 787 and other models could request deferrals of their non-787 orders, or other considerations that could affect the company's revenues and profitability," analysts at Standard & Poor's (MHP) wrote after news of the delay.

Airlines Are Getting Antsy

Many airlines had already started to voice their displeasure with the chronic delays, which in turn have created an opening for archrival Airbus (EAD.PA) to steal some of Boeing's customers. While Boeing boasts that it still holds more than 800 orders, analysts say customers have canceled orders for more than 70 planes so far this year, and deferred some orders for others. One airline, Qantas Airways (QAN.AX), canceled orders for 15 Dreamliners in June and deferred the delivery of 15 others. And while the Australian carrier still holds orders for 50 more 787s—an indication of the high hopes many airlines held for the fuel-efficient 787—its patience is clearly wearing thin. "This is frustrating news but not unexpected," Qantas Chief Executive Alan Joyce said in a statement following news of the latest delay.

The task of shepherding the Dreamliner now falls to Jim Albaugh, a former Rockwell executive who has served as head of Boeing's defense business since 2002. While the defense business has grown in recent years—now accounting for roughly half of Boeing's $61 billion in overall revenues—it hasn't been without its own issues. Under Albaugh, Boeing won the bidding to build the Army's Future Combat Systems, a sophisticated wireless network connecting soldiers, ground vehicles, and drones. But Defense Secretary Robert Gates canceled the contract last April and later told the Senate Armed Services Committee that the program "was all messed up." (Gates later divided the contract into five smaller awards, only one of which went to Boeing.)

As head of defense, Albaugh serves a relatively small customer base—Uncle Sam and a few foreign militaries—and those buyers have generally limited options with a handful of suppliers. Now tasked with the job of getting the Dreamliner officially out of the hangar, Albaugh must appease the dozens of customers like Qantas who are threatening to defect, as well as the balky suppliers demanding to be made whole. How well he juggles those competing demands could determine Boeing's fate in coming years.

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