Boeing (BA) has announced yet another delay. This time it's for the 467-seat 747-8 (pictured). Today's news comes as Boeing's 787 Dreamliner has been delayed seven times and is nearly three years late. These delays are proving costly to Boeing shareholders for a new reason -- an accounting provision that will require Boeing, due to the lateness, to forgo reporting a profit on some of the aircraft that it ultimately delivers.
The question now for Boeing's board is whether the best way to move forward is to replace CEO Jim McNerney. The answer is yes, and the replacement ought to be Ford (F) CEO Alan Mulally.
Boeing's latest 747 woes are even harder to explain than those with its 787. As Bloomberg reports, Boeing's 747-8 's now facing a three- to 10-month delay, making it two years late and costing Boeing $100 million to $1 billion more than the $2.04 billion worth of charges that it's already taken due to delays. One reason for the delay is a redesign of the 747-8's "inboard aileron actuator, a system on the wings that helps the plane turn and had moved up and down unexpectedly on one of the jets," reports Bloomberg.
Mediocre at Best
This delay is historic for an unusual reason because of the accounting rule it triggers, which Boeing has been forced to apply only once before in its 94-year history. That's because at the end of 2008, the 747-8 was so unprofitable that Boeing was required to apply the so-called reach-forward loss position. This rule requires Boeing to record future plane deliveries "at no profit margin unless its profitability improves," according to Bloomberg.
Between the problems with the 747-8 and the 787, Boeing's board has to be wondering whether current CEO McNerney is the right man for the job. Based on the stock market's evaluation of his performance, McNerney is mediocre at best. When he became CEO in July 2005, Boeing traded at $66 -- right about where it trades now. The S&P 500 during that time fell 4%.
However, Boeing's financial performance under McNerney isn't that disappointing. Between 2005 and 2009, Boeing's sales have risen 27% to $68.3 billion, but its net income has plunged 50% to $1.3 billion. Its cash has grown 97% to $11.2 billion.
Three Likely Problems
The problem is McNerney lacks a key skill that Boeing needs:-- the ability to manage a portfolio of complex engineering projects. The delays Boeing is experiencing indicate there's a gap between what's happening on these development projects and what Boeing has been telling investors. And this suggests that McNerney isn't in control of Boeing's operations.
Based on the research for my book, You Can't Order Change, I'd guess that Boeing is suffering from three problems that are McNerney's responsibility. He may have assigned the wrong people to run these projects, those project managers aren't coordinating Boeing's efforts effectively among internal and external teams and the truth about the status of these projects isn't reaching McNerney. My reading is that people down the line aren't giving bad news to McNerney because they fear it will cost them their jobs. So the information is released only when absolutely necessary.
Fortunately, Boeing's board could potentially bring in the ideal person for the CEO slot. That person is currently CEO of Ford -- Alan Mulally (who had a long and successful career at Boeing before taking over at Ford).
The Key: Sharing Information
What's so great about him? Beyond keeping Ford out of bankruptcy, unlike its Detroit peers, Mulally is a great problem-solver. According to Stan Sorscher, a former Boeing employee and current union official I interviewed for an August 2009 story on DailyFinance, Mulally would invite people from all levels of the business to share information and work toward solutions that are in the best interests of Boeing.
Sorscher noted that Boeing's last successful new aircraft was the 777, which employed this problem-solving approach in 1995, when Frank Schrontz was CEO. Says Sorscher: "The 777 had the opposite corporate culture [of the 787], with a strong emphasis on early awareness of problems, close coordination of all stakeholders and global optimization on the overall program, instead of suboptimization on each organization's localized interests."
That sounds like just the thing Boeing needs right now. What's the board waiting for?