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Originally published March 1, 2010 at 9:36 PM | Page modified March 2, 2010 at 6:15 PM

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Albaugh: Boeing's 'first preference' is to build planes in Puget Sound region

Boeing Commercial Airplanes CEO Jim Albaugh said Washington state is "where we want to be" for building future airplanes, but only if the Machinists union moderates its future wage demands and avoids strikes.

Seattle Times aerospace reporter

Jim Albaugh

Chief executive of Boeing Commercial Airplanes

Born: May 1950 in Richland.

Education: Bachelor's degrees in mathematics and physics from Willamette University and a master's degree in civil engineering from Columbia University.

1975-1996: Began his career with Rocketdyne as a project engineer on cleanup of the Hanford nuclear site. He was an engineer and later vice president of operations on Rocketdyne's Atlas and Delta rocket programs and the space shuttle. He rose to become president of Rocketdyne, by then part of Rockwell.

1996: Boeing acquired Rockwell's aerospace and defense businesses, including Rocketdyne, for $3 billion.

1998-2002: President, then CEO, of Boeing's space and communications group. He led a push for growth in commercial and military satellite and rocket-launch systems. But the satellite division ran into serious quality issues, and the market for commercial satellites collapsed after the dot-com bubble burst. In 2002 and 2003, Boeing took more than $4 billion in write-downs on its satellite and launch businesses.

2002-2009: CEO of Boeing's defense and space division. He shifted its focus from building airplanes to designing complex integrated defense systems. Several major defense projects failed or were severely cut back, most recently the Army's Future Combat Systems program. But profits from other projects and from mature defense programs remained steady.

Albaugh wasn't held personally responsible for two major scandals that erupted early in his tenure: Boeing was barred from government launches for 20 months after using proprietary Lockheed Martin data in bidding for federal rocket-launch contracts, and it lost the original 2001 Air Force tanker contract after a Boeing executive gave illegal favors to a defense-procurement official.

September 2009: CEO of Boeing Commercial Airplanes. Since his appointment, Albaugh has gathered around him an advisory group of former Boeing executives, shuffled his leadership team and held a management-strategy retreat. Last week, Boeing gave Albaugh a special bonus of more than $3 million in shares in recognition of his new role, on top of his regular annual bonus of more than $1 million in shares.

Source: Boeing

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Jim Albaugh, chief executive of Boeing Commercial Airplanes, said Monday that even though the company is creating a new 787 Dreamliner assembly line in South Carolina, Washington state is his preferred location for building future airplanes.

But he attached a condition: The Puget Sound region will be favored only if the Machinists union moderates its future wage demands and avoids strikes.

"This is where our people want to live. This is where we want to be. We've had a great partnership with the people of Washington, and I hope it continues for a long, long time," he said. "I caveat that by saying, it's going to be a much more competitive environment out there in the future. And work anyplace is not an entitlement."

In an exclusive interview, Albaugh also said the company will outsource less work in the future. He strongly hinted that Boeing will never again outsource the wings of an airplane, as it did the 787 wings to Mitsubishi of Japan.

Albaugh also said Boeing needs to restore the corporate culture that made its "iconic engineers" as influential as its business executives.

He said that if Boeing wins the Air Force tanker contract, Everett will get an expanded role. And he expects Boeing once again to outproduce archrival Airbus in a couple of years.

Boeing's next new airplane after the Dreamliner will determine the future of aerospace in the Puget Sound region. Albaugh said that when the time comes to choose a final assembly site for that plane, he doesn't want to hold an open competition as the company did in 2003 for the 787 Dreamliner.

"If I'm involved, I'm not going to have a competition like that," Albaugh said. "The commitment I can give you is that the first preference is to put the work here."

He said Boeing didn't pick South Carolina for expansion last year because of Washington's tax rates or regulatory system. Nor was it a question of chasing low wages.

"The overriding factor was not the business climate. And it was not the wages we are paying today," Albaugh said. "It was that we can't afford to have a work stoppage every three years. And we can't afford to continue the rate of escalation of wages."

