The great big air battle over the next 'Baby Boeing'

Regional leadership is lining up its ducks in an effort to convince Boeing to build the next generation of 737s here. One contender is the historic site of a Boeing factory at Boeing Field. Here's a survey of the issues and the fault lines in the local team.

Boeing's 737 MAX would have new engines.

Boeing's 737 MAX would have new engines. Boeing

Beneath partly cloudy skies and before a flock of newly hatched Boeing 737s, King County Executive Dow Constantine and a fleet of local politicians, education, and labor leaders launched a new effort last week to keep production of Boeing's newest jetliner, the 737 MAX, at or near the company's current plant in Renton. But just how cloudy are those local skies?

Constantine announced the formation of a King County Aerospace Alliance and proposed funding a $100,000 study to "assess the current state of the aerospace industry" and make recommendations to the members of the group within 90 days. Constantine also proposed that King County contribute $30,000 to the state of Washington's efforts to keep the re-engined 737 MAX production in WashingtonsState.  King County Council budget chair Julia Patterson said she plans to bring the $130,000 supplemental budget request to the council right away.

The King County Aerospace Alliance is impressively broad, and it includes the county, Renton, Auburn, Tukwila Bellevue, the Port, various chambers of commerce, colleges, and labor groups. The city of Seattle is apparently missing.

The county's $130,000 effort may be worth a press conference or two but stands little chance on its own of impacting the decision-making of a company like Boeing. The recommendations that will come from the county's report, if implemented, will supplement the state's own, larger effort to win 737 MAX production, an effort called the Pegasus Project. The state group has hired consulting firm Accenture to author a report with recommendations for statewide legislative and policy changes that could help seal a deal with Boeing. That report is due out within the next few weeks.

Boeing's decision to launch the 737 MAX as a competitor to the Airbus A320NEO (New Engine Option) earned mixed reviews from analysts, but makes great sense from a strategic perspective. Single-aisle jets fly shorter routes more often and offer thinner profit margins for both planemakers and airlines. The cost, time, and uncertainty of designing an entirely new plane from a blank sheet of paper (analysts estimate it would have cost at least $6 billion more to start from scratch) would have given customers a reason to look elsewhere if development surprises occurred. And the longer process would have slowed Boeing’s ability to meet the projected demand for new single-aisle jets.

The 737 MAX will benefit from the vast legacy of the original “Baby Boeing”  and yet will still be a major advance. Engines are the most expensive, complicated part of a modern jetliner and are also where the biggest performance gains can be realized in a single round of evolution. Boeing claims that the MAX will lower per-seat fuel costs by 12-16 percent and cut fuel costs by 50 percent over the MD-80s that are still dieseling on for many airlines. Boeing's decision to re-engine the most popular jetliner in the world is the best and quickest path to gaining performance advantage at moderate risk.

Where to build the new plane remains an open question, according to Boeing CEO James McNerney's remarks earlier this year. Boeing's options range far and wide,including the largely unused former McDonnell Douglas 717 plant in Long Beach, the new South Carolina 787 facility, the company's Snohomish County (Paine Field) Jumbo plant, or Boeing Field and the site of the company’s former Plant 2 alongside the Duwamish River. If governments jump in to assist with environmental cleanup and preparation for a new Plant 2, what looks like a very expensive option may turn out to be very strong from an operational point of view. But Boeing is truly global, and places like Canada, Brazil and soon China all have what it takes to design and build modern jetliners from tip to tail.

Sizing up this big poker game makes it clear that the governments at the table are not the big players. Boeing has a market cap of $46 billion and sales of about $80 billion a year. Washington state's operating budget is roughly $75 billion per biennium, King County’s total budget is $5 billion, and the city of Renton trifles at a couple hundred million per year. That gives a sense of the relative horsepower of the players.

For Boeing, there will be a calculus that has nothing to do with Renton or King County or even Washington state's unique historical role in the development of the company. As it stands, there is no one on the comparatively small Boeing board of directors who appears to have any particular compelling tie to the local area or its unique aviation heritage.

