The Unraveling of Boeing | Change of Destination | 2

0:07Phil Condit feels his stomach knot as the consultant's presentation grinds forward. It's April 1996, and it's his first day as Boeing's CEO. Boeing is the world's number one aircraft maker. Condit joined the company as an engineer 31 years ago and dedicated his life to reaching this lofty position. But his reign is kicking off with a kick in the teeth. He and 17 other top Boeing execs are in a meeting room at the company's Seattle head office. They've gathered to hear a team of external consultants explain how their biggest rival, Airbus, is undercutting them. Boeing thought little of Airbus when it launched over 25 years ago.

0:48It was the brainchild of Western European governments, created as a lifeline for the old world's fading aircraft industry and funded by European taxpayers. It's not even a company, more an awkward coalition of French, German, Dutch, Spanish and British manufacturers. But despite the shaky beginnings, Airbus beat expectations. It's now the only aircraft maker capable of challenging Boeing in commercial aviation. It owns almost 30 % of the market. And it's gunning for Boeing's 63 % share of the market. So Boeing's called in external consultants to dig into Airbus's recipe for success. Condit listens as they confirm the executive team's worst fears.

1:34Airbus isn't undercutting Boeing because it lives off government subsidies. Its prices are lower because it's better at building aircraft. Airbus can make just as many planes as Boeing can, but it can do that with half the manufacturing space. Its production lines are more automated and less wasteful, too. The upshot is that Airbus' production and tooling costs are as much as 15 % lower than Boeing's. and that gives Airbus a major pricing edge. After the consultants leave, Condit listens as his team debates how to respond. He's always been more of a listener than a rash decision maker. He even jokes about how his jug ears make him all the better at listening.

2:20But his team members aren't wallflowers, and one of them is certain he knows how to rise to the Airbus challenge. His name is Ron Woodard. He's the lanky president of Boeing's commercial aircraft division. And he wants a war, a price war, that will take down the European threat. But the company's new offensive against Airbus is about to set Boeing on a downward trajectory that will see it go from king of the skies to a company trapped in a tailspin, one that threatens to destroy one of America's most important manufacturers.

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5:31In the last episode, aviation regulators grounded the Boeing 737 MAX after two fatal crashes, leaving the company struggling to save its finances, stock price, and reputation. But the seeds of this business disaster were sown years earlier. In this episode, we rewind to the late 1990s to find out how an aerospace mega-merger and fierce competition from Airbus set Boeing on a new course, a course that would end in tragedy. This is Episode 2, Change of Destination.

6:14It's mid-1996. Several weeks have passed since the consultants briefed Boeing's executives on Airbus' price advantage. And at Boeing head office in Seattle, the company's commercial aviation president, Ron Woodard, is pitching a dream. He's a lanky, pushy man who relishes confrontation. His dream is to extinguish the threat from Airbus. And he wants Boeing Chief Executive Phil Condit to embrace his plan to make that dream real. On the surface, the plan is simple. Boeing will launch a full-throttled price war with Airbus, its only major rival in civil aviation. He walks Condit through the plan.

6:52Currently, the maximum discount Boeing offers airlines is 10%. But Woodard wants to offer airlines up to 20 % off, maybe even as much as 30%. Whatever it takes to beat Airbus on price in every negotiation. Condit listens without comment. He wants to hear out Woodard's plan in full first. Woodard moves on to the second part of his plan to take down Airbus. Not only will Boeing offer airlines discounts on jetliners, but it'll deliver those planes fast. Right now, airlines place orders and then have to wait three to four years for Boeing to build, test, and deliver them. Woodard wants to slash the wait times, not by months, but by years.

7:34To do it, Boeing will have to overhaul its entire production operation. But by eliminating waste, Woodard is confident the company can boost productivity and slash costs. Those savings will pay for the price discounts to airlines and allow Boeing to deliver airplanes faster. It's a neat plan. Almost too neat. And Condit knows it's easier said than done. But Woodard's a forceful man. And convincing, too. So Condit approves his aggressive sales strategy. But Condit's backing the plan not only to get at Airbus, there's another factor at play too, McDonnell Douglas. The St. Louis-based McDonnell Douglas used to be Boeing's foremost rival, but its civilian aircraft division lost its way years ago.

