DELIVERING ON OUR COMMITMENTS

Alan Mulally reviews 2004, looks ahead to next year

BY CHARLES BICKERS

Boeing Frontiers recently sat down with Commercial Airplanes President and CEO Alan Mulally to review 2004's accomplishments and look at the year ahead. Mulally covered a wide range of topics, including the gradual recovery of the global airline industry, competition with Airbus, upcoming negotiations with Boeing's largest labor unions and the outlook for employment growth in 2005.

Q: We've just come through a challenging period, both for the industry and Boeing Commercial Airplanes. Now it looks like the market is starting to turn around. What impressed you the most about these past few years?

A: The tremendous performance of our team! Never in the history of commercial aviation have we been through a situation like the last four years, with the war on terror, the slowing global economy, and SARS [the Sudden Acute Respiratory Syndrome epidemic] in Asia. Now we have higher oil prices, and many airlines, especially in the United States, are going into bankruptcy and having to restructure.

Our team's response to that environment has been spectacular. It has positioned us very well for going forward.

I don't know another company that has decreased production of any product by 50 percent and stayed not just viable but profitable, too. And we kept investing in new products and services for the long term. We have been able to set the course for a very bright future, and that's a tremendous testament to our global enterprise team. Everyone contributed, and it has really helped our customers and all the travelers of the world.

Having said that, there remains quite a bit of uncertainty in the market right now, and we're facing very aggressive competition. That means we have to be relentlessly focused on improving our quality and productivity and reducing the cost of our products and services for our customers.

Q: What can we look forward to in 2005?

A: 2005 is very important for us. The world economy is coming back, travel is coming back. The airlines are starting to improve their profitability and need new airplanes to replace older airplanes and to grow their business. So, the most important thing we'll do next year is increase our production and do it very efficiently. We're increasing deliveries from 285 airplanes in 2004 to around 320 in 2005. It's important for our customers that we deliver each of those airplanes on schedule.

We also must perform on our commitments for new products and services. The big one there—of course—is the 7E7. And we need to complete design and production of the 777-200 long-range airplane and the passenger-to-freighter conversion on the 747-400. Plus we have many new products and services for e-enabling the airplane.

We really need to deliver on these commitments. It's going to be a very busy and exciting year.

Q. We started increasing employment toward the end of 2004. How is the 2005 employment picture looking?

A: Right now, it looks like we'll have a significant—but measured—employment increase to support higher production rates and all the exciting new product development going on.

We've restructured to focus on what Boeing does well so we're not going to go through the terrible employment ups and downs we've seen before. That's the plan, and it's good for everybody.

Q: The average age of a Commercial Airplanes worker is about 47. What does that mean for us going forward?

A: The fact that we've restructured and we're more focused is positive. People who are getting ready to retire can go ahead and do so on their own schedule. This opens up opportunities for new people coming in. We couldn't have said that if we were still in the downturn.

Q: Is the recovery we're seeing in the airline industry different from previous rebounds?

A: It's a more gradual recovery. We've had a lot of recoveries in our industry. The last one was very dramatic because everything came back at once. The world economy came back across all regions of the globe, and the airlines needed to replace a lot of older airplanes. So we ended up with tremendous demand and a tremendous economy. That meant production rates increased faster than at any time in our history.

This time, the economic development is a little bit slower. With oil prices and security costs affecting airlines, their return to profitability has also been delayed.

At the end of the day, the need for new airplanes will be more gradual than in the past. But that's good. It will help keep us away from those huge swings in production, and employment levels, that we've seen in the past.

Q: In 2005, Boeing negotiates contracts with its two largest labor unions—the International Association of Machinists and Aerospace Workers [IAM] and the Society of Professional Engineering Employees in Aerospace [SPEEA]. How do you see these negotiations unfolding?

A: In the last negotiations both the IAM and SPEEA—along with all the employees of Boeing—had terrific conversations about the business environment and our strategy to compete. That's the foundation of all negotiations—coming to a shared view about our business realities, about what our customers need to be successful and about what we need to do to be preferred in the marketplace.

