Back to Business: Alan Mulally, president of Boeing Commercial Airplanes

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Karen Walker SEATTLE

For Alan Mulally, president of Boeing Commercial Airplanes Group, this is the year the company can finally put its troubles behind it with new launches, a growing services business and, above all, a renewed focus on the customer

To some, this is the year of the dragon; in Seattle, it is the year of the customer. Just ask Alan Mulally what his priority is for the year 2000 and the reply is lightning quick. "This is the year of the customer," he says. "We can look outside now and keep improving."

Such a statement is an admission - stunning from a company of the size and stature of Boeing Commercial Airplanes Group - that the customer has not always been the main priority in recent years. Boeing's crisis is well documented. Failure to keep suppliers up to speed as Boeing ramped up production rates to all-time highs resulted not only in delivery delays, but also to write-offs totalling $4 billion, putting the company in the red.

By 1998, even though Boeing delivered a record 559 aircraft, company morale was low, analysts were shaking their heads and some customers were talking about how much easier it was to do business with rival Airbus Industrie. Mulally denies charges of Boeing arrogance, but admits that the troubles forced the company to look internally rather than to the world outside.

By the beginning of this year, however, Boeing was back in control. Not only was it able to deliver another record number of airliners last year - 620 - but it also delivered the news that analysts and shareholders wanted to hear; net earnings more than doubled, to $2.3 billion, while Commercial Airplanes climbed out of 1998's $266 million loss to record operating profits of $2 billion. Even better, the fourth quarter results were particularly pleasing, with operating profits of $698 million on revenues of $10 billion.

With the company's financial equilibrium restored, it was also satisfying to get back to the business of launching new aircraft. On 29 February, choosing New York rather than the Asian Aerospace air show in Singapore as a launch platform, the company removed the "X" and the debate over its 777 and announced that the longer-range 777-200 and 777-300 were off the drawing board and in the catalogue.

It was an especially sweet moment for Mulally, who has been with Boeing since 1969 and was named Group president in September 1998. Mulally's name is intrinsically linked with the 777 - he was vice-president and general manager of the programme and is regarded as one of the driving forces behind the successful strategy of involving customers from the early concept stage and through programme development. Mulally says it was always the company's intention to complete the 777 family with the longer-range "X" version. Getting the aircraft launched reaffirms that intention.

Removing ambiguity

But Mulally knows there is more to do - such as getting a customer for these new 777s, for example. While it has long been a Boeing mantra that "Boeing does not launch aircraft; the customers do", the company appears to have back-tracked from this policy in its eagerness to get the 777X launch out of the way before it can be overshadowed by an even bigger launch - that of the Airbus A3XX (see article, page 52). So the New York announcement came without a launch customer.

Mulally argues that, by "removing any ambiguity" about the company's commitment to the longer-range aircraft and by "adding it to the catalogue", Boeing has offered the customer what it wants for now - clarification. "We were not thinking before or after Singapore? and we know that no airline wants to make an announcement now, for strategic reasons. But they did want us to announce our intentions to make this aircraft available for September 2003," says Mulally. "Over the next two or three months, the airlines will announce their intentions - it could be in time for Farnborough [in July]. But what they want from us for now is the removal of any ambiguity of Boeing's production plan. They need to know their timing and they now know that they have this choice if they are looking for more capability. If they intend to carry more passengers and fly further, then this is the most capable aircraft in the world."

If the capability of the longer-range 777s is not in question, then Boeing's choice to single-source these particular variants with the General Electric GE90 engine remains controversial. The day after the launch, American Airlines chairman and chief executive Don Carty described the longer-range 777 as "a very interesting aircraft", but as an existing 777 customer who would be forced to acquire a different engine supplier with this variant, he admitted: "We would have to think very hard about it." American is not alone in its dilemma - most 777 customers to date have selected either Pratt & Whitney or Rolls-Royce, so none of the three will get their engine of choice on the new variants.

Mulally stands by his company's decision, however. "At the end of the day, all three engine companies could not end up on the programme, so we had to decide," he says. "We asked for the best deal from the engine companies and the GE package was absolutely the best value. But a Roll-Royce or a Pratt & Whitney customer has to get comfortable with that decision. So we have asked GE for a really comprehensive package and they agreed to that." Mulally says the added value will come in the support, spares and maintenance package that GE will provide. "GE will put everything into support," he insists.

With the longer-range 777 launched, Mulally makes it clear that other new products are not yet a top priority. He lists it third as he counts off the areas on which Boeing needs to focus. "The number one priority is to deliver to the airlines quality products and services that they want and to deliver on our commitments. That is why I say this is the year of the customer," he says. "Second, we need to keep improving our production line and operational efficiency so that we can make a reasonable return. Third, we will need to develop new products for the future."

The key word is "future" - Mulally argues that it is difficult today to identify a package of new technologies that would offer a better-value new aircraft type. "We have to ask ourselves, can we bring a better-value solution to the airline? If we could make a new large airplane with substantially better economics than the 747-400, we would do it, but we cannot figure out how to do it. So now is the time to optimise; to fill in the family."