8:21These days it makes its money making F-15 fighter jets and Apache helicopters for the U.S. military. But since the Cold War ended, military budgets have been shrinking, a decline that's weakening McDonnell Douglas. So Condit wants to seize the moment to strengthen Boeing's military business by buying its old rival. But to pay for it, Boeing needs a high stock price, something the rapid growth promised by Woodard's new sales strategy would deliver. So with the sales push underway, Condit opens buyout talks with McDonnell Douglas.

9:00It's December 1996, and Condit is ready to seal the deal on a buyout of McDonnell Douglas. He's invited McDonnell Douglas CEO Harry Stonecipher to Seattle for a one-to-one at Boeing's suite at the Four Seasons Hotel. They're here to hash out acquisition terms. Condit and Stonecipher have crossed paths for years at industry events and on the golf course. But while friendly with one another, they make an odd couple. Condit is quiet and thoughtful. Stonecipher is grizzled and as abrasive as sandpaper. He's also a disciple of Jack Welch, the General Electric boss who preaches that the paramount duty of any company is to enrich their shareholders, even if that means sacrificing market share.

9:43Stonecipher applied that mantra at McDonnell Douglas. He focused the business on military aircraft and left its troubled commercial arm to wither. Then, he used its cash reserves and research budget to buy back a huge chunk of the company's stock. That buyback curtailed the supply of McDonnell Douglas stock on the market, inflating its stock price, even as the company fell behind its peers. Then, the Pentagon dropped a bombshell. It kicked McDonnell Douglas out of the race to create the Joint Strike Fighter. And, having lost out on a slice of that$300 billion military project, McDonnell Douglas is heading for collapse.

10:23But instead of coming to Seattle to beg Boeing to rescue his ailing company, Stone Cipher's come with a list of demands. Condit listens as Stone Cipher lays out his non-negotiables. First, McDonnell Douglas stockholders won't take a lowball offer just because the company's in trouble. Condit doesn't object. Owning McDonnell Douglas would give Boeing a bigger share of the military market and chances to do that are rare. With strength in both military and civil aviation, Boeing will be less prone to the ups and downs of the commercial side. They agree that McDonnell Douglas shareholders will get just over$13 billion of Boeing stock in return for their company.

11:06Stonecipher moves on to demand number two. McDonnell Douglas will get board seats after the merger. Condit says, sure. He knows that'll make it easier to integrate the two companies. Next, Stonecipher presses for a leadership role for himself. Condit agrees that he can be chief operating officer and president of Boeing. After all, Stonecipher's 60 years old. Condit figures he won't hang around for long. Then, Stonecipher issues the final demand. The merged company will be named Boeing McDonald. The McDonald family wants to preserve their legacy. Condit refuses. Boeing is buying McDonnell Douglas.

11:50Stone Cipher lets that demand slide The two shake hands The merger is on But it'll take months to get approval from shareholders and the world's governments And since Boeing is paying mainly with stock Condit needs to ensure its stock price stays high Because if the price declines Boeing will have to hand over more of its shares to McDonnell Douglas stockholders to reach the agreed price But Boeing's new aggressive sales drive has that problem under control. Its main rival Airbus is already feeling the pressure of Boeing's new strategy. Discounted jetliners delivered fast.

12:36It's 1997 in Arlington, Virginia, and in a corner office near Washington National Airport, Airbus's Jowli CEO, Jean Pearson, smiles cautiously. He's just flown in from France, hoping to land one of the biggest deals in aviation history. The Airbus sales team has spent months negotiating the deal with U.S. Airways, and they told him this meeting would be mere ceremony. Just shake hands with U.S. Airways Chief Stephen Wolf, then return to France with an order for 400 planes that's worth up to$14 billion. But Wolf had other plans. When Pearson arrived at U.S. Airways headquarters this morning, Wolf handed him a long list of last-minute asks.

13:18So he patiently worked through the list so they could reach an agreement again. Now, Pearson smiles hopefully at Wolf. So, we're good? We have a deal now, yes? Wolf leans back into his chair and gently strokes his gray cowboy mustache. Actually, no. I need more. More? Yeah. Pearson folds his arms and moves to rest them on his stomach, but misses. His doctor has put him on a strict diet that's left his belly less prominent and his suit loose and baggy. Pearson unfolds his arms and narrows his eyes instead. Stephen, I just gave you plenty. What more could you want? I want the deliveries to start six months earlier.

