Boeing (BA) Chairman and CEO Jim McNerney has taken his share of hits lately. The ambitious 787 Dreamliner is about 15 months behind schedule, and in late March, Boeing lost out on a multibillion-dollar contract to build a fleet of refueling tankers for the U.S. Air Force. That deal, which is being protested, went to Northrop Grumman (NOC) and partner EADS (EADS), the European consortium that builds the Airbus and is Boeing's archrival.
Boeing's stumbles have caught many by surprise, primarily because McNerney, a disciple of former GE CEO Jack Welch, is held in such high regard. After a stellar 19-year career at GE, McNerney became chairman and CEO of 3M, moving to Boeing as chairman and CEO in 2005. I talked with McNerney on May 22 in Chicago at a conference on competitiveness sponsored by the Commerce Dept.
Oil has climbed as high as $135 a barrel. What are the implications for the aerospace business and Boeing?
W. JAMES McNERNEY JR.
I don't see any business plans that any companies in our industry have that don't assume a very high price of oil, because it is having a big impact. You can see the impact on our airline customers with American Airlines' (AMR) announcement about curtailing capacity. [On May 21, AMR, American's parent, said it would cut back on flights.] They've got to deal with it. And it has sort of a double-edged impact on Boeing: On the one hand, our customers are taking out inefficient capacity because at the current price of oil, they're not making money on certain routes. On the other, the replacement technology they need are the planes we're building now that are 20%, 30% more efficient.
A lot of people are talking about the 787 promising 20% fuel savings. How significant will they be?
Well, 30% overall operating savings, with 20% to 22% fuel savings driven by engine technology. Also, this is the first carbon-fiber titanium airplane ever built, and it's 20% lighter. And so the combination of engine technology and lighter materials produces those savings and lessens the environmental footprint. Two big deals in today's economy.
Boeing stock went from 100 to 75 because of delays with the Dreamliner. How did you allow that to happen?
Well, I would characterize the 787 as a leading-edge innovation, all right? The good news is we're five years ahead of our competition with an innovation that they're having trouble duplicating, and we have market acceptance for this airplane that has been better than any airplane ever marketed. We have almost 1,000 orders for this airplane. Now on the supply-chain side, I think we ran into some issues. We overestimated the ability of our partners to get things done with the timing we'd all hoped for. Our oversight of that environment was not as good as it could have been. It's a big global enterprise, this 787, and we have some problems that we've got to learn from, and we've got to do better.
Do you have any regrets about the way you handled it? Some people say: "Look, he’s a high-profile manager and highly regarded. How come he was so low-profile during such an important time for the company?"
I don't think the guys in Seattle [where the Dreamliner is being built] would characterize me as low-profile regarding my involvement with the 787. Having said that, you can always look back on these situations and say if I’d moved two months earlier here or a month and a half earlier there…we probably could be in slightly better shape.
What kind of confidence do you have that the targets you've got now for the 787 will be met?
We have a high level of confidence. We regret the stumbles we've had, particularly the impact we've had on our customers. But I think we've got it down to an executable plan we and our partners can implement together. It's still the most successful introduction in aviation history. We'll get there.
I was talking with a money manager who has a position in Boeing stock, and he said: "The dollar has put enormous pressure on Airbus, and yet they're outselling Boeing in the smaller end of the market." How is that possible? Why haven't you been more successful there?
The fact is our sales levels are about the same in the narrow-body segment and our sales levels in the bigger airplanes are in excess of Airbus' over the last couple of years. So I wouldn't characterize us as losing out in the narrow-body side. But our competitor is doing a good job there.
What about the defense part of the business? You have had some losses to Europe. You've got business going to Lockheed (LMT), business going to Northrop.
Overall our defense business is doing very well. We won 9 out of 11 competitions last year that we were in, but we did, as you alluded to, lose a tanker competition, which we are protesting, that [went to] an airplane made by Airbus in France. And we are protesting that decision not on the basis of where the airplane is made and some of the political atmospherics, but on the basis of the decision process, which we think was flawed.
What's the timing on that protest?
The GAO [General Accountability Office] will render a decision on June 19.
You've got roughly $12 billion in cash right now. A lot of people might say: "That's about $16 a share. We would like a high dividend or more acquisitions." Are there any plans to use that cash differently?
We are mindful of our employees first—in terms of pension plans and health-care plans—and our investors. But you have to remember, [aerospace] is a lumpy industry. Things happen quickly. Billions of dollars move this way and that. I'm a pretty conservative manager who likes to keep probably more than enough cash around.
Can you categorically rule out a change in plans?
No, but we want to be ready. If an acquisition that makes sense comes along, we want to move quickly. We want to have that as an advantage.