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Originally published January 29, 2014 at 11:14 AM | Page modified January 30, 2014 at 1:36 PM

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Boeing CEO talks of rebuilding relationships with Machinists

Boeing CEO Jim McNerney said good relations with the IAM can be rebuilt after the recent contentious contract extension.

Seattle Times aerospace reporter

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Boeing Chief Executive Jim McNerney said Wednesday that emotions will subside after the hotly debated 10-year contract extension Machinists union members narrowly approved this month, and predicted “a period of 10 years of stability.”

Speaking on a conference call after Boeing announced record profit for last year, McNerney said, “Through the drama, heartfelt as it was, and there’s still some emotion, we’re now focused on the business opportunity.”

He was referring to the new 777X jet, which Boeing’s agreement with the International Association of Machinists (IAM) ensures will be built in Everett.

“Fairly quickly we’re going to come together,” McNerney added.

He said building the 777X in the Puget Sound area is “the right answer for the company” because it will reduce capital spending compared with producing it at a new site elsewhere.

The plane will be built by “the very best aerospace workers in the world that don’t have to go down a learning curve to get things done,” he said.

That same reasoning convinced many industry analysts and Boeing workers ahead of the decision that — despite the intense state-versus-state competition launched in November — management would not have risked building the 777X anywhere but Everett.

McNerney insisted otherwise Wednesday.

He said that without the 32,000-member union’s agreement to have their pensions frozen and other benefits reduced, Boeing was “prepared to move the work, notwithstanding some of the risks.”

He added that Boeing Commercial Airplanes chief Ray Conner and his management team are already reaching out to the local union officials at District 751.

“There’s more interaction right now between 751 and the management in Seattle than there has been in a long time,” McNerney said. “They are beginning to come together.”

There have been two routine meetings between Boeing management and union officials since the Jan. 3 vote on the contract, but IAM District 751 spokesman Bryan Corliss said there have been “no meetings between Boeing’s leadership and 751’s leadership” at the top level.

Pensions: “Stay tuned”

McNerney also was asked on the conference call with journalists what he would tell the Machinists, now facing frozen pensions, who have questioned the fairness of him keeping his own defined-benefit pension — which will pay out more than $3.6 million a year, or more than $300,000 a month.

In response, McNerney spoke not about his own pension specifically, but more generally about the defined-benefit pension plans that survive within Boeing.

The company says about 75,000 current nonunion employees retain such plans, as do the engineers represented by the Society of Professional Engineering Employees in Aerospace (SPEEA).

McNerney made clear that these pensions are also targets for shifting to 401(k)-style benefit plans.

“We still have a very large pension obligation that we need to address over the next few years and we will address it,” he said. “The principle of dealing with that in a fair and equitable way is something we are mindful of. Stay tuned.”

Speculation that McNerney, 64, might retire within a year or so arose last month when he promoted the head of Boeing’s defense unit, Dennis Muilenburg, to corporate president and chief operating officer. That was seen as a step in grooming Muilenburg as his replacement.

McNerney and his wife in December paid $7.25 million for a new house in Palm Beach Polo and Country Club in Florida, a luxury enclave where they already own a $3.1 million house. But on the earnings call, McNerney insisted he’s “not planning to retire anytime soon.”

Dreamliner update

McNerney said Boeing’s 787 Dreamliner is now operating on average at 98 percent reliability, despite some continued in-service delays he attributed to software bugs and some “electromechanical systems that have to be replaced a little more often than we want.”

He conceded that some airlines — Norwegian Air would be an example — have experienced more problems and seen reliability below that 98 percent.

Still, he said, “We’re confident that this year we’ll reach our goal of over 99 percent reliability.”

Chief Financial Officer Greg Smith confirmed on the conference call recent reports of some production problems in the 787 fuselage plant in North Charleston, S.C.

“We have experienced a higher number of jobs behind schedule in the mid-body (fuselage) section,” he said.

Smith attributed the delays to the pressure of introducing the 787-9 model, which has a longer midbody fuselage section than the 787-8, while at the same time stepping up production from seven jets per month to 10 per month.

Smith said the company has added resources to cope with the buildup of work — new contract personnel have been brought in — and insisted the Charleston workforce is “doing a great job.”

Throughout the 787 program, Smith said, the company has made significant progress in reducing the cost of building each jet.

He said the cost per airplane came down by 20 percent in 2013, though each one rolled out still costs more to build than the airline customer paid for it.

Under a standard accounting rule accepted for the airplane industry, Boeing defers most production costs on a new jet program like the 787, spreading them over many years in the expectation that the profits in the later years will make up for the losses in the early years.

The cumulative total of deferred 787 costs reached $21.6 billion at the end of 2013, and Boeing projects that figure to continue rising and peak at about $25 billion late this year.

Using that accounting method of amortizing 787 costs, Boeing Commercial Airplanes reported Wednesday a net profit of $5.8 billion in 2013.

If the 787 unit costs were booked as each plane was built, that would have shifted to a loss of $1.6 billion, the company said.

Shares drop

Overall in 2013, driven by a record 648 jet deliveries, Boeing had a net profit of $4.6 billion, or $5.96 a share, on revenue of $86.6 billion.

Excluding certain retirement-benefit expenses, what Boeing cites as its “core operating profit” was $7.9 billion.

In the fourth quarter, Boeing reported a net profit of $1.2 billion, or $1.61 a share, on revenue of $23.8 billion. “Core” earnings for the quarter were $1.8 billion.

Despite those hefty profit figures, Boeing shares sank sharply Wednesday as the stock market reacted negatively to a lower-than-expected forecast for both deliveries and cash flow in the year ahead.

Boeing said Wednesday it projects delivering between 715 and 725 jets in 2014 and generating free cash flow of $3.75 billion.

Given planned increases in production rates — the 787 has just gone from seven to 10 jets per month, and the 737 in the second quarter will step up from 38 to 42 per month — analysts had expected higher figures.

Free cash flow, the cash generated from operations less planned expenditure on plant and equipment, was $6.1 billion last year.

Boeing stock closed at $129.78, down $7.31, or 5.3 percent

One Wall Street analyst, who asked not to be named because his official report to clients doesn’t go out until Thursday, said “cash flow was a big minus” in the earnings forecast. “I’m not surprised the stock is down,” he said.

Getting to 2020

One concern for the local Boeing workforce has been the possibility of layoffs in Everett before 777X production begins around 2020.

Part of the reason for that worry is that the current 777 model has only three years of production on order and Boeing needs a “bridge” of about 300 new orders to get it to 2020.

McNerney expressed confidence in additional 777 orders, noting that the 777 stands alone in the large twin-engine jet category, with no competition from Airbus.

“On 777, we are building a bridge with a franchise that is pretty singular in its strength,” McNerney said. “We anticipate being able to build that bridge over the next several years.”

McNerney was also upbeat about the flight path ahead of Boeing as it prepares to introduce three new jets.

Because the 737 MAX, 787-10 and 777X are all derivatives of earlier models, he said they will take full advantage of “technologies harvested largely from the 787 that have now matured.”

“The risk we’ll absorb in developing them and introducing them into production is significantly less than we’ve had over the last 10 years,” McNerney said.

News researcher Gene Balk contributed to this report.

Dominic Gates: 206-464-2963 or

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