The Boeing Company
"Address to Shareholders"
May 03, 2004
Ladies and gentlemen, I have been a board member for the past five years, but my association with Boeing goes back much further.
At Hewlett-Packard, where I worked for many years, including seven as Chairman and CEO, we assigned a senior executive to act as a personal representative, or envoy, to each of our most important customers.
We would make several trips a year to our assigned companies and get to know the key people on a personal basis. For more than a decade, I served in that capacity to Boeing. I came to know the company very well, and to admire the company and its people enormously.
Today I speak to you as Boeing's Chairman. We have an extraordinarily gifted and - if I may say - formidable CEO. As some of you know, Harry Stonecipher likes to quote another Harry - Harry Truman, who said, "I never give them hell, . . . I just tell them the truth and they think it's hell."
At Harry's suggestion, I will tee things up this morning by reviewing the state of the company.
I'm going to keep this short. Later on, Harry, and I, will be happy to answer questions from the floor.
As all of you know, 2003 was a year unlike any other for Boeing. Harry and I were called into our current positions to deal with what I would describe as a crisis of confidence, involving serious ethical lapses and damage to the company's reputation. One of our first tasks was to address the situation with words and actions that would be readily understood by customers, employees and investors alike.
This is how we began our 2003 letter to shareholders - written just as the year came to a close:
"For decades, Boeing has symbolized discipline and daring in extending the frontiers of aerospace. We have been among the most admired and trusted companies in the world. In 2003, that proud and hard-earned reputation was put at risk.
"As the senior leaders of this company, we are acutely aware of a huge disconnect - between the great work and dedication of many, and the misdeeds of a few."
As we pointed out, many things went right in 2003 - programs won, remarkable gains in productivity, pre-launch of an exciting new commercial airplane, and a Malcolm Baldrige National Quality Award - the highest quality award in U.S. industry.
Unfortunately, a few things went wrong - very wrong. A few people, who engaged in unethical behavior, caused great damage to Boeing's reputation and the morale of our people.
We promised to fix the things that went wrong, so they would not and do not happen again. We also promised to take this company to a new level of performance. We noted that there had been too many unpleasant surprises affecting our 2003 financial performance, as a result of write-downs and an inability to consistently meet or exceed customer expectations in a few areas of our business.
Since December, as a result of outstanding work by people all across Boeing, we have made real and substantial progress on both of these fronts.
First, in fixing the things that went wrong, Harry - with help from me and others - has conveyed a message of intolerance for anything less than the highest ethical standards. He has conveyed that message to every employee and to every supplier in the Boeing system.
Every employee has been asked to certify that they adhere to the Boeing Code of Conduct. There was some initial pushback from a few people who felt that they didn't need to sign a piece of paper to stick to the high ground. However, as we told them, that misses the point. This has been a way for employees to demonstrate their commitment to high ethics, to each other, and to our customers.
And, indeed, customers have noticed and are impressed that the people of Boeing are willing to state their support for high ethics in such a unified way.
The best way to defend against rogue behavior is to create an environment in which there is zero tolerance for anyone who even begins to bend or break the rules.
Second, Harry has carried a similar message to people regarding business standards. There can be no excuse for failing to meet the promises we make to each other - or to our customers - in meeting cost and schedule or any other targets.
As Harry likes to say, "Always do what you say you are going to do." I know of no business leader who is any better at focusing a large and complex organization on execution and attention to detail.
Last week we reported our results for the first quarter of 2004. They were excellent, across almost all of Boeing.
As the biggest and most diversified aerospace company in the world, we are going to do well if we are firing on all cylinders. That is what we are beginning to see.
Let's begin with Boeing Commercial Airplanes. Under the incredibly adverse conditions that have prevailed since 9/11, BCA has remained solidly profitable.
Imagine a large car company - or any other big manufacturer - re-sizing and re-directing the organization and continuing to make money on less than half of a previously assumed level of volume.
