Wednesday, September 24, 2008

Boeing's CEO Beat the Pentagon, But Lost Some, Too

Boeings CEO Beat the Pentagon, But Lost Some, Too

W. James McNerney Jr., who pitched for Yale University nearly 40 years ago, can play hardball. Take the ultimatum the Boeing (BA) chief executive officer delivered to a top defense official in late August. Give Boeing six more months and a legitimate shot to bid on the now infamous $35 billion airborne-refueling tanker plane deal, McNerney said. Otherwise he would quit the competition—leaving a sole bidder and a potentially explosive reaction from Congress. "He put the Secretary of Defense into a real crack," says a congressional staffer familiar with the meeting. "To McNerney's credit, it worked."

Score that one for McNerney, who may prove to be one of the most hard-nosed leaders in Boeing's history. Twenty days after the showdown, the Defense Dept. abruptly canceled the competition, postponing the tanker decision until the next Administration. That stunning turn in a tortuous seven-year fight was McNerney's second triumph in the battle: Earlier this year he mounted a highly unusual protest that caused the Pentagon to reopen the decision to award the contract to a rival alliance of Northrop Grumman (NOC) and European Aeronautic Defence & Space, maker of Airbus planes. "He handled that very deftly," says Boeing director Edward M. Liddy, who has just been named CEO of American International Group (AIG).

McNerney has had a mixed record since being tapped in 2005 to run Boeing after back-to-back scandals. One CEO's tenure ended when a Boeing chief financial officer and a Pentagon official were found guilty of improprieties in the first go-round on a tanker deal in 2002; a second CEO's career was cut short after an affair with another Boeing executive. McNerney cleaned house, paid a $615 million fine, and toughened in-house ethical oversight, impressing Boeing's harshest critic, Senator John McCain. Southwest Airlines (LUV) CEO Gary C. Kelly, a big customer of Boeing's, adds: "I'm glad that Jim McNerney is at the helm."

Internally, the former 3M (MMM) chief and GE (GE) veteran has received fewer accolades. Even as he was winning in Washington, he was losing a battle in Seattle with the International Association of Machinists & Aerospace Workers. The IAM's 27,000 Boeing workers struck on Sept. 6, replaying a late 2005 walkout that hobbled Boeing's commercial plane building operations for 28 days. The new stoppage could stretch deep into the fall.


McNerney, who declined to comment, insists that Boeing needs flexibility in its labor contracts, saying in an in-house memo that it must "protect [its] long-term competitiveness." He's betting that the right to outsource—perhaps to countries that may then buy Boeing planes—is worth the pain of a strike. McNerney "will be judged by what labor relations look like over the next five years," says Noel M. Tichy, a management professor at the University of Michigan's Ross School of Business.

Critics also say McNerney took too long to replace executives in charge of a much delayed new 787 jet. So far, Boeing has announced three postponements totaling more than a year in bringing out the so-called Dreamliner. McNerney & Co. could have "moved more aggressively" to fix the problems, says Cai von Rumohr, an analyst with Cowen & Co. Boeing executives hope for a flight test by yearend—unless the strike forces further lags.

Those delays may be the largest factor weighing down Boeing's stock price. After soaring past 107 last year, shares have fallen to about 62. Since that's a couple of dollars below the price when McNerney became CEO in July 2005, it may be his lowest mark yet.

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