Boeing Owns Up to 787 Woes

Jim Albaugh, the 59-year-old CEO of Boeing's defense business, will take over as CEO of its commercial aircraft business, replacing Scott Carson, who will retire at the end of the year.
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Updated from Wednesday, Sept. 2

SEATTLE (

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CEO Jim McNerney offered a frank assessment of the 787 program's failings Wednesday, and said he expects Jim Albaugh to restore "program management" to the project.

Boeing said Monday that Albaugh, the 59-year-old CEO of its defense business, would take over Tuesday as CEO of its commercial aircraft business, replacing Scott Carson, 63, who will retire at the end of the year. The two divisions each provided about half of Boeing's 2008 revenue of $61 billion.

McNerney, speaking at an investor conference, said Boeing has "struggled with program execution and the functional oversight of that programmatic execution" on the 787, which is now two and a half years behind schedule. "There is nobody who has led more (programs) in this company than Jim Albaugh," McNerney said. "He has been managing hundreds of programs for the last eight years." Managing programs is "where we lost the handle a little bit," he said. "We need to regain that."

Asked whether Boeing and competitor

Airbus

comprise a "dysfunctional duopoly," given extended delays in both the 787 and the 380 programs, McNerney said both companies "have been somewhat chastened by our reach exceeding our grasp on a number of programs. There have been some lessons around program management discipline, program management baseline and market driven promises that were not fulfilled. At the end of the day, customers value people who deliver, not people who promise."

As far as the extensive 787 program outsourcing to suppliers, McNerney was asked whether he would do it the same way again. He said he would not.

"There's plenty of blame to go around," he said. "We asked some partners to do some things that they, technically and financially, were not able to do. I would draw the lines in a different place: more shared engineering done together, visibility on the supply chain across corporate boundaries. But I would still have the same supplier-partner concept. I would just have more control."

One other problem, he said, is that "the 787 program was set up as an island unto itself, not the subject of the queries and barbs and arrows of other functions. That was a mistake. We got the baseline wrong. We didn't have the right oversight. We didn't have the program management talent we needed. I'm trying to address all of those right now."

Discussing Carson's replacement on a conference call Monday, McNerney stressed that "the decision to retire was Scott's" and the timing was based on Carson's desire to step down after the 787 schedule was reset." It's unlikely that it will ever be entirely clear whether Carson was nudged.

On Tuesday, Broadpoint AmTech analyst Peter Arment wrote that Carson was promoted to the top spot at Boeing Commercial Airplanes after Alan Mulally left to run

Ford

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. Boeing "tried to fill Mulally's big shoes with Scott Carson and Jim Jamieson (who) was given engineering while Carson was in charge of everything external."

Jamieson left the company in March 2008, and now, with Carson leaving too, "it is Albaugh's turn," Arment wrote, adding: "While many things were out of Scott Carson's control on the 787 program, fresh eyes were needed." Albaugh will join Pat Shanahan and Scott Fancher to form a trio of former defense side executives tries to straighten things out on the commercial aviation side.

Boeing reported Thursday that through August, 73 orders for the 787 have been canceled or deferred this year, while 13 have been placed, for a net loss of 60. Orders for the aircraft now stand at 850.

Overall, Boeing has taken 161 aircraft orders this year, along with 91 cancellations, for a net gain of 70 orders. On the conference call, McNerney said "deferrals and cancellation are pretty much in line with what we did historically (in recessions)" adding: "When the economy recovers, we won't be able to make enough new airplanes." Through Aug. 31, Boeing delivered 307 aircraft in 2009, a marginal decline from 313 during the same period in 2008.

On Thursday afternoon, Boeing shares were trading at $48.25, down 15 cents.