13:58No, Stephen. That's impossible. Impossible. Boeing says they can deliver quicker. Saying and doing are not the same. But we could bring the delivery schedule forward two months. Three months. Fine, fine. Now, surely we have a deal, yes? Nope. I also want 5 % off. 5 % off of what? Off the price of everything. Aircrafts, spare parts, pilot training, the works. Pearson locks eyes with Wolf. Airbus needs this sale. Boeing's heavy discounts and promises of fast delivery are thinning out Airbus's order book, but U.S. Airways has already extracted far too many concessions. Pearson considers what to do for a moment.

14:46Then he stands and reaches for his belt. He unbuckles it and allows his baggy pants to fall to his ankles. Wolf stares in shock at the Airbus chief standing before him in his underwear. See, Stephen, I have nothing left to give, not even my dignity. Wolf notices that his office door is wide open. The entire executive floor now has a view of his French guest standing in his office with his pants down. All right, all right. Point taken. Forget the 5%. Then a look of mischief flashes on Wolf's face. He calls to his secretary. Bring the champagne. Pearson scrambles to haul his pants back up his legs as Wolf's secretary rushes in with a bottle of champagne and two glasses.

15:40Airbus has its deal, but it nearly lost it. Boeing's energetic sales blitz has left the European aircraft maker vulnerable. It's now in a weakened position. It will have to cave to airline demands just to stay in contention. In 1996, Boeing doubles the number of orders from airlines to more than 700 aircraft. more than twice as many as Airbus. But while its order book is bulging, its assembly lines are buckling under the avalanche of sales. Orders are coming in faster than the company can build aircraft, despite Herculean efforts to accelerate production. Suppliers can't produce parts fast enough, causing snarl-ups that force Boeing to park half-finished jets on the tarmac outside its production plants.

16:27Workers pull triple shifts and still can't catch up. And in the rush, more and more mistakes are made. At the 737 plant in Renton, Washington, plane production gets out of sync. Planes are being painted before they are wired, forcing them to halt work and send the aircraft back to wiring. And once wired up, the plane has to go back to be painted again. Mistakes that add to the delays and growing backlog. Supervisors plead with their bosses to halt the production and give their teams a chance to get on top of the chaos. But every time, their request gets rejected. Condit and the rest of Boeing's top brass know that halting production will expose the company's problems and alarm Wall Street.

17:13And if that panic causes its stock price to tumble, the McDonnell Douglas purchase will cost even more. There's also fear the problems could cause McDonnell Douglas to bail on the deal. So Boeing's senior leadership looks the other way. refusing to deal with the chaos on the production floor until the merger is finally signed off on by regulators. It takes until August 1, 1997 for the merger deal to complete. But it takes another two months before Boeing finally moves to fix the mess. In October 1997, after months of strain, Boeing shuts the production lines for its 737 and 747 jets for three weeks.

17:56The manufacturing meltdown forces Boeing to write off$2.6 billion. Enraged stockholders file lawsuits. Airlines, who will now get their planes much later than promised, demand millions of dollars in late delivery penalties. Boeing's reputation as a paragon of American manufacturing takes a big hit. And that stumble gives Airbus a chance to strike back.

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20:43It's January 1998, and in Palm Springs, California, Boeing's managers are attending their annual retreat. And despite the warm sun overhead, a cloud hangs over the event. It's the first retreat since the company merged with McDonnell Douglas. But instead of celebration, Boeing's reeling from a production crisis and a loss of nearly$180 million, the first loss since 1959. Then there are the new working styles imported from McDonnell Douglas. Managers thought Boeing was buying McDonnell Douglas, but insiders now half-joke about how McDonnell Douglas bought Boeing with Boeing's money. And the man who most embodies the wind of change at Boeing is the man now on stage, the company's new president, Harry Stonecipher.

