Boeing's Revised Flight Plan

Would cuts in management and output rescue earnings?

When Boeing Co. announced on Dec. 2 that canceled orders from Asian carriers would force it to cut back production by 25% starting in 2000, management finally acknowledged publicly what investors had long feared: The aerospace giant's earnings would be one of the biggest U.S. casualties of the global meltdown. What Boeing has yet to disclose, however, is how seriously it is still being victimized by its own inefficiencies--which won't be solved by its new plan to cut as many as 48,000 jobs by 2000.

The hidden problem: Boeing aggressively priced 737s and other models in the past three years. Earnings from the cash-cow 747 line have in the past compensated for this, but now that Asian orders for 747s have dropped, the narrow margins will show up on the bottom line. In addition, the company's costs have risen because it is building planes more slowly, partly because it has hired less experienced workers. "We have to fundamentally change the way we make planes," Alan Mulally, president of Boeing Commercial Airplanes, told analysts on Dec. 2.

"MUCH LEANER." Mulally now has a plan to do just that. Company insiders say he will propose changes, including increasing outsourcing and reducing the time to assemble parts, at a Boeing board meeting on Dec. 14. He will also propose thinning management ranks as part of the announced layoffs. "I don't think he's talking about something fundamentally different in the design," says Jerry Martin, Boeing's director of process vision. "It's about the way we conduct the business." Mulally declined to comment.

Even if Mulally's proposal gets a green light from the board, Boeing will face plenty of challenges in 1999. The company would be rapidly modernizing its production practices while assembling a record 620 planes and laying off 20% of the workforce. Moreover, the plan is almost certain to meet with resistance from Boeing workers. The International Association of Machinists is slated for contract talks with Boeing next fall. And Bill Johnson, president of IAM Local 751, says the moment Boeing moves to outsource more, "we will put together a campaign to stop them."

ROADBLOCK. At first, Boeing thought it could shave 25% off the cost of producing airplanes by implementing production improvements such as using lean manufacturing techniques, adopting more efficient layouts for factory floors, and installing a new computer system. But Boeing's bloated management has stalled many of these plans. "We have too many layers," admits Martin.

More than half of Boeing's 232,600 employees are white-collar workers--but not for long. The company has said that 80% to 90% of the cuts will be in the commercial airplane group. The engineering union expects to lose one-third of its 25,000 members, says Charles Bofferding, executive director of the engineering union. The machinists union is also bracing for cuts among its 40,000 members. Indeed, part of Mulally's plan is to get suppliers to build more components and use Boeing plants for final assembly.

Even that may not be enough. Boeing must fully reassess the way it does business, say analysts and suppliers. A case in point: A supplier to Boeing and Airbus tried to make a change in an electronics system. The move required just two letters to Airbus--but at Boeing the same change required several meetings and nearly $1 million in rework and labor. Until Boeing can shed that kind of inefficiency, the company is unlikely to get back to its old cruising altitude.

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