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Tuesday, December 02, 2003 - Page updated at 11:53 A.M.

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Boeing shake-up aims to stop ethics damage

By David Bowermaster
Seattle Times aerospace reporter

TOM REESE / THE SEATTLE TIMES
Phil Condit, who joined Boeing in 1965 and rose through the ranks of engineers to become chairman and CEO, resigned yesterday after growing concerns about company ethics.
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Hoping to shield Boeing from a fast-moving ethical storm that is battering the company's $25 billion defense business, Phil Condit resigned yesterday after seven years as chairman and chief executive officer.

Harry Stonecipher, a Boeing board member and leader of McDonnell Douglas until its 1997 merger with Boeing, took over as president and CEO effective immediately.

Many Puget Sound Boeing workers cringed at the return of Stonecipher. They blame him for the move of the corporate headquarters to Chicago and for the strike by engineers and technical workers in 2001.

But Stonecipher's ascendance and Condit's bold gesture drew praise from investors, government officials and military analysts, who said Boeing badly needed to reassure its largest customer, the U.S. government, that it would halt a spate of improprieties in its Integrated Defense Systems division.

Boeing fired Chief Financial Officer Mike Sears and Vice President Darleen Druyun just a week ago after an internal inquiry found Sears improperly contacted Druyun about working at Boeing in 2002 when she was a Pentagon official overseeing a Boeing proposal for the Air Force to lease 100 767 refueling tankers.

Yesterday's announcement "is a very important symbolic move," said Anita Antenucci, managing director of the aerospace group of Houlihan Lokey Howard & Zukin, an investment bank.

Harry Stonecipher, formerly of McDonnell Douglas, now Boeing president and chief executive.
"There had become real concern ... in Washington that one of our leading prime contractors and one of our leading commercial players had embarrassed itself worldwide, more than once."

Condit has not been accused of any ethical breaches, but the problems of the past 18 months have occurred under his watch. Condit's move did nothing to diminish the severity of the political and business challenges.

The Justice Department, the Senate Armed Services Committee and two investigative branches of the Defense Department are reviewing allegations that Boeing acted improperly, and possibly criminally, to secure at least two multibillion-dollar military aerospace contracts in recent years.

Lockheed Martin has filed a lawsuit against Boeing stemming from the alleged theft of 36,000 pages of proprietary Lockheed data.

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PROFILES:
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REACTION:
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What people are saying

On the commercial side, Boeing's board of directors plans to vote Dec. 15 whether to go forward with the 7E7, a new 200- to 250-seat plane that would require billions of dollars and at least five years of work to get to market.

Development of the 7E7 is considered by many in the industry to be vital to preventing Airbus, Boeing's European rival, from grabbing more of the market that Boeing dominated less than a decade ago.

Airbus expects to deliver more airplanes than Boeing this year for the first time.

Indeed, Boeing's vulnerability in the commercial-airplane business was underscored early yesterday when Qantas, Australia's largest airline and a longtime Boeing customer, announced plans to buy 23 Airbus jets worth $1.15 billion for a new low-fare airline it's developing.

Condit said yesterday he first offered his resignation to Boeing's board of directors a week and a half ago, before Sears' departure.

"There were a relatively small number of things that were taking the focus off the parts of the business that were running extremely well," Condit said in an interview yesterday, referring to the ethics questions.

"I wanted to make sure we returned the focus to what was successful and where we were going" as a company, he said.

Lewis Platt, another Boeing director who became the company's non-executive chairman yesterday to assist Stonecipher, said the board initially declined because of its high regard for Condit. "Over the course of many, many board discussions we decided it was probably one way to get some of the confusion behind us and get on with a fresh start for the company."

Stonecipher acknowledged he'd probably get a chilly reception from longtime Boeing workers in the Puget Sound area, who remain bitter about stiff financial controls and other changes he instituted in the late 1990s to remedy production problems.

But Stonecipher extended an olive branch to the Renton-based Commercial Airplanes unit yesterday and expressed nothing but praise for the local work force.

"We don't have anything in the company running any better than" Boeing Commercial Airplanes, Stonecipher said yesterday. "The work that's been done in this downturn is absolutely heartwarming and inspiring."

Industry analysts and government officials had kind words for Stonecipher.

"Boeing is enormously lucky that they have a guy of Harry's impeccable abilities who's able to come back and pick up the reins in the midst of sort of a crisis," said John Douglass, president of the Aerospace Industries Association, the industry's lead lobbying group.

"Boeing's reputation is in the toilet, but the departure of Sears and Condit lifts that cloud," said Loren Thompson, chief operations officer of the Lexington Institute, a think tank in Arlington, Va.

"Harry Stonecipher is a known commodity," he said. "He's a bottom-line guy who knows the company inside and out. I think this is much better news than most people believe it to be."

Sen. Patty Murray, D-Wash., said Stonecipher brings integrity to the job. She wouldn't put a grade on how difficult the ethical challenges facing the company are:

"I do think that putting Stonecipher at the top is a good message. He sends a strong message for integrity on the military side, and I think that will help them incredibly with Congress, the Pentagon and with Wall Street."

Many of the company's ethical problems stem from the businesses it acquired when it merged with McDonnell Douglas.

Local Boeing workers were far from enthused about trading Condit for Stonecipher.

"I think ultimately it's not for the best," said James Bell, senior manager of engine strategy at Boeing's Everett plant. "This is the demise of the old Boeing. I view it as the final acquisition of Boeing by McDonnell Douglas."

Whatever respite Boeing gains with its critics by appointing Stonecipher is likely to be short-lived.

Congress is not in session this week, but Republican Sen. Peter Fitzgerald, of Boeing's new home state of Illinois, said the musical chairs in Boeing's executive suite is a cause for increased, rather than reduced, attention.

"Congress must redouble its efforts to prevent defense contractors from conspiring with friendly — and possibly compromised — Pentagon employees to push through sweetheart contracts that are unfair to taxpayers," he said in a statement.

One aerospace-industry source, who spoke on the condition of anonymity, said the Air Force 767 tanker deal is likely to be in limbo for some time.

"You can't say, 'you've been such a bad boy, I'm ashamed of you — and here's a $16 billion contract,' " the source said. "But nobody really believes we're going to go and buy from Airbus. So what's the next thing you do? You delay it."

Michael O'Hanlon, a defense expert at the Brookings Institution, a nonprofit think tank in Washington, D.C., said the Senate Armed Services and Commerce committees have long-standing ethical concerns about Boeing's government-contracting practices that predate the tanker compromise and will not disappear with Condit's exit.

"I don't think Boeing can expect this will automatically lead to a decision not to have further scrutiny. I think Boeing's problems are more serious than that," O'Hanlon said. "Boeing could lose the tanker deal, and that could be only the first of its problems if it's seen as a company that doesn't play by the rules."

Seattle Times reporters Katherine Pfleger, Alex Fryer, Tricia Duryee, Kristina Shevory and Sarah Ann Wright contributed to this report. David Bowermaster: 206-464-2724 or dbowermaster@seattletimes.com


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