MEMORANDUM:

TO: The Boeing Company Board of Directors

FROM: Douglas Gantenbein

RE: Flying Right

It is difficult to exaggerate your company's importance to the United States -- and the world. For more than half a century, ever since Boeing's B-17s and B-29s became icons of the United States' World War II effort, Boeing has been one of the country's leading innovators and manufacturers. Today, many people across the globe know the United States for three things: Big Macs, Coca-Cola, and 747s.

The first two speak to consumer and pop culture, no doubt powerful engines of U.S. cultural hegemony. But Boeing's 747s may say the most about the United States' technological prowess, ingenuity, and will to lead. Moreover, at a time when the U.S. trade deficit reached a record $489 billion in 2003, your company is one of the country's most reliable export machines, accounting for close to $20 billion a year in overseas sales.

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But now, your company is in trouble with its finances, its ethics, and its customers. Airbus -- the progeny of sclerotic European governments -- is eating your lunch in the commercial aircraft realm. Airbus is nearly ready to launch its giant A380 jetliner, which easily outstrips the famous (and famously profitable) 747 for carrying capacity. The A380 is proving to be catnip to executives at airlines such as Singapore and Emirates who want the newest, biggest, and best jet to carry their fleets' colors. Even bottom-line-obsessed Federal Express ordered 10 of the massive jets, yet none of the once favored freight version of the 747.

Even before September 11, 2001, which crippled your commercial airplane division, Boeing clearly had been drifting, hanging new chrome onto 30-year-old jetliners and hoping to fall into money with new Pentagon contacts that came with the acquisition of military contractor McDonnell Douglas in 1997. That merger has landed your company in an ethical swamp. First there was the January 2003 disclosure that company executives had stolen a missile-launch rival's pricing proposals. Then, late last year came news that Boeing's chief financial officer had been dangling a job in front of a Pentagon employee who at the time had influence over the Boeing bid to lease one hundred 767 jetliners to the military as refueling tankers. That scandal hastened the departure in December 2003 of your former chairman and CEO, Phil Condit, whose seven-year tenure was marked by one blunder after another, from botching production schedules to dismissing Airbus as a serious threat.

Still, the momentum of increased military spending and a recovering domestic economy, along with growth in the Asian airline market, is a big help. You have an important chance to correct course before new competitors emerge. Although China and India are gaining technological prowess, many years will pass before they can pose a real threat when it comes to the complex tasks of designing, building, and selling a commercial jetliner. But chances are, some day they will. Don't squander the time you have now.

You can restore Boeing to its former prominence if you follow these suggestions:

Don't Outsource Your Knowledge

Outsourcing has become a political flash point this year, and it could burn you in several ways. Take the 7E7 Dreamliner, your superefficient, mid-sized jet scheduled to debut in 2007. It may be the company's best hope of halting the Airbus juggernaut. You're betting that airlines want smaller jets so they can offer customers more direct flights, rather than hub-and-spoke flight patterns dictated by bigger aircraft such as the 747 or Airbus A380. The 7E7 also represents a more fundamental gamble -- that you can maintain your leadership role in global commercial aviation without doing much of the hands-on work.

Once the 7E7 blueprints leave design engineers' hands, Boeing will do next to nothing until major components of the jet arrive at the final-assembly plant in Everett, Washington. Then, as few as 800 people will bolt the big bits together, hook up a few wires, and send the new jet on its way. By pushing the manufacture of major fuselage and wing components onto subcontractors, you spread the financial risk of launching the $7 billion 7E7 and also win points in the home nations of major subcontractors, such as Japan.

But the approach poses hazards for the company. Your executives insist that Boeing's "magic" is in conceiving an aircraft such as the 7E7 and overseeing its design, not in making its wings and other parts. In the case of the 7E7, Boeing is allowing subcontractors such as Mitsubishi to make the most important parts of the jet -- in Mitsubishi's case, the complex carbon-fiber wings. As a result, you risk losing touch with much of the knowledge that gets your jets into the air.

Outsourcing also poses political risks. First, you might become a punch line in some future presidential election (although this year you've even had U.S. Senator and presidential candidate John Kerry in your corner, calling for government intervention to fight off Airbus). Outsourcing can also link you with countries whose industrial practices may be less than squeaky clean. Airbus, for example, has been trying to get the 7E7 issue before the World Trade Organization by claiming that you've allowed Japanese subcontractors to take unlawful subsidies from the Japanese government while your company delicately avoids direct involvement. So far, Airbus officials haven't made the accusation stick, and the United States and European Union (EU) may call a truce on the issue. But if the EU ever carries through, it could cause trouble.

It's too late to suggest that Boeing keep more 7E7 processes for itself. But you need to consider the danger in giving away too much critical work, particularly if pursuing short-term profits creates a long-term competitor. One possible solution: Be more aggressive in launching new aircraft. Thirteen years passed between the launch of Boeing's last commercial jet (the 777) and the decision to build the 7E7. It's true the world doesn't need a new commercial jet every two or three years. It's also true that Boeing's refusal to build a new jet for more than a decade led to ennui at the company, giving Airbus an open door. Today, Boeing engineers concede that the mere act of designing the 7E7 gave them insights into both engineering and customers that they otherwise might never have had.

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