Is Boeing Cutting Too Close to the Bone?

Huge layoffs could leave it shorthanded when orders rebound

Just a week after the September 11 attacks, Boeing Co. (BA ) responded with some grim news of its own. The Chicago-based aerospace giant said it would cut 30,000 jobs from its commercial aircraft division in Seattle and slash jet deliveries by nearly 50% over the next two years. The company was responding to a "dramatically altered market," CEO Philip M. Condit told analysts in mid-October.

But Condit wasn't laying out the whole story. For months prior to September 11, top company and union officials say privately, Boeing had been quietly drawing up plans to slice employment in its commercial-aircraft business by 10,000 to 15,000 jobs over several years, or some 15%. The factors pushing the decision included slower sales, sliding market share, and management's efforts to lift productivity and hand work off to subcontractors. The idea was to rely on efficiency gains to assemble jets faster with fewer people. Thus, the announced cutbacks extended beyond what Boeing needed to meet the sudden crisis of oversupply posed after the terrorist attacks, the officials say.

NO SURE THING. Is the world's largest plane maker moving too fast? A recent study suggests that the steep layoffs could leave Boeing woefully short of skilled workers if orders rebound substantially over the next few years. The hoped-for efficiency gains depend on avoiding a repeat of the crippling production snarls that occurred when the company imposed a slew of new manufacturing techniques back in 1997. But that's by no means a sure thing. In addition, the planned cuts antagonize already strained relations with the company's two biggest unions, which accuse Boeing management of sacrificing people for profit. "We expected an adjustment coming before September 11," says International Association of Machinists & Aerospace Workers (IAM) President R. Thomas Buffenbarger, who represents 62,000 Boeing workers. "But they are using it as an opportunity to justify an overreaction in the magnitude of the layoffs." A Boeing spokesperson insists that all 30,000 layoffs are related to the slump in demand following the September 11 terrorist attacks.

No question, Boeing had to scale back sharply after the disaster. The precipitous drop in air travel has prompted airlines to delay scores of plane orders. Management responded immediately with production cuts. Boeing is on track to deliver 522 planes in 2001, but the September 11 tragedy will shrink that to 400 next year and under 300 in 2003.

Even so, big cuts had already been in the works, the company insiders say. Those had been planned as part of the drive that began earlier this year in an effort to leapfrog the higher productivity of European rival Airbus Industrie. The push involved the same kind of leaner assembly-line system that triggered the 1997 production fiasco. But this time, management appears to have worked out some of the kinks. For example, it has started to shift to the industry's first-ever moving assembly line for the final phase of the production process, which cuts out unneeded steps. That contrasts with traditional stationary assembly. Already, the Renton (Wash.) plant turns out 737s with just two assembly lines instead of three, eliminating the need for hundreds of workers.

Now, Boeing hopes to apply this approach to other operations where finished planes are put together, including assembly lines for 757s in Renton as well as those for 747s, 767s, and 777s at its Everett (Wash.) plant. If it works, the company could speed production by 50% or more and maintain its double-digit profit margins on commercial plane sales. "There's a lot of additional capacity that could be taken out of the system" using leaner manufacturing techniques, says analyst Peter Jacobs of Ragen MacKenzie, a unit of Wells Fargo (WFC ) in Seattle.

The question now is whether Boeing can pull off such an ambitious agenda in the midst of a massive and painful downsizing. The company has already squeezed out many of its younger workers in the past few years, particularly engineers. It did so as a result of efficiency gains, but also because plane orders declined from their 2000 peak of 608. The current layoff plan would slash Boeing's total workforce by nearly a third, to about 60,000, leaving an older workforce and few skilled replacements-in-training. At the same time, Condit expects orders to rebound by 2003, lifting production rates back up to pre-September 11 levels in the following years.

MORE LEVERAGE. If that happens, Boeing will need all of its productivity plans to pan out as expected or it may be caught short ramping back up to 500 planes a year. Indeed, a recent study by Massachusetts Institute of Technology found that the aerospace industry has already cut 500,000 positions since 1990 and hasn't done enough to replace an aging workforce. "We're facing a critical-skills shortage" down the road, says Robert E. Scott, an economist at the Economic Policy Institute in Washington and a co-author of the study.

It didn't take long for the company's two major unions to vow to resist the scale of the announced downsizing. Union proposals to dampen the impact with early-retirement packages, voluntary layoffs, or less outsourcing to contractors have so far gone nowhere, say both the IAM's Buffenbarger and Charles Bofferding, executive director of the Society of Professional Engineering Employees in Aerospace (SPEEA). That could undercut morale and stir worker resentment, union leaders warn. SPEEA'S 25,000 Boeing engineers and technical workers have become more militant in recent years, mounting their first strike ever against Boeing in 2000.

The IAM has even taken the company to court. The union charges that Boeing outsourced jobs to subcontractors in violation of its 1998 labor pact. "We're seeing a couple thousand jobs lost due to this violation," says IAM District 751 President Mark A. Blondin, whose unit represents 24,000 production workers. A Boeing spokesperson says all the job shifts to suppliers comply with the union's contract. Still, the IAM's pact expires next year, which will give members more leverage to battle outsourcing and layoffs.

CEO Condit has been struggling for years to lift Boeing's efficiency and bring down labor costs. If all goes according to plan, he may finally realize his goal when the current cuts go through. But the price may be steep if there aren't enough workers on hand when the industry revives.

By Stanley Holmes in Seattle

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