21:31He's already imposed a new policy called the 515 Rule. It states that all memos must take less than five minutes to read and 15 minutes to write. He's also brought with him a gang of McDonnell Douglas executives who, like him, want Boeing to prioritize shareholder returns. Stonecipher eyes the hundreds of Boeing executives crammed into the hotel's vast conference hall. Then, he asks the managers in charge of commercial aircraft production to stand. Around 200 people stand up. Stonecipher leaves them hanging for a moment, then tells them they need to apologize to the entire company for missing their financial goals.

22:13After the humiliated managers sit back down, Stonecipher warns the room that Boeing's sole threat is from within. The failure to execute is the number one enemy, not Airbus.

22:32In summer 1998, Stonecipher gets conduit to publicly and suddenly fire Ron Woodard, the mastermind behind Boeing's discount-driven sales push. Two days later, several of Woodard's top reports also get fired. Next, Boeing's financial chief is fired, allowing Stonecipher to step in as acting chief finance officer. Stonecipher uses the position to accelerate his push to convert Boeing from a great engineering company into a great business. Central to that plan is convincing Wall Street that Boeing is a great investment. So Stonecipher focuses on RONA, the return on net assets. That's a measure of how efficiently a company uses its assets, and the higher it is, the better.

23:18So Stonecipher moves to push Boeing's RONA score up. He starts selling Boeing plants, spinning them out to create an ecosystem of small suppliers that depend on orders from Boeing. And the advantage of these small suppliers is that they can be squeezed on price. Old-school Boeing managers warn this will put quality at risk. Stonecipher rejects that idea. For him and Boeing's new regime, maximizing shareholder returns is prized above all else. Stonecipher believes businesses exist to make money for their owners, and if tradition, employees, and innovation get in the way of achieving that, then those are barriers to success that need to be dismantled.

24:02But while Boeing is putting innovation on the back burner, Airbus sees it as an opportunity.

24:14It's May 2000, and in Singapore Airlines headquarters, a 79-year-old man in a short-sleeved shirt is causing a commotion. The airline's executives gasp as the hunched retiree strolls down the 6th floor corridor towards the boardroom. One nervous employee approaches, timid as a teenager, asking a celebrity for an autograph and asks if he may shake the man's hand. The elderly American looks surprised, but obliges. The thrilled employee grins as they shake hands. He can't believe it. He's actually shaking hands with Joe Sutter, the Boeing engineer who built the 747 jumbo jet, the biggest passenger jet ever made.

24:53Sutter's an industry legend, a straight-talking old-school engineer, and Boeing sent him here to convince Singapore Airlines to snub Airbus' latest project, the A380. Airbus calls it the Super Jumbo, and it's designed to make the 747 extinct. The 747 is a thorn in Airbus' side. It's a huge moneymaker for Boeing, but Airbus has no equivalent jet to offer airlines, so Boeing has no need to discount 747s to win sales. If an airline needs a jumbo, it has to buy from Boeing. And the profits from the 747 allow Boeing to reduce margins on its other jets, helping it to undercut Airbus on price. So, Airbus is going on the attack, but not head-on.

25:40Instead, it's going to try and split the jumbo market. It's already using its wide-bodied A340 jet to appeal to airlines that need plenty of seats but doubt they can fill a 747. Now, it's building a super jumbo A380 to peel away the customers who wish their 747 had more room. And that strategy's got Boeing spooked. If Airbus's plan works, the 747 will lose sales in both directions, and its profits will crumble. So while Airbus continues trying to build its super jumbo, Boeing's trying to convince airlines to steer clear of it. Sutter takes a seat in the boardroom, and as the excited Singapore Airlines executives listen.

26:24He starts picking holes in Airbus's A380 project. He questions how Airbus is going to build a heavy jumbo jet with two stories and more than 500 seats, but also make good on its claim that it'll be cheaper to fly per passenger than a 747. It just doesn't add up. He urges them to hold off on making a decision about whether to buy any A380s until they've seen Boeing's plan for a stretched 747-400. The executives seem to laugh it up, but really they're just thrilled to hang out with Sutter, and they're not excited at all about buying a longer 747. In fact, it just underlines why they and other airlines are turning to Airbus.

27:05For while Airbus is bringing new jets to market, Boeing's playing it safe. Boeing used to be the trendsetter, But these days, it's an aircraft manufacturer that seems terrified of spending the billions of dollars needed to bring a truly new jet to the market. And that's about to come back to bite them.