Boeing CEO Defends Job Transfers, But Experts Question Rationale

April 23--Boeing Chief Executive Jim McNerney on Wednesday defended management's plan to transfer thousands of engineering jobs out of the Puget Sound region, saying it's aimed at "creating the strongest possible Boeing."

But aerospace-industry experts were skeptical of his rationale for the strategy and warned of risks to the company's future.

McNerney's comments came during a conference call after Boeing reported a strong quarterly net profit of nearly $1billion on sales of $20 billion.

The Boeing CEO acknowledged that the engineering-work transfers now in progress -- which will result in a loss of more than 4,300 highly paid, white-collar jobs locally -- are "controversial."

But he insisted the moves will "strengthen our company, strengthen our engineering capability."

He justified the moves as a way to leverage engineering talent available elsewhere in the company.

"As the world's largest aerospace company, that has been put together out of the cloth of a number of different acquisitions over the years, we have engineering talent around the company that is extraordinary," McNerney said. "When we place work, there is a tension between engineering work being done next to the product on one hand, and on the other, doing it in the place that has the best engineers for the task at hand, or so-called centers of excellence."

Most of Boeing's commercial- airplane engineers are in the Puget Sound region, but last year management announced the establishment of new engineering "centers of excellence" in North Charleston, S.C.; Huntsville, Ala.; and St. Louis, as well as Southern California.

"We're trying to achieve the right balance between centers of excellence and proximity" to where the airplanes are built, he said.

In future, McNerney added, engineering will not be in a single location but instead will be located across the different centers.

Experts skeptical

Richard Aboulafia, longtime aviation-industry analyst with the Teal Group, dismissed the idea that Boeing is leveraging available talent at other locations inherited in the late 1990s by the acquisition of companies including McDonnell Douglas, Rockwell and Hughes.

Instead, he said, it's all about cutting costs.

"It's been a long time since they had a surplus of legacy engineering talent at any of the places they acquired," said Aboulafia. "They are letting costs drive decisions. You wouldn't be doing this if it wasn't for cost."

Aboulafia added that "prioritizing cost above everything else had very bad consequences for the 787. Hopefully, this time it won't be so severe."

Hans Weber, president of engineering-consulting firm Tecop International, concurred that cost cutting is behind the work transfers and that the result will be damaging to Boeing.

"I suspect the real motivation is to get rid of senior engineers, to weed out expensive people and replace them with junior people," he said. "The bean counters think they can save money that way."

Weber said moving engineering work away from the main assembly plants in Everett and Renton "goes against the so-called Toyota principle that you want to keep engineering and manufacturing close together."

This proximity is especially important in industries like aviation, he said, because the extended learning curve in building new jets and the continuing need to modify current models over the decades of production mean there is "a constant need for interaction between engineering and manufacturing."

Toyota's manufacturing model is one that Boeing management has long aspired to emulate.

Based on his own experience of leading engineering-intensive aerospace projects for two different companies, said Weber, a bean-counting approach that gets rid of experienced people will backfire.

"It takes several projects for an engineering team to really come together," he said. A team lacking such cohesiveness inevitably produces big cost and schedule overruns, he added.

Scott Hamilton, Issaquah-based aviation analyst with Leeham.net, said there is some logic in Boeing's strategy of spreading engineering work around the company.

As the U.S. defense budget declines, Boeing will want to put its military-side engineers to work in order not to lose their expertise. He said that at least partially explains why Huntsville, where Boeing does missile-defense work near the U.S. Army's Redstone Arsenal and NASA's Marshall Space Flight Center, is being promoted as a center of engineering.

And because Boeing has already committed to building up North Charleston as a commercial jet-manufacturing complex, it also makes sense to beef up the engineering workforce there, Hamilton said.

But he said that even accepting such logic, the way management is carrying out the transfers -- laying off people here, then inviting some to reapply for their old jobs at new locations -- is counterproductive because it engenders such bad feelings.

"They are doing it in a very callous way," said Hamilton.

On the earnings call, McNerney barely acknowledged the upswell of bad feeling here in Washington state and said that will be dissipated by future work such as the 777X.

"I realize that moving work around a very large corporation can be controversial at the local level," McNerney said. "As we see further success in the future, we'll fight through the dislocations that happen not only in Seattle but in other places around Boeing."

Pension changes

Likewise, McNerney turned the recent battle with the Machinists union, which also engendered bad feeling among employees, into a future positive, at least from a Wall Street perspective.

The International Association of Machinists (IAM) District 751, under pressure to secure future work on the 777X, in January gave up their traditional pension benefit and agreed to a contract that will last through 2024.

In February, the IAM District 837 in St. Louis followed suit with a contract that runs through 2022.

Thanks to these agreements and a similar transition for nonunion staff, the portion of Boeing's workforce with traditional pensions will swing from 85 percent to just 20 percent, McNerney said.

(Most of that 20 percent are the company's unionized engineers, who look likely to lose this benefit in their next contract in 2016.)

McNerney said the stability and economic gains from the IAM contracts could result in Boeing doing more future work in-house rather than outsourcing.

"Coming out of an era when we may on the margin have relied too much on some outside work, this gives us the option, where it's smart, to do some of the work inside," McNerney said.

He said he's not implying a "seismic shift" in Boeing's strategic use of outsourcing versus in-house work, just "the option to use the best mix of inside-outside."

Strong profits

As he fielded questions on the telecon, McNerney dealt crisply with doubters.

Asked whether the turmoil in Ukraine could affect the company's supply of titanium from Russia, or to the operation of its outsourced engineering centers in Moscow and Kiev, McNerney insisted Boeing has "good contingency plans in place" should the crisis worsen.

And when some seemed skeptical that Boeing can keep building its big 777s at a rate of 100 per year through this decade, when firm orders go out only through 2017 and the 777X is set to debut in 2020, McNerney insisted he has "high confidence in being able to maintain production rates up until the introduction of the 777X."

McNerney let Chief Financial Officer Greg Smith deal with questions about the troubles of the 787 Dreamliner.

Earlier this year, Mitsubishi discovered hairline cracks in the wings it built for 43 of the jets before delivery. And assembly problems in the South Carolina mid-fuselage assembly plant resulted in far too many unfinished sections sent to Everett.

Smith said only three airplanes with the wing cracks remain to be fixed and that South Carolina has "still some work to do, but (is) making tremendous progress."

In all his responses, McNerney was buoyed by the day's announcement of yet another quarter of strong earnings.

At $965 million, net profit was down 12.7 percent from last year's $1.1 billion first quarter profit, but only because Boeing took a $334million one-time accounting write-off related to the pension-plan changes and because 2013 earnings were inflated by a research and development tax credit.

Net income per share dropped to $1.28 per share from $1.44 during last year's first quarter. But adjusted to exclude the write-off, earnings were $1.76 per share, beating the estimate of $1.56 per share from Wall Street analysts surveyed by FactSet.

Boeing's shares rose $3.08, or 2.41 percent, to close at $130.63.

If, as Weber believes, "the bean counters are in charge at Boeing," on Wednesday they must have been content.

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Information from The Associated Press is included in this report (206) 464-2963 or dgates@seattletimes.com

 

 

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