McNerney Tested at Boeing as 787 Inquiry Raises Costs

Jan. 22 (Bloomberg) -- Japan’s transport ministry is conducting a second probe of GS Yuasa Corp.’s headquarters in Kyoto and sent a team to a U.K. supplier to investigate faults that have grounded Boeing Co.’s 787 Dreamliner fleet. Alix Steel reports on Bloomberg Television's "In The Loop." (Source: Bloomberg)

Boeing Co. (BA) Chief Executive Officer Jim McNerney has thrown himself into the investigation of the company’s grounded 787 Dreamliner, conferring at least twice a day with a half-dozen top executives.

“He wants to know in real time everything that’s happening” with the probe by Boeing employees and government agencies, said Tom Downey, the planemaker’s senior vice president of communications, who attends the meetings.

The stakes are high for the 63-year-old McNerney. His job may depend on whether and how soon he can resolve questions about the Dreamliner’s safety and win government approval for airlines to start flying the plane again.

The Dreamliner crisis is the biggest predicament McNerney has faced in his career, which has included running General Electric Co. (GE)’s aircraft engines business and almost five years in charge of 3M Co. (MMM) Boeing directors who named him CEO in 2005 considered him a prize who would restore the company’s reputation after a series of scandals and get the Dreamliner launched in a disciplined, cost-efficient way.

While investigators are focusing on the batteries and electrical system, they have yet to zero in on a cause of a Jan. 7 fire on a Japan Airlines Co. 787 in Boston or the battery- fault warning that led to a Jan. 16 emergency landing in Japan.

Photographer: Ben Stansall/AFP via Getty Images

Boeing Co. Chief Executive Officer Jim McNerney walks out from a Boeing 787 Dreamliner aircraft upon its arrival at the Farnborough Airshow, on July 18, 2010. Close

Boeing Co. Chief Executive Officer Jim McNerney walks out from a Boeing 787 Dreamliner... Read More

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Photographer: Ben Stansall/AFP via Getty Images

Boeing Co. Chief Executive Officer Jim McNerney walks out from a Boeing 787 Dreamliner aircraft upon its arrival at the Farnborough Airshow, on July 18, 2010.

‘Leadership Test’

“This is a leadership test for McNerney,” said Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware. “Even if no one has been hurt on a 787, who wants to get on a plane that may go on fire? It’s never good for a company when you question its basic product, so now McNerney has to convince customers and investors that the Dreamliner is OK.”

Chicago-based Boeing declined to make McNerney or board members available to comment on this story.

Boeing and the Federal Aviation Administration, working with accident investigators in the U.S. and Japan, are trying to determine what prompted charring and the release of fumes from the battery packs, a person familiar with the deliberations who wasn’t authorized to speak about them said last week.“

Getting the Dreamliner cleared to fly again and keeping credibility with investors and customers is a ‘‘huge job’’ for McNerney, said Michael Useem, director of the Center for Leadership and Change Management at the University of Pennsylvania’s Wharton School.

Welch’s Playbook

A graduate of Yale University, where he played varsity baseball with future U.S. President George W. Bush, and Harvard Business School, McNerney worked briefly at Procter & Gamble Co. and McKinsey & Co. before joining GE. During his 19 years there, he rose to become head of its lighting unit and later the aircraft engines business, and he was a finalist to succeed mentor Jack Welch as CEO. He lost that contest to Jeffrey Immelt in November 2000 and was quickly snatched by 3M to become its first outside CEO.

Photographer: Andrew Harrer/Bloomberg

Jim McNerney, chief executive officer of the Boeing Co., is seen in this May 8, 2012 photo. Getting the Dreamliner cleared to fly again and keeping credibility with investors and customers is a “huge job” for McNerney, said Michael Useem, director of the Center for Leadership and Change Management. Close

Jim McNerney, chief executive officer of the Boeing Co., is seen in this May 8, 2012... Read More

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Photographer: Andrew Harrer/Bloomberg

Jim McNerney, chief executive officer of the Boeing Co., is seen in this May 8, 2012 photo. Getting the Dreamliner cleared to fly again and keeping credibility with investors and customers is a “huge job” for McNerney, said Michael Useem, director of the Center for Leadership and Change Management.

McNerney, more reserved than Welch, often followed his former boss’s management playbook. At 3M, he intensified performance reviews, cut about 11 percent of the workforce and reined in spending. He also imported GE’s Six Sigma program, a series of techniques designed to decrease production defects and increase efficiency. The plan had results: McNerney raised 3M’s operating profit margins to 23 percent from 17 percent. He won praise for bringing more order to the maker of Scotch tape, abrasives and thousands of other products in a period that 3M’s current CEO Inge Thulin in November said was highlighted by ‘‘efficiency, productivity and processes.”

3M Tenure

McNerney’s successor at 3M, George Buckley, didn’t entirely agree. He dialed back McNerney’s emphasis on Six Sigma, arguing that while the program identified issues in processes and helped cut defects, it also sometimes squelched creativity.

Boeing already had begun work on the 787 when McNerney took charge. The idea was to produce a fuel-efficient jet using composite materials. To reduce costs, Boeing also devised a new manufacturing plan with 70 percent of the Dreamliner designed and built by suppliers around the world.

That gave Boeing less control than it traditionally had had when making new planes, and it contributed to seven delays in the Dreamliner program between 2007 and 2011. Intent on finding out for himself what was causing the bottlenecks, McNerney visited the factories of every major supplier around the world in late 2007 and early 2008, Downey said.