Boeing's decision will likely be driven on hard analysis of key risks, such as risk to current production by attempting to scale up volumes in this region, the risk of not being able to find the caliber and quantity of employees needed, and the risk of losing control of project costs on a running basis down the road. This translates directly into concerns about workforce supply and labor relations.

For the local campaigns to win the 737 MAX plant, there are two challenges to tackle head-on: local education of quality workers, and the willingness of organized labor and Boeing to leave the past behind and innovate some way into a better working relationship with fewer work stoppages.

Speakers at the Renton press conference projected demand for aerospace-caliber employees for Boeing and its nearly 700 suppliers in Washington state to be about 5,000 technically capable graduates per year. Right now, our area output is closer to 2,500. If studies bear these numbers out, it means finding a way to double the number of technically skilled students emerging from local trade, technical, and aviation related programs. This should be a bracing wake up call to local leaders. If the area doesn’t find a way to dramatically improve education in bold ways, the cost of finding qualified employees goes up and our competitiveness goes down.

For organized labor and Boeing, there will need to be some fresh thinking all around the bargaining table. Since the Seattle area has historically been where most Boeing work was done, it has also been where most Boeing strikes and labor negotiations have occurred. So, we have baggage. Some sort of fresh approach by organized labor to the entire discussion will be important to the effort, and soon. One approach might be tiered contracts or a greater emphasis on performance bonuses (like the recent contract agreed by Ford Motor with the United Auto Workers). And with these talks occurring in the midst of the ongoing NLRB dispute over Boeing’s South Carolina plant, this entire issue is likely to the toughest of the lot.

So far, no one appears to be talking about up-front government incentives, sweeteners, tax breaks, or giveaways yet. They are not likely to be of scale or magnitude to sway a decision, with the possible exception of environmental or infrastructure work that would be needed at Plant 2/Boeing Field if that site were to be chosen.

One local wrinkle is the potential for tug of war between King and Snohomish counties. While both county execs are naturally bullish on their county’s prospects, it would likely make Washington’s overall effort stronger if they can find a way to collaborate as members of a regional team rather than compete with one another. If the MAX gets built here, there will surely be prosperity enough for both King and Snohomish County to share.

Even if every part of the effort is executed to the utmost, the region may not be able to stand in the way of the ongoing globalization of Boeing. Boeing works in Washington state but makes decisions in Chicago. Influencing all of those out-of-towners about where the next "Baby Boeing" gets built will require the entire Washington team to play at a global level, seize every conceivable advantage and work together beyond what they have done before. It will be a crucial test for regional leadership in an area not noted for such orchestration.

Contributor Matt Fikse (Twitter: @mattfikse) has covered urban affairs, politics, tech, and business at Crosscut since 2009. His work has also been featured on KUOW 94.9 FM, GeekWire.com, Q13 television, The Stranger/SLOG, and elsewhere. He has worked as an entrepreneur, CEO, consultant, and past Special Projects Director for the Mayor of Seattle.


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Comments:

Posted Mon, Oct 24, 9:53 a.m. Inappropriate

Given the recent nuptials of the machinists union and the NLRB, I'm not sure why, for a nanosecond, Boeing would consider locating a new plant our state.

Posted Mon, Oct 24, 11:21 p.m. Inappropriate

I think the correct saying in this situation is, "Ya'll missed the plane, Boeing's company song has been changed to Dixie. Ya' hear."

Djinn

Posted Tue, Oct 25, 5:53 a.m. Inappropriate

"I'm not sure why, for a nanosecond, Boeing would consider locating a new plant our state."

Because, cranyoldlady, if the company has learned anything from the 787 case history, it's that tech and engineering involve steep learning curves, which impact profits each and every quarter and tarnish the brand and hence the marketability of the products over the long term. These kind of civil wars have winners, it's the competition far more often than not. The Boeing boardroom has a huge asset with a skilled workforce, they ought to treat it as a partner instead of as an enemy. Airbus has managed to compete very effectively with their unionized workers. Maybe Boeing could hire that fella running Ford, he seems to have turned that American company around even saddled with union workers. Think he'd consider?

