Mulally's the man

A blunt Business Week editorial concluded last month that "an outside CEO and a new board" are required to "clean up Boeing's troubled corporate culture and end the constant, brutal bureaucratic infighting."

Sorry to disagree, but in the opinion of this long-time industry observer, now more than ever Boeing needs a skilled, trusted insider — a career Boeing blue blood. For me, Alan Mulally, head of Boeing Commercial Airplanes, is that man.

For Boeing, the corporate drama lies not in the Phil Condit and Harry Stonecipher messes of the past, but in the selection of a new chief executive officer that could be the tipping point for this aerospace giant. Boeing's Integrated Defense Systems (IDS) and Commercial Airplanes divisions are at crucial junctures — ethically, operationally. Lockheed-Martin is watching. Airbus is watching. So is the Pentagon. So are potential and established airline customers.

While a positive turnaround may already have begun, the stakes are huge for Boeing's credibility as a Pentagon supplier and for its continued viability as a leader in delivering advanced, fuel-efficient aircraft to airlines of the world.

Strong contenders for the CEO post, from both outside and inside Boeing, already have been mentioned, including: James McNerney, CEO of 3M and a Boeing director; David Calhoun, chief executive of the General Electric division making locomotives and a wide range of jet engines; James Albaugh, a former Rocketdyne executive and head of Boeing's IDS division since July 2002; and Laurette Koellner, head of Boeing's Connexion division

So, why would Mulally rise above the crowd?

Boeing's board of directors is bound to be looking for a leader who listens and communicates and inspires people to work together, a leader with deep institutional memory, a leader with firm grounding in design and engineering aspects of the industry, and with strong experience in Boeing's commercial as well as its military business.

Above all, it must want an institutional head with integrity — trusted equally by Boeing line workers, executives and the company's airline and Pentagon customers. Mulally fulfills these requirements.

Suffice it to say that when Mulally talks, people listen. And when they talk, he listens. He initiated the "Working Together" revolution that sought customer airline input for the 777 design process and got workers sharing ideas with supervisors, and designers with component suppliers. His pathways: Let the data speak; criticize plans — not people — and then improve them. And keep things simple: It's now legendary that Mulally kept Fisher-Price toys in his office as a reminder that the 777 needed to be easy to assemble.

Integrity? There's another legend. Retired Boeing engineer John Moran recounted that when informed that Boeing's designers had kept two sets of books tracking the weight of a new aircraft (one for Boeing, one to show the customer), Mulally replied, "Guys, you can't do that. You'll end up spending all your time managing the secret and none managing the weight problem. If you come out of the closet, the customer can even help you."

Bottom line: He is respected and trusted by corporate peers and customers alike. Perhaps Mulally, as a former Information, Space and Defense Systems head, could emphasize advantages of such openness to IDS, just now struggling out of its own series of contracting scandals.

But Mulally's appointment is especially critical for improved viability of the Boeing Commercial Airplanes division as it faces a depressed U.S. airline market and ferocious sales competition from Airbus. Mulally has headed the commercial airplane unit, with its 55,000 employees and 2004 sales of $21 billion, since 1998. He's privy to the details of the increasingly contentious dispute between the U.S. and the European Union regarding subsidies for Airbus and Boeing aircraft. He knows the vagaries of the fiercely competitive jetliner market, and has launched the sleek 787 Dreamliner.

Moreover, Mulally, a 35-year Boeing veteran, comes with an engineering background vital for intuitive understanding of this highly technical industry — and with institutional memory essential in this time of corporate transformation.

When necessary, he's a fixer: After record orders for 671 jetliners flowed Boeing's way in 1996, inventory mismanagement and production-line inefficiencies brought 747 and 737 production lines to a shuddering halt in late 1997 — the year of the McDonnell-Douglas merger with Boeing. Mulally orchestrated the cleanup, unscrambling tie-ups that cost the company roughly $2.6 billion. Unscrambling Boeing's multiple and incompatible computer systems took a bit longer.

An innovator, he also assisted in the birth of the 777, the first paperless jetliner, designed entirely on computer and built without the preliminary mock-up that had been customary for decades.

Consider that before 1999, landing gear for the 777 arrived as 1,850 parts that had to be stored, then put together. Mulally got suppliers to ship the gear in three preassembled packages. After introducing "Lean Enterprise" and "Just-in-Time" concepts (adapted from Toyota), he instituted moving production lines that cut 737NG (Next Generation) assembly time in half. The same methods are now being applied to the 777 and will be to the 787.