Mulally points, as an example, to the 7J7 project that would have introduced into the market a twin-aisle, 150-seater powered by an all-new technology ultra-high bypass engine. "It was a great engine, but the benefit of fuel efficiency was offset by the extra material needed to protect the engine," he says. "I can imagine new aircraft in the future - we are looking at a blended wing concept - but right now we need to keep improving the cost of the aircraft and to get travel costs down. That is as challenging as making a new model. It's exciting technological work to make everything work together and cost less."

So if anyone remains sceptical that Boeing will be able to resist launching a new very large aircraft once Airbus formally launches the A3XX, then Mulally seems prepared for now to stand firm against such notions. "We don't see the market for it," he says. "The airlines have choices - they can buy another 747 and add frequency - but now the situation is that we don't see a large enough, long-term market to justify investment in an all new aircraft. We would never do it as a reaction. A lot of people are wondering what Boeing will do; it's a good thing to wonder about. But you are not going to spend $12 billion to give an airline a choice; they [Airbus] had better believe there is a market because, if you don't have a large enough market, then it won't be a success no matter how much subsidy you have."

Mulally's argument against an all-new very large aircraft is rooted not just in Boeing's resolute belief that growing liberalisation will lead to a need for smaller rather than larger aircraft. Mulally also says Boeing is duty-bound to respond to the overall marketplace. "We use the words 'customer-in and market-driven'," he says. "That means you want to do what each customer wants and be very responsive, but you also have to remember the overall marketplace. People are saying they want a bit more range on the 747, so that's our first priority and we are working on that. Some think that, if we stretch the aircraft or the upper deck, that might work. But that's not the groundswell. We don't have the market for that yet."

So Boeing is casting its bet on its belief that the market is not big enough for something as large as the A3XX, and also on having available the strategic alternative. "The 777X is the clear strategic choice because we really believe that point-to-point and fragmentation is the way ahead," he says. "It's like the Internet in the sky - go wherever you want to go. That is the way of the world."

What will not be the way of the world, if Mulally has his way, is an ongoing situation in which the world's airliner market share splits 50:50 between Airbus and Boeing. Mulally makes it clear that he intends Airbus' capture of 52% of the market in dollar terms last year to be a short-term win.

"We cannot win every campaign," he concedes. "But our goal is to give the customers really good choices and to be preferred. Anything above 50% and you are preferred. We would like as much of the business as possible, but when the industry has consolidated to two suppliers, you can never get to a 90:10 situation. Traditionally, we have been at about 60%, but we don't have a target in terms of market share. We want to be the preferred choice and we want to provide the aircraft that customers want and to make a reasonable return so that it's good, healthy business for all of us."

Customer services

An important strategy for keeping business healthy is Boeing's new focus on selling airliner-related service packages to its customers. Mulally sees this growing segment of Boeing's business as vital to his goal of increasing earnings margins to 10%. As he points out, the company achieved a "fabulous turnaround" last year when margins grew to 5.2%, from 0.7% the previous year. That performance alone, he says, did much to regain the confidence of analysts, but there is more to do.

"Our goal is to have steady growth in revenues and steady growth in margins over the next two or three years," says Mulally. "The services segment will grow at 15-20% a year and become a larger and larger percentage of our total business." Boeing believes it has crossed the awkward hurdle of establishing itself in this sector of the marketplace without offending some of its best airline customers, which would prefer either to conduct such operations themselves or which sell the same services to other airlines and would rather not find themselves in competition with Boeing. The division that Boeing has set up to seek out and perform this business, Boeing Airplane Services is described as more of a software integrator than a bricks-and-mortar operation, which does not threaten such as Lufthansa Techniks.

Of the total $330 billion global service industry, including ticketing, Boeing has identified some services, such as maintenance, training, air traffic management systems and spare parts distribution, worth $60 billion annually and described as "core to Boeing". This is Boeing's target market and it will be critical to the company's aspirations to increase its value fivefold over the next five years.

During the Asian Aerospace show, Boeing announced two letters of intent with BFGoodrich to pursue maintenance, repair and overhaul activities worldwide and to develop a landing gear overhaul alliance for Boeing aircraft fitted with BFGoodrich equipment. It is the sort of business arrangement of which Mulally wants to see more. It is powerful, he says, because of the way it can add value for the customer, drive down costs and also nurture Boeing's financial health.

There remains some internal nurturing to be done. In March, the Boeing management had just settled a costly dispute with one of its unions, the Society of Professional Engineering Employees in Aerospace (SPEEA). Union officials rejected both Boeing's wage offer and Mulally's cajolings and went on a 39-day strike once more putting production lines in jeopardy. Of the 42 aircraft that were supposed to be delivered in February, only 27 made it out of the factory door. "Our number one priority through this is to minimise the impact on the customers, so we are talking with them and working around the schedule as best we can. It makes me feel so bad to let them down," says Mulally. The focus now is to work as fast as possible to produce all 491 airliners due to be delivered this year.