NickBob

Posted Tue, Oct 25, 12:40 p.m. Inappropriate

If this company called Boeing really was Boeing, there'd be no question that the plant would be located here. But it's not really Boeing; it's McDonnell-Douglas in drag.

dbreneman

Posted Tue, Oct 25, 3:59 p.m. Inappropriate

"I'm not sure why, for a nanosecond, Boeing would consider locating a new plant our state."

Because you can't build planes with substandard machining and engineering. If the plant in Everett hadn't been here there wouldn't be a 787 flying now.

Secondly Boeing outsources it's knowledge to foreign countries at it's peril. Just ask Siemens about China and it's high speed trains that got copied. Or Mitsubishi which now makes aircraft wings, but not for Boeing.

You'd think that management would have learned that the sum of a company is not just it's tooling. It's the people who know how to run those tools.

GaryP

Posted Wed, Oct 26, 10:39 a.m. Inappropriate

You're right Gary. I don't understand people like crankyoldlady who don't want Boeing jets built by well-paid, well-trained laborers. Would she rather they be built by minimum wage unskilled labor? Are you insane?

Plus, why would anyone who lives in the Puget Sound region want to join in the insane race to the bottom for wages and benefits? Do you WANT to become the next Detroit? Again, insane.

Regarding Boeings management decisions, Wall Street is highly involved in calling the shots these days. Just read this article from Reuters where Hedge Fund manager David Einhorn is calling for the head of Microsoft's Steve Ballmer.

http://www.reuters.com/article/2011/05/25/us-microsoft-idUSTRE74O8BQ20110525

Yea, since Wall Street did SUCH a great job in the unregulated mortgage industry, right? Again, more economic insanity.

Posted Wed, Oct 26, 12:31 p.m. Inappropriate

Rich misinterpreted the intent behind my comment. I would like nothing more than to see all of Boeing's commercial airplanes built in Washington. I wish the company and its employees engaged in collaborative bargaining processes that honored the workers' invaluable contributions while also honoring the fiscal and competitive realities facing the company. I wish that the federal government would stick to the things it needs to do and do them Steve Jobs well. But if wishes were horses, we'd be awash in compost.

When the federal government puts its thumb on the scale for one side in a commercial dispute, there are consequences. Newton's third law of motion works in the business as well as the physical world - for every action, there is an equal and opposite reaction. The federal government/machinist family pushes and the Boeing executive/board family will react in opposing and ameliorating ways. It's what science predicts for objects in motion and it's the way humans react when they feel threatened and have choices.


Posted Sat, Oct 29, 10:13 a.m. Inappropriate

I think I interpreted your comments exactly right. Namely, you feel the unions are unreasonable and should defer to Boeing management in every case. What this means is accepting lower pay and fewer benefits so this money saved can be given to investors whose only concern is ever greater dividend checks. This is not a sustainable way of doing business as the banking meltdown clearly has proven, at least to people who are open to thinking.

The reason people like crankyoldlady are anti-union is that they've been exposed to anti-union propaganda for 30 years. And it's clearly working. That's why they call it propaganda.

It's funny that the Glenn Becks and Rush Limbaughs of the world aren't anti-union when it comes to rich people. For instance, right now the NBA players union is having a dispute with its megarich owners. Yet, nary of a word about that.

NBA, player representatives meet on lockout
http://articles.latimes.com/2011/aug/31/sports/la-sp-nba-labor-20110901

Look at the salaries. $25 million a year! Funny who you never hear a single negative word about the unions that represent the basketball players only about the unions that represent middle class workers.

Posted Mon, Oct 31, 11:20 p.m. Inappropriate

How much does it cost to relocate the entire 737 final assembly operation plus build a new facility?

Before they jack up the bill on the MAX, they need to come to grips with the real breakeven point on the 787. For production systems, every time they tried to reinvent the wheel, it ended up costing unplanned billions and eating up more years of program profitability.

I understand if they build an all new design wherever, but I thought the whole point of going with the 737 MAX was minimum change for the highest percentage of return on investment.

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