It comes down to working together to improve quality and productivity. Worldclass companies improve quality and productivity usually by between 3 and 5 percent each year, forever. We have been doing that for the past five years. It really has increased our competitiveness.

So, a big part of the discussion will focus on aspects of our competitiveness. We'll talk about wages, benefits and work rules—everything that allows us to keep making 3 percent to 5 percent productivity improvements each year.

The centerpiece of these negotiations is going to be the employees of Boeing, and what we all need to do to keep this wonderful business moving forward and increasing our competitiveness each year. Because that's our only job security. And it's the key to growing our business so that everyone benefits—customers, employees, investors and the community.

Q: We're considering selling our Wichita, Kan., Commercial Airplanes operations. How does that fit into our strategy?

A: It's part of a journey we have been on for some years, focusing on large-scale integration and becoming a lean global enterprise.

Wichita is very important to the Boeing operation. They make components and subassemblies and major assemblies for all of our airplanes. They will continue to be very important to us.

If we sell Wichita, it will turn out to be very positive for everybody involved. It allows Boeing to focus on final assembly, design, integration, sales, marketing and product development of airplanes.

It allows Wichita to make products for other companies so they can increase their business base. That helps them become more stable and better able to go through economic cycles efficiently.

It also will help improve quality and productivity so together both of us can help the ultimate customers—the airlines and the travelers like us—pay less to fly.

Q: In 2004, the U.S. government stepped up to aggressively take on the Airbus subsidies issue. Will this issue be resolved in 2005?

A: Nobody really knows, but I'm very encouraged that the United States and Europe are moving toward a more rule-based trading framework.

The intent of the 1992 bilateral (agreement between the United States and the European Union) was to reduce launch aid. Clearly Airbus has institutionalized launch aid. So, it's appropriate the United States terminated that agreement for cause and is asking Europe to renegotiate the agreement.

The goal is to negotiate a new agreement, or for everybody to move toward operating in the framework established by the World Trade Organization—which doesn't support Airbus launch aid.

Q: Talking about Airbus, they're raising production faster than we are. Do our views of the market differ?

A: Our views are pretty much the same, but we're at different points of the product cycle right now. While we wind down on the 757 and 767, they have more demand for the A330. We're in a period of transition until the 7E7 enters service. So, Airbus' production could be a little higher than Boeing's for the next couple years.

This is something we considered—and expected—when we decided to proceed with the 7E7. As the 7E7 comes on line, I'm confident we'll be back to more than 50 percent market share. And we'll continue to be preferred in the marketplace.

A: It's doing very well. The 7E7 has received a more positive response in the marketplace than any new airplane we've ever introduced.

We're talking to 30 airlines about more than 600 airplanes. We have down payments on nearly 200 airplanes. Once airlines make a down payment, more than 90 percent of the time we end up with a firm order.

It's unprecedented to have that kind of response this early in a new program. The airlines helped create the 7E7 to take travelers where they want to go, when they want to go, faster and more efficiently. They clearly like what they have created!

Q: How much of a threat is Airbus' proposed A350?

A: We're not quite sure what the A350 is yet. Airbus had a good product in the A330, but they know it can't compete with the all-new 7E7. So, they've talked about taking the engines developed for the 7E7, modifying them to work on the A330 and maybe using more composites, and calling it A350. Whatever they do they're not going to match the range, payload or economics of the 7E7.

Q: Boeing Frontiers is read by employees, customers, suppliers and the media. If there is one thing you want to share with all these audiences, what would it be?

A: The most important thing we can all do together is to continue focusing on our customers, to improve the quality of our products and services, and to improve our productivity every year.

A critical fundamental of our Boeing Commercial Airplanes business plan is the inclusion of all our stakeholders in what we're trying to do. We include our customers. We include our investors. We include our communities. And we include all of the employees of Boeing.

So, if I had to boil it down to one sentence, it would be, "Keep focusing on our business realities and helping our customers." Working together, we are delivering on our commitments, creating our future and having fun.

charles.n.bickers@boeing.com