Albaugh said it was he who last fall recommended to the board that it choose Charleston over Everett for a second 787 final-assembly line.

In the interview Monday, he conceded that the choice of Charleston, where Boeing must build a new factory and hire workers from an inexperienced labor pool, is expensive and risky. But he said the cost of the strike in fall 2008 outweighed that.

Although many union members believe that the decision to go to Charleston was made long before last fall's final negotiations with the Machinists, Albaugh insisted it was not.

"I went into this feeling that if we could get it done here, we could save the company a lot of money," Albaugh said. "There were two things we needed, and we couldn't get those things done."

He repeatedly made clear that those two things — first, no strikes; second, lowered escalation of wages in the future — remain deal breakers for placing future work here. Without that, he said, the company won't be competitive not only against Airbus but also against looming threats from planemakers in Canada, Brazil, China and perhaps Russia.

"This is a great workforce here. They are magicians," Albaugh said. "My job is to make sure they have jobs five years from now, 10 years from now, 20 years from now.

"If we don't have a company, nobody has jobs," he said. "That's the worst outcome for Puget Sound."

Albaugh said he will work with the Machinists union to achieve his goals. "There are many things we agree on. I hope there are more things we can agree on," he said.

Certainly, when the Machinist contract talks next come around in 2012, the union faces the harsh reality that Boeing has a ready alternative if they do not agree.

Boeing's other union, the Society of Professional Engineering Employees in Aerospace (SPEEA), will be pleased that Albaugh, who started as an engineer, proclaimed an overarching respect for that discipline and said he will elevate the engineering role at Boeing.

"When I grew up, the sheriff in town was the chief engineer," he said.

On the 787 program, he said, outsourcing decisions were driven by the company's business decision makers rather than its engineers.

"We outsourced too much. ... We didn't consider the extent of the risk we'd take on by going outside," Albaugh said. "We will make sure the voice of the engineers is much more involved in the decision making as we go forward."

To protect its exclusive technical skills and intellectual property, he said Boeing will "build the walls around those very high."

He went on to list some things that Boeing should "never outsource," including airplane flight controls, the wings and the composite fuselage.

Asked why Boeing is having the 787 wings made in Japan and parts of the composite fuselage in Italy, Albaugh said pointedly, "Well, we'll build other airplanes."

His comment strongly suggested that those parts won't be outsourced for future airplanes.

On the company's complex relationship with China, Albaugh said China will become a competitive airplane maker and yet also offers a massive market opportunity.

When the U.S. recently sold Boeing missiles to Taiwan, it drew threats of boycott from China. And the proposed Chinese C919 single-aisle jet could be a threat to Boeing's 737. At the same time, China will buy 200 airplanes a year for the next 20 years, and Boeing wants to supply a big portion of those.

"It's a big market for us," Albaugh said. The U.S. and Chinese "economies are dependent on each other now and for the long haul. There's a lot to be lost on both sides if we don't have a good relationship."

He said to "stay tuned" for the appointment of a Chinese-American executive to help promote sales in China.

On the Air Force tanker competition, Albaugh said the decision to cancel the 2008 contract award to Northrop Grumman was "nothing to do with politics" but was due to a "flawed" procurement selection process.

And if Boeing wins the new tanker competition, he made clear it will mean more work for Everett than originally envisaged in the first tanker competition in 2001.

To make the Boeing bid more cost-efficient, Albaugh said, many of the structural modifications to the 767 will be done on the assembly line in Everett, although the very specific refueling equipment — hose, drogue and fuel-tank bladder — will be installed in Wichita, Kan.

In other good news for Boeing's local workers, Albaugh said the Renton 737 factory will definitely not slow production this year, and that the rate might even go up.

"It's a question of do we keep it the same or increase," he said.

Regarding the current competition with Airbus, Albaugh noted that being second in a duopoly market is equivalent to being in last place. Airbus has delivered more planes than Boeing every year since 2003.

"I don't want to be in last place," Albaugh said. "When we start taking delivery of the 787s in quantity, starting in 2012, 2013, we should take the number-one position."

Dominic Gates: 206-464-2963 or dgates@seattletimes.com

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