A couple years ago Boeing decided to sell the Wichita/Tulsa division of its Commercial Airplanes Group to Toronto-based Onex for $900 million, which renamed it to Spirit. The division was just too unprofitable for Boeing, so spinning it off seemed to make sense… even if it meant that thousands of knowledge workers were shed from the company. One of those peculiar things that happens since knowledge and experience isn’t captured on a traditional accounting balance sheet. Onex saw an opportunity, and got to work.
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. Finally, it asked the unions for a 10% wage cut to better reflect the prevailing wages in the area. For the wage and job cuts, Onex offered union members a 10% equity stake in an eventual IPO.
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.
About a three year payback on Onex’s initial investment… not too shabby. Makes you wonder what could have happened if Boeing had decided to sink a few bucks into building the business instead of selling it.
Of course EADS/Airbus couldn’t sit idly by and watch such brilliance in action, so they are trying to one-up Boeing by selling four factories as part of its Power8 program.
EADS and Airbus have selected Latécoère in France, GKN in the UK, and MT Aerospace in Germany as preferred bidders for the sites of Méaulte and Saint Nazaire Ville in France, the Filton wing component and sub-assembly manufacturing facility in the UK, and Nordenham, Varel and Augsburg in Germany.
The Airbus plants targeted for divestment employ a total of 7,400 employees, and represents € 1.4 billion of Airbus’ cost base in 2007. EADS Defence & Security’s plant in Augsburg employs 2,000 employees and represents around € 450 million of its cost base in 2007. About 70 percent of the Augsburg plant’s revenues come from Airbus.
Of course in their minds those are 7,400 knuckle-dragging manufacturing grunts, or about 15,000 hands used to assemble stuff. Anything above the hands apparently doesn’t matter, or at least it doesn’t show up on the balance sheet. But here’s the kicker:
The Power 8 programme is a comprehensive improvement programme designed to reinforce Airbus’ competitiveness in the face of the weakening dollar. It will enable Airbus to become more efficient and productive through a complete turn-around of the company. This involves becoming more integrated, with simpler processes, implementing lean manufacturing, shortening development times and reducing the number of suppliers.
Is spinning off four plants really reducing the number of suppliers? Or just converting tier 1 to tier 2 suppliers? Boeing just learned a painful lesson about the problems of longer supply and design chains, and the issues created by reduced direct oversight. Outsourcing makes processes simpler? The processes are the same… just that someone else is doing them (plus adding a process step to transact it between companies). Implementing lean manufacturing? Obviously they don’t understand the fundamental lean principle revolving around the inherent value of people.
But maybe there is a silver lining. Just as with Onex/Spirit, perhaps these new nascent companies will be able to create excellence in their own right. And perhaps someday we’ll get to wonder what could have been if Airbus had simply invested some time and resources into improving those operations instead of throwing the knowledge away.