View Full Version : When good business practice just doesn't fly (IHT)

27th Dec 2003, 00:19
When good business practice just doesn't fly
Boeing and Airbus

By William Pfaff (IHT)
Tuesday, December 23, 2003

PARIS: An all but perfect model of logical delirium” is how the eminent French political analyst and philosopher, Raymond Aron, once described a complex instance of 1960's nuclear deterrence theory.

The phrase came to mind while reading the argument recently made in The Wall Street Journal by Holman W. Jenkins Jr. to explain why it is a good thing rather than bad thing that Boeing, one of the great, pioneering American aircraft companies, has fallen into grave decline.

Unless I misunderstand this article - and I have carefully examined it for evidence of irony - the present condition of Boeing is the right and proper outcome of good business practice and enlightened management.

Let Airbus make huge gambles on technological progress and future markets. If it fails, governments will bail it out. If Boeing makes such gambles and loses, stockholder return will suffer.

The article concedes that in the past Boeing won its place as the world's greatest aircraft manufacturer by making and winning just such gambles. "Back in the 60's, when a director asked for future profit estimates on the proposed 747, he was told to go suck an egg." That, the author says, "doesn't fly today, nor should it."

The article is prompted by Boeing's decision to abandon its project to build a near-supersonic Sonic Cruiser to compete with the 800-passenger super-jumbo A380 that Airbus is starting to put together in Toulouse.

Boeing has chosen instead to explore the market for a new but essentially conventional aircraft, the 7E7, its first new design in a decade.

Boeing now is an ideologically correct company. Its management mandate is to produce positive quarterly earnings and annual profit increases, so as to keep Boeing's stock price high. This is incompatible with betting the company on a visionary project.

If the result of these good business practices is Boeing's eventual ruin, that's the way it is, you know. Investors will find another company to invest in.

You will understand why I quoted Aron on logical delirium. You ruin the company to save the stock price.

Boeing was a pioneering American aviation company. It produced the earliest monoplane fighter aircraft for the U.S. Army Air Force (as it was then). Its role in World War II was primarily as manufacturer of a heavy bomber, the B-17, on which it had bet the company.

The prototype flew in 1935, long before any other country had a long-range bomber. Building it was a considerable financial risk for Boeing. The B-17's defensive armament and its speed were supposed to allow it to operate without fighter escorts and to make "pinpoint" attacks with its Norden bombsight, also a technical advance.

However nobody made pinpoint bombing attacks in World War II, and the B-17 succeeded mainly because of formation tactics and its phenomenal operational ceiling of 35,000 feet, or 10,600 meters - 10,000 feet higher than its British counterparts. It was one of the most important aircraft in the war.

While there were Boeing efforts in passenger aircraft before and after the war, including the memorable trans-Atlantic Stratocruiser of the 1950's, with berths and a cocktail lounge, Douglas dominated the market with the DC-3 and its descendants.

Then, in 1954, Boeing made a military tanker into a commercial airliner, the 707, and initiated the passenger jet era. (Britain had been the true pioneer in 1949 with the De Havilland Comet, ruined by a series of crashes due to metal fatigue, poorly understood at the time).

Boeing followed in 1969 with the all-new 747 jumbo, changing the nature of air travel and tourism, with profound and not always happy cultural and social consequences. The 747 was another project on which Boeing "bet the company."

The French and Germans, prewar aviation leaders, then decided to become players again, and with government support founded Airbus.

Its long-term government loans, essential to a start-up on this scale, were a source of tension with Washington, eventually settled in a formal agreement setting limits on government support for both sides - Boeing having always benefited from indirect support via its military programs.

Airbus had a generation's advantage with its new aircraft. Boeing was building with basic technology from the 1950's and 1960's, Airbus with that of the 1970's and 1980's. The result is that today Airbus is the leading commercial aviation manufacturer.

Could Boeing have fought back? Certainly, but market economics and the new priority on investment return had tamed a company once run by engineers and aviation visionaries. Wall Street was hostile to the investment needed to give Boeing innovative models to fight off Airbus.

Management moved the company's headquarters from Seattle to Chicago so that stockholders would stop thinking of it as a passenger aircraft builder. That was the real tip-off.

Boeing downsized by 40,000 workers. Although it currently is in serious trouble with the Pentagon over several forms of alleged skullduggery, it insists that its future now lies in military and other government projects. The Wall Street Journal, defender of market investors and enemy of socialism, nods its satisfaction at how it all has turned out for Boeing.

From the International Herald Tribune