Given current and building momentum on the commercial-airplane side, the last thing Boeing needs is another culture change that would ensue with installation of an outside CEO.

Important new projects also will be at stake. Within months, the decision will be made whether to proceed with the 747 Advanced jumbo jet — featuring an 11-foot fuselage extension raising capacity to 450 passengers, tweaked aerodynamics, 787 engines and lighter alloys. Apparently, there's airline interest, and it would be much cheaper than Airbus' A380, able to get into production quickly with minimal investment.

Boeing also could be squeezed at the low end of the market (95- to 115-passenger planes) by Brazil's Embraer 190/195 series and Canadian Bombardier's just-announced C Series. Looming on the horizon for Boeing will be the design of a modern, 787-influenced replacement for the 737NG series — before Airbus beats it to the punch.

With such changes in the offing, plus 787 assembly, testing and certification, the last thing Boeing needs is an outsider who must learn the culture before he or she can become effective. The stakes in new sales are huge, and Mulally knows the system inside out and is trusted.

We also cannot ignore the shutdown issue. Boeing has just closed down its 757 production line, has given an end date for the 717 line, and this summer will probably decide to cease 767 production after only nine orders over the past 15 months and collapse of the flawed $23 billion, 100-tanker lease-buy deal with the Air Force. Such closures don't boost worker morale.

My understanding is that Mulally has been popular with production-line workers and is the person to mitigate reverberations from these shutdowns and those stemming from the recent sale of Boeing's Wichita plant to Canada's Onex Corporation — in line with Boeing's new goal of shedding non-core operations to focus on design and final assembly of major components, a business plan in whose formulation Mulally was instrumental.

Indeed, production allocation agreements will see Boeing assembling the new 787 but actually manufacturing only 35 percent of its airframe. This ongoing paradigm shift will clearly require sensitive management and marketing.

Consider, too, the recent appointment of a new sales chief and companywide stresses arising from reassignment of four key department heads triggered by the imminent retirement of two high-level executives. With everyone still adjusting to this new chain of command, it is not the time for an outside CEO.

Indeed, if Mulally is selected, Mike Cave, current vice president/general manager of Boeing's airplane programs, could smoothly step in as head of the commercial aircraft division. He worked closely with Mulally at the defense-systems unit, brings strong financial and business experience and played a prime role in resolving serious C-17 transport production problems. He and Mulally worked well together before and would do so again. Mike Bair, current head of Boeing's 787 development program, would also be a possible and deserving replacement, but for the moment, the Dreamliner — and Boeing — need him right where he is.

While a new outside CEO or one from another division would only sow confusion, a Mulally appointment at the top would give confidence to current Boeing airplane customers as well as to potential new ones.

It would, I think, also make Airbus very nervous, keeping the European rival from being able to tell prospective customers that they wouldn't be able to count on Boeing for timely delivery because new leadership was unfamiliar with the sales and production process.

Now for the bad news. It could be a bumpy flight: In 2004, Airbus garnered 279 orders for its A320 series while Boeing received 152 for its 737s. Furthermore, Airbus recently approved production of the A350 (an A330 derivative) to rival Boeing's new Dreamliner. Orders from U.S. airlines? Aviation fuel prices have punched through the roof, and few airlines can afford new aircraft. United Airlines and U.S. Airways remain in Chapter 11 bankruptcy protection, with Delta on the brink after its $5.2 billion loss for 2004. Continental finds itself under pressure and could cancel its contingent $1.3 billion order for 10 Boeing 787s.

But the good news for Boeing is that Airbus' A380 is over budget and CEO Noël Forgeard is leaving to become co-head of parent company EADS — with directors deadlocked on the choice for his replacement.

Moreover, Boeing's sales momentum is building: Icelandair and Korean Air just placed firm orders for 12 787 Dreamliners, Air France exercised options for four additional 777-300ERs, and orders from Ryanair and Singapore Airlines' leasing unit have totaled 90 next-generation 737s with options for another 90. With list prices starting at $61.5 million per 737-800 and $218 million per 777-300ER, this is not small change.

So, there stand Boeing's major divisions, with customers, suppliers, competitors and the company's own 160,000 employees looking on.

It's time for Boeing's board to appoint Mulally as the corporation's new CEO and turn him loose to do what he does best — produce success.

Lee Gaillard is a freelance writer based in Philadelphia who writes frequently on defense and aviation issues.