Despite lower revenues, our Commercial Airplanes business achieved an operating margin of six-point-six percent in the first quarter of 2004. That, on its own, is a remarkable achievement.
But more than just holding on in this business, we have continued to focus on the future . . . and to invest in the future.
In December, the Board gave its approval to offer the 7E7 Dreamliner in the market. And just over a week ago, the Board authorized the launch of the program based on a solid business plan, a great market outlook, and a great launch order. All Nippon Airways, or ANA, ordered 50 7E7s, which is the largest launch order we've ever had for a new Boeing commercial jet.
We believe the 7E7 will push the envelope of commercial air travel like no other airplane since the Boeing 707 during the dawn of the jet age.
The 7E7 will fly higher, faster, farther, cleaner, quieter and more efficiently than any airplane in its class.
The "E" in the 7E7 is for "Efficiency." The Boeing 7E7 will be the first large airliner with a composite fuselage and wing, and it has been designed for the express purpose of providing economical and comfortable nonstop service between scores of new city pairs around the world. It will be a true game-changer for the industry and the traveling public, because it brings big-jet ranges to mid-size airplanes.
Much has been said and written about the competition between Boeing and Airbus. They have their vision of the future; and we have ours. They have opted for a new super-jumbo that will carry some five to six hundred people between major hubs. Our new airplane will provide a quantum leap forward in point-to-point service between distant city-pairs.
Given a choice...at an affordable cost...we believe most people will choose to fly directly to their destinations rather than make lengthy stopovers at major hubs.
The marketplace will decide who has more accurately anticipated future demand within market segments. Over the long term, however, we believe (as I'm sure they do, too) that this is a great growth market.
For seven decades, the growth in air traffic has outpaced the world's economic growth by a factor of about 1.5 to one. Simply put, travel is part of the DNA of human progress.
Eight years ago, Boeing was not a major defense company. Phil Condit set out to change that when he became Chairman and CEO. Due to Phil's far-seeing vision and strategy of creating a diversified aerospace company, Boeing is now the second-largest defense contractor in the world.
In 2003, Boeing Integrated Defense Systems accounted for more than half of Boeing's total revenues, and, in dollar volume, it booked twice as many orders as it shipped. In fact, new defense orders in 2003 exceeded Boeing's total revenues.
I am happy to report that Boeing Integrated Defense Systems, or IDS, is continuing to perform at a very high level.
During the first quarter, IDS, delivered double-digit growth in all four of its business segments, and it had an overall operating margin of 10 percent, reflecting outstanding execution across a wide range of programs.
IDS is more than a collection of defense businesses that act as a counterweight to the cyclical commercial airplane business. It is a dynamic business with an overriding mission and strategy of its own - to establish Boeing as the leading industry partner to the U.S. government and others in developing a "network-centric" view of the world and applying that to defend against a wide array of conventional and non-conventional threats.
We have grown this business not just through acquisition, but through a willingness to change - and to lead.
The Secretary of Defense has called for a "Transformation" in the whole way our warfighters "think, train, exercise and fight." What that means, more than anything else, is dramatically increased sharing of information and capabilities, making it possible to get the resources that are needed to the place they're needed . . . on time and every time.
Today, Boeing excels in this area - as a lead integrator of complex systems - and it is work that bears little resemblance to any historic defense business.
Every big company looks to its core businesses for strength, balance and staying power. We have all those things with Boeing Commercial Airplanes and Boeing Integrated Defense Systems.
Time does not permit me to discuss some of our other businesses, other than to say that we are working in a variety of ways to transform the experience of flight and to extend the frontiers of aerospace.
In conclusion, I can - and will - say to you . . . with the utmost confidence:
- We have the right strategy.
- We have great people.
- We are in excellent financial condition.
- And we have strong, well-positioned businesses.
Now - under Harry's leadership - we are intensely focused on execution and raising performance to new levels.
That applies to standards of conduct. It applies to business standards. It applies to maximizing our return on investment. It applies to everything in this great company.
Thank you very much.