Lost In Space At Boeing

Post-merger clashes throw the aerospace giant off-course

Marriage counselors always warn young couples that money troubles are the biggest threats to a happy union. Boeing Co. can tell you it's not so good for corporate marriages either.

Almost from the time Boeing completed its merger with McDonnell Douglas Corp. last August, the company has been racking up writedowns caused by production problems and product cancellations. On Apr. 27, Boeing execs are bracing for their first post-merger shareholder meeting--at which investors will be asking why the parts shortages and assembly-line glitches that the Seattle aerospace giant promised to clean up six months ago still persist. On Apr. 9, Boeing announced a new $350 million charge, bringing the tab for the production disasters to nearly $3 billion. Boeing's stock, now at 53, is nearly 12% below where it was when the $13 billion McDonnell deal closed.

PUBLIC SPATS. It all adds up to a lot of stress in the combined corporate family. For months, President Harry C. Stonecipher, the hard-nosed former McDonnell Douglas CEO who joined Boeing in the merger, has disagreed--at times, in public--with Ronald B. Woodard, head of Boeing's commercial aviation unit, over the cause of the problems. Before Stonecipher came aboard, Woodard was in line to be president, and the two clashed from the start, insiders say. Stonecipher, they add, even tried to pin blame on Boeing's popular Chairman and CEO Philip M. Condit.

The potential for internecine war has kept the rumor-mill working overtime both on Wall Street and at Boeing. Indeed, earlier this year Condit publicly denied reports that Woodard would be fired--or that he himself would be stepping down and former CEO Frank Shrontz would return.

Condit, Stonecipher, and Woodard all deny any tensions and say they work well together. And in a recent interview, Stonecipher and Condit seemed in sync in their views. But Boeing's directors--a third of whom came from McDonnell Douglas--are growing impatient. The board doesn't want any more surprises, say observers and insiders, and further large charges could force Woodard out. "A lot of investors think that there have been all these problems, and yet no one has lost their job," says Bill Whitlow, manager of Saveco Northwest Fund, which has $4 million in Boeing stock. On the other hand, customers aren't looking for more disruption. "I would hate to see any shuffle in management, given that we're the ones who would be the recipients of the consequences," says Gordon M. Bethune, CEO of Continental Airlines Inc., which is slated to take 15% of Boeing's output this year.

In a joint interview with BUSINESS WEEK, Condit and Stonecipher said they won't make a scapegoat of anyone. But they're not ready to declare that their problems are behind them, either. "A lot of issues started a long time before [last fall], so you can't snap your fingers and say: `Let's shape up here,"' says Condit.

Today, Condit and Stonecipher show a united front and say they're working together to shift Boeing's culture. In the past, Boeing's focus was on designing the most advanced planes, says Condit, and cost was a secondary issue. But airlines are balking at higher costs and Boeing is now competing on price with rival Airbus Industrie to snag commercial market share.

But in straining to fill 1,750 orders for new planes, Boeing has let costs spin out of control. Six months after the problems appeared, work is still being done out of sequence, union officials say. And demands from U.S. and European regulators have forced Boeing to make expensive redesigns on the new 737. "These production problems just go on and on," sighs Byron Callan, an aerospace analyst at Merrill Lynch & Co. "I don't think management knows what's really happening on the factory floor."

Part of the problem is the culture clash at the top, says Jon B. Kutler, president of Quarterdeck Investment Partners Inc., a Los Angeles aerospace investment bank. Stonecipher, who spent 26 years at General Electric Co., built a reputation there and at McDonnell Douglas as an aggressive, cost-oriented executive. Woodard and Condit, two career Boeing vets, come from a tradition that stresses more collaborative problem-solving.

Stonecipher's forceful style has made him a lightning rod within Boeing's ranks. Analysts and union leaders accuse Stonecipher of posturing for Wall Street. In December, Stonecipher announced that Boeing planned to slim down by 12,000 employees to cut costs. But with all the plant floor problems, Boeing actually is holding employment levels steady and only recently stopped hiring. "They brought Stonecipher in to whip us into shape, but instead he's pissed everyone off," says a machinist at Boeing's Everett (Wash.) plant.

Stonecipher says it's his job to be the tough guy and take the heat for Condit. He argues that he has restrained himself: The most difficult "part in this whole thing has been not slaying people," he says. Condit, for his part, says he leans on Stonecipher. "One of the things that has got me through was that I could walk down the hall and put my head on Harry's desk and say: `Aaargh'," he says.

The groaning isn't likely to end until until the production problems do. Wood-ard says the company is "bouncing back," and points to improved production schedules on the 747 and 767 assembly lines. Still, in commercial aviation, which accounts for 56% of company revenues, Boeing will lose money on at least the first 400 new 737s. That means it won't show profits from that plane until 2000, when the first batch is completed.

As a result, Boeing's stock will continue to languish and could even fall more, says Prudential Securities Inc. analyst Nicholas P. Heymann, who turned negative on Boeing when the production problems surfaced last fall. Not quite the news to make shareholders smile when they gather in St. Louis.

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