A Missed Opportunity?

In 2005 Boeing decided to sell the Wichita/Tulsa Division of its Commercial Airplanes group to Toronto-based Onex for about $900 million in cash, naming the new company "Spirit AeroSystems."  Although that division was going to play a major part in Boeing's future, including being responsible for the 787 Dreamliner nose section, Boeing believed that getting rid of it was a positive strategic move.

"This agreement fully supports our strategy to focus Boeing on large-scale systems integration, which is where we are most competitive and can add the most value to our airplanes and services," said Boeing Commercial Airplanes President and Chief Executive Officer Alan Mulally. "Boeing will benefit from lower procurement costs."

Yes, the same Alan Mulally that now runs Ford.  We've questioned Boeing's commitment to "real lean" in the past but chalked up some of the supply chain convolutions to political necessity.  But in this case a domestic subassembly supplier was spun off with the understanding, and even a formal supply agreement, that they would continue to supply Boeing with components for the long term.  The Wichita facility did have some problems.

Boeing, in a bid to shed weak assets and outsource more of its manufacturing work, decided to sell its uncompetitive Wichita plant. Although it was Boeing's biggest internal supplier, cranking out fuselages and nose cones, it suffered from inflexible work rules, high wages, and testy labor relations.

But Onex saw an opportunity.

Enter Mersky and fellow Onex Managing Director Nigel S. Wright. Where Boeing executives saw lemons, the two turnaround specialists saw lemonade. They reasoned that if they could cut costs, make the plant more productive, and start working for Airbus, defense contractors, and regional jetmakers, the Wichita plant could become profitable.

The "easy" work created some initial wins.

First Onex had to get costs under control. The firm saved $40 million annually by slashing corporate overhead costs inherited from Boeing. It negotiated price reductions from Spirit's suppliers and simplified the procurement process. It managed to reduce the complexity of work rules, reducing 160 job classifications to 13.

But then it became more difficult.

Finally, it asked the unions for a 10% wage cut to better reflect the prevailing wages in the area and told them it would reduce the workforce by 15%.  Onex, which sought the union's support, lost the first vote with the Machinists. Many workers came from third- and fourth-generation Boeing families and wanted to stay with the giant.  A new deal was negotiated: For the wage and job cuts, Onex offered union members a 10% equity stake in an eventual IPO. The new owners sketched out a scenario where workers could earn some $30,000 in stock and cash over five years as long as the IPO was successful.

Wage cuts and workforce reductions are never fun, and impact real people with real families.  In this case it was 800 skilled people.  As we've mentioned before, that's a lot of knowledge and creativity and potential benefit that was cut.  But that's not the point of this rant so we won't rehash that issue.  So instead let's focus on the financial results of Onex's turnaround program.

Now, 18 months later, the bargain has exceeded everyone's wildest dreams. An IPO on Nov. 21 raised $1.4 billion. Each Machinist is about to receive $61,440 in cash and stock. Given Boeing's backlog of orders, plus a surge of defense-related spending, analysts figure Spirit's stock will do well in the next few years.  The commercial plane business is booming, which is why Spirit expects to post a 2007 profit of $260 million on projected revenues of $4.1 billion, up from about $3.2 billion in 2006.

Sounds great, and Spirit appears poised for a successful and profitable future.  But let's take a step back.

• Boeing sold the division to Onex for $900 million
• 18 months later Onex and Spirit AeroSystems are now realizing annual profits exceeding $260 million
• Part of that profit is at Boeing's expense, as Boeing now has to buy the large subassemblies at a margined cost instead at straight internal cost

Not a bad return on investment for 18 months of work by Onex.  Should Boeing have kept it and put its supposed lean strength into basically the same improvements, and then taken what it learned and applied it to other Boeing operations?  What would the value be to Boeing?