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Sunday, December 7, 2003 - Page updated at 12:00 AM

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Plan to put 7E7 in Everett tied to Boeing transformation

Seattle Times aerospace reporter

Crunch time for the 7E7


Monday: Boeing Chief Executive Phil Condit is suddenly replaced with former McDonnell Douglas Chief Executive Harry Stonecipher.

Wednesday: Stonecipher visits Seattle for briefings on the 7E7 and Boeing's long-range strategy for commercial airplanes.

Friday: The 7E7 executive team's conclusion that Everett is the best place to build the next-generation jet is disclosed in The Seattle Times. The Boeing board will have the final say on the production site.

Dec. 15: Boeing's board is scheduled to meet in Chicago, charged with deciding whether to go ahead with the 7E7, and, if the answer is yes, where it will be built. Boeing says the site decision could be pushed into next year.

Though maintaining working labor relations was a decisive factor in his staff's conclusion that the 7E7 be built in Everett, Boeing Commercial Airplanes Chief Executive Alan Mulally — who has overseen 26,000 job cuts in Washington since September 2001 — has not gone warm and fuzzy.

The recommendation of Everett over three sites in the Southeast is primarily about making money and competing with Airbus, not about a sentimental attachment to the Puget Sound region, according to details of the site evaluation provided by a Boeing insider.

The 7E7 plan, to be put before the Boeing board for approval in Chicago Dec. 15:

• Projects a much higher return on investment for the 7E7 than previous Boeing airplane programs.

The insider would not disclose details of the financial projections contained in the 7E7 team's analysis for fear, he said, of providing sensitive data useful to Boeing's France-based nemesis, Airbus. He did say that the plane is projected to reap hefty profits for Boeing.

• Is linked to a broader transformation of Puget Sound production lines for at least two other planes, the 777 and the 767.

According to the analysis prepared for the Boeing board, that larger streamlining effort, something Boeing calls "lean global enterprise," will require buy-in from Boeing's employees and unions in the Puget Sound region.

Their support, and that of political leaders and the community, would be at risk if the 7E7 is sent off to be produced in another part of the country, the analysis indicates.

The 7E7 site evaluation and the long-range business plan for the commercial-jet division was presented to new Boeing CEO Harry Stonecipher, Mulally's boss, Wednesday, according to an in-house publication for Boeing employees.

Some details of the long-range business plan were described by the insider, who has provided accurate information about key 7E7 decisions in recent months. They reflect what Mulally has been saying publicly for years: Boeing has to become dramatically more efficient, and workers in the region must help make it happen.

In light of Boeing's fierce competition from Airbus, Charles Bofferding, executive director of the Society of Professional Engineering Employees in Aerospace (SPEEA), the union for Boeing engineers and technical workers, agrees change is necessary.

"I think the 7E7 necessarily has to be about more than just the 7E7," Bofferding said. "It has to be about Boeing Commercial Airplanes changing itself to be the world beater that we should be." Bofferding meets with management regularly and is familiar with the outlines of Boeing's plans but said he did not know specifics about the 7E7 site evaluation.

The pains of change

Mulally's implementation of "lean global enterprise" for commercial airplanes means continuing a sweeping and painful transformation.

For engineering, it means retaining high-level oversight of airplane design but giving up detail parts design to outside partners.

For production, it means keeping only a simplified, minimized final assembly process and outsourcing parts fabrication and much of the airframe-assembly work traditionally done by Boeing employees.

Planes will be put together on assembly lines flexible enough to make quick production changes, such as rolling out a different airplane variant on short notice. Those flexible assembly processes also will create an option to move the assembly lines if Boeing chooses.

In this supply system of superefficient, just-in-time parts delivery, buy-in from the work force and good relations with unions are essential because everything must run like clockwork. If one part of the production mechanism backs up, the whole thing would quickly grind to a halt.

The 7E7 manufacturing process has been designed for this new model from the start. But the long-range plan is to remake existing jet programs, including the 767 and 777 lines in Everett, in a similar fashion as much as possible.

The plan to convert 777 final assembly to a moving line is under way.

According to the insider, Boeing Commercial Airplanes' "lean global enterprise" plan is scheduled to be fully implemented by the end of 2007. That's why, in talks with unions in the past few months, Boeing asked SPEEA and the International Association of Machinists, the factory-workers union, for a two-year contract extension to 2007.

That extension would have guaranteed Mulally no strikes until his "lean global enterprise" is largely phased in. Because the plan foresees a committed and cooperative work force and a smaller one — outsourcing and downsizing are projected to continue in the long-range plan, according to the insider — that would have provided insurance against problems ahead.

