Until re-engine plans are firmed, 737’s future in Renton is an open question

Jim Albaugh, CEO of Boeing Commercial Airplanes, made a comment last week on the sidelines at the American Airlines order announcement in Dallas that initially escaped my note, in response to a question about the industrial footprint for re-engining the 737 and Renton’s role in building the updated narrowbody:

Albaugh: We need to look hard at what we can do within the four walls [of the Renton factory] and if the demand is there we’ll have to look at: do you need to build a new factory and where might you put it? But we’re getting way ahead of ourselves we just made the announcement to do it, we made the decision to do it a few weeks ago, but in the event that we need more capacity we’ll look and made the best decision for Boeing.

That question was revisited in today’s second quarter earnings call by CEO Jim McNerney:

Ken Herbert, Wedbush Securities: You’ve talked about narrow body rates now a few times getting to a 50-60 range, as you think about the cost profile of this program, how should we think about understanding considering some of the limitations up in Renton. How narrow body production may evolve to potentially support, to maintain some of your margin while at the same time looking at some of the rates you’ve thrown out there the next five to ten years:

Boeing CEO Jim McNerney: We haven’t made the final decision on where we’re going to produce the re-engined airplane, your question implies though that after the 42 per month, we do run into some challenges if Renton were the choice, some capital expenditures there to increase it. But we have other options and we’re going to study them all as we think it through. But, demand could easily be that high in the timeframe we’re talking about and the good news is we have options.

KH: To what extent could South Carolina step in and meet some of that demand for you?

JM: It would depend as we studied it for how competitive they could be as compared to a Renton or compared to another site, if we would study it all and come up with a decision that would make the most sense for our customers and the company.

Continuing later on…

And depending on how it goes [in South Carolina], we’ll have to see how competitive the factory is. We’re going to invest to make it as competitive as we can. But I think it’s fair to say, just getting the 87 done over then next few years is a big challenge and we are going to succeed. But over the next few years, I don’t want to dilute the effort down there with other new airplanes right away, so it could be an option down the road on re-engine, it’s not at the top of the list right now.”

Dominic Gates, Seattle Times: I’m a little surprised to hear you opening up this option, you hope to produce 50 to 60 narrowbodies but the end of the decade per month, so you’re now talking about not doing the re-engine in Renton, that seems like such a surprising thing to bring up. You’ve got your most efficient line of all your aircraft programs, you’ve actually got a third line – which does have the complication of being an ITAR line – but it seems like in Renton you do have all the options you could possibly want to make that airplane there. Are you seriously considering doing a re-engining somewhere else? Charleston doesn’t even do metal airplanes, or is this a matter of just trying to keep your options open. And what’s the effect on morale of the Renton workforce when you raise this, what’d I have to call a spectre, of putting work elsewhere?

JM: Well listen, Renton is one of the great aerospace factories in the world, obviously, the idea of putting a lot of work, a lot of narrowbodies there is very attractive, I think the spirit which I was answering the question was: Until we have sorted out the milestones associated with the ramp up, the degree to which we have to modify the airplane, there would be major investments in Renton, beyond the currently planned for production rates. Until we sort that all out we can’t confirm where we’re going to put it precisely. But would putting it in renton be a good option? Yes.

DG: All your supply chain converges on Renton. To put it somewhere else means having Wichita send it elsewhere. It seems like more investment to do it elsewhere.

JM: I think until we study it all…Renton has a strong case, but again, Dominic, there is significant investment that we’d have to make some place beyond the current rates that we’re contemplating and until we understand exactly what the plane will be and what rate we have to build it, I think we have to study that and figure it out.

The investment, put simply, appears to a back of the napkin equation: Is the cost of setting up a greenfield site higher or lower than the cost of tooling and equipment it would take to expand line three in Renton? 

Paradoxically, as it heads into the 2012 labor negotiations with the International Association of Machinists, Boeing’s own stated desire for labor stability is perhaps lost when it introduces uncertainty within its own workforce. Boeing was quick to try and walk back McNerney’s comments about the future of Renton, saying “We’re committed to [Renton]. Jim (McNerney) might have omitted some things.”