He also kept replacing executives in charge of the Dreamliner. Boeing has had four different heads of its commercial plane division since McNerney became CEO and four managers of the 787 program.

Battery Fire

Boeing currently has 800 unfilled orders for the plane, whose list price starts at about $207 million.

McNerney’s focus on details and uncovering where problems have occurred and who’s responsible for them is shown in his current round of meetings. Because of his knowledge of planes and electrical systems, “he asks a lot of very specific questions,” Downey said.

When McNerney learned on Jan. 7 that a battery fire had occurred on a Japan Airlines 787 in Boston, he told his chief technology officer to supplement information coming from directors of the 787 program, Downey said. Since then, scores of Boeing managers and engineers from across the company have been assigned to work on the Dreamliner, and McNerney also has kept in touch with directors and government officials.

An All Nippon Airways Co. 787 was forced to make an emergency landing in Japan on Jan. 16 after the pilots received a battery-fault warning.

FAA Grounding

Boeing has tried to persuade the FAA to end the groundings by proposing a variety of inspections and having pilots monitor electronic signals from the batteries to prevent fires, the person said last week. The FAA has been reluctant to approve those steps without a clear idea of what caused the defects and how they can be prevented, the person said.

Although McNerney is rarely quoted in Boeing press releases, he issued two statements over the past two weeks as well as an internal message to all employees.

“We are confident that the 787 is safe,” he said in a Jan. 16 statement. “Boeing is committed to supporting the FAA and finding the answers as quickly as possible. The company is working around the clock with its customers, the various regulatory and investigative authorities.”

Davia Temin, who leads the Temin & Co. crisis management firm in New York, called the situation McNerney’s “Challenger moment,” referring to the 1986 space shuttle accident.

‘Challenger Moment’

“McNerney needs to be saying Boeing will do everything in its power to assure the complete safety of the plane for every passenger and airline,” Temin said. “He needs to show he’s part of the solution, not the problem.”

Every CEO knows that the ability to manage and solve crises, especially those involving safety or damage to the environment, determines how long one lasts in the corner office. Tony Hayward stepped down as CEO of British Petroleum Co. in 2010 after being criticized for downplaying the environmental impact of the Deepwater Horizon oil spill in the Gulf of Mexico.

Akio Toyoda, on the other hand, has remained president of Toyota Motor Corp. (TM) after overseeing the recall of more than 10 million vehicles after cases of reported unintended acceleration in 2009 and 2010. Toyota won preliminary approval in December to pay more than $1 billion to settle claims over economic losses to car owners and investors because of the recalls.

Boeing Briefings

McNerney, the eldest of six siblings who has always sought to excel and win in business and sports, is taking an all-hands- on-deck approach to the Dreamliner crisis. Among the executives he wants to hear from several times a day are the head of Boeing’s commercial planes division, the chief technology officer and chief financial officer, Downey said. McNerney wants updates on customer and investor reaction as well as the probes.

It’s too early to know the extent of the 787’s issue and what it will cost in delays and repairs to put the jet back in the air, said Michael Derchin, an analyst at CRT Capital Group in Stamford, Connecticut.

“I think there’s confidence in Boeing in getting this thing fixed,” Derchin said. “It’s too soon to speculate whether anyone is going to be on the chopping block.”

Boeing’s shares fell 1.2 percent to $74.16 at the close in New York. The planemaker declined 4.5 percent from Jan. 6, the day before the Boston fire, while the Standard & Poor’s 500 Index gained 1.8 percent.

The costs may escalate for Boeing if the plane stays on the ground for long because of mounting inventory and lower sales from undeliverable planes, as well as penalties owed to suppliers and airlines, said Richard Tortoriello, an equity analyst with Standard & Poor’s in New York.

“If there’s a major design program that would probably tip the program into a loss position,” he said.

Financial Risks

Financial risks to Boeing include possible compensation to buyers under warranty, design and manufacturing expense, and delivery disruptions, Howard Rubel, a Jefferies Group Inc. analyst in New York, told clients in a note last week.

The most likely outcome may be a cost of about $550 million, according to Rubel, who based his estimates on the probability of different scenarios for Boeing, such as customer reimbursements and spending on any redesign work. His buy rating on Boeing is one of 23 such recommendations in a Bloomberg survey of analysts, along with four holds and two sells.

Higher costs may put pressure on McNerney from investors who are expecting to share in the company’s rising cash flow as Dreamliner deliveries pick up this year and next. Boeing said in December it resumed a $3.6 billion stock-repurchase plan that it had suspended in 2009 amid the earlier 787 delays. The company also announced a 10 percent increase in its quarterly dividend to 48.5 cents a share from 44 cents.

Bob Nardelli, the former CEO of Home Depot Inc. (HD) and Chrysler who now heads XLR-8, an investment advisory firm, is betting that McNerney will get Dreamliner planes flying again. The men were colleagues and rivals for the CEO job at GE.

“I have every confidence Jim is going to resolve this,” said Nardelli. “He’s taken on complex, unprecedented change with the Dreamliner, and he has all the background and experience to succeed.”

To contact the reporters on this story: Carol Hymowitz in New York at chymowitz1@bloomberg.net and Thomas Black in Dallas at tblack@bloomberg.net

To contact the editors responsible for this story: Jonathan Kaufman at jkaufman17@bloomberg.net

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