Machinists balk

Mulally didn't get that insurance. Although the Machinists have been helpful to Boeing this year, providing crucial political support for a list of Boeing-friendly legislation adopted in Olympia, including a revamping of the state's unemployment-insurance system, the union balked at giving up the only leverage it had.

According to the insider, the Machinists refused to grant the contract extension, and Boeing suspended talks with both unions.

Machinists District 751 President Mark Blondin was out of town and could not be reached for comment, but a spokeswoman, Connie Kelliher, said of the 7E7 and Boeing's strategy, "We see an opportunity for the company and the union to start a new beginning as partners in ways that will help both."

While acknowledging Friday that talks took place, SPEEA's Bofferding refused to discuss details.

Having union contracts run out in 2005, in the midst of implementing "lean global enterprise," makes it more essential for Mulally to be able to work with the unions.

Bofferding, who hopes a successful strategy will eventually mean expansion of Boeing employment, believes the plan can and should be implemented in a way that treats workers with respect. With an aging work force in the Puget Sound region, he thinks any interim downsizing that may be necessary can be achieved through attrition.

He welcomed the news that consideration of employee morale is figuring into the 7E7 site-selection process.

"Yes, the business case has to close; but the employees are part of the business case," said Bofferding. "These are great messages to be sending to employees."

The Stonecipher factor

Making the case to the Boeing board is Mulally's other challenge.

According to the 7E7 site evaluation cited by the Boeing insider:

• Everett's costs of production would be higher than three other contending sites, Kinston, N.C.; Mobile Ala.; and Charleston, S.C.

• The differences were not significant compared with the overall cost of the 7E7 program and what's at stake for Boeing's business in the Puget Sound region.

• Everett would not have been in the running if not for the huge 7E7 tax exemption approved by the state Legislature and Gov. Gary Locke in June. The measure is estimated to provide Boeing and the Washington aerospace industry $3.2 billion in tax breaks in the next 20 years if the 7E7 is built in Everett or in the other possible Washington site, Moses Lake.

In presenting the business case to Boeing CEO Stonecipher on Wednesday, Mulally may have found a more receptive ear than many expected. For all his reputation as a cost-cutter, Stonecipher has shown he will work with unions when the situation calls for it.

In 1994, when Stonecipher had just arrived to head McDonnell Douglas, corporate managers at the company's commercial-aviation division in Long Beach, Calif., suggested outsourcing final assembly of its proposed MD-95 jet — which became the Boeing 717 — to Dalfort Aviation, a modifications-and-maintenance operation in Dallas.

Bruce Leadbetter, the former owner and CEO of Dalfort Aviation and now chairman of boutique investment firm Beta Capital Group, visited Stonecipher and heard why he had come out against the move to Dallas.

"I can't handle a fight with the union right now, so I'm not going to do it," Leadbetter recalls Stonecipher telling him. "They'll give me grief on the C-17, and I don't need grief there."

The C-17 is a Long Beach-based military cargo jet, then in serious trouble and subsequently turned around to become a hugely profitable program for Boeing.

"I can't risk the C-17," Leadbetter recalls Stonecipher as saying. "I have to start with a good relationship with the unions."

McDonnell Douglas never moved final assembly out of Long Beach, and it was Stonecipher who stopped it.

The executive on the 7E7 team responsible for developing the business case, Craig Saddler, formerly worked for McDonnell Douglas as general manager of business management on the C-17 program.

Because the Boeing board is known to be focused on the bottom line, the fact that the selection of Everett was not made on cost alone surprised some.

Yet, the employee morale issue also boils down to cost.

As Mulally implements his lean plan to create efficiencies and profits over the next four years, he must walk a knife edge: keeping the unions on board while outsourcing and possible downsizing continues.

With the four-year transition likely to be much more brutal in the fabrication arena than in design, Boeing Machinists face tougher choices than engineers. Mulally will have to work with both unions.

"If you have a bunch of pissed-off Machinists on the production line, they're going to be less inclined to go the extra mile," said Scott Hamilton, a local aerospace-industry consultant. "If you have an unhappy work force, it stands to reason that you're not going to have the highest-quality product or the smoothest-running operation."

On Dec. 15, barring some last-minute change in the equation, Mulally will put a hard-nosed case to the board and recommend the 7E7 for Everett.

Times business reporter Drew DeSilver contributed to this report. Dominic Gates: 206-464-2963 or dgates@seattletimes.com

Copyright © 2003 The Seattle Times Company

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