Boeing Chairman, President and CEO Jim McNerney oversees a company with more than 170,000 employees and $68.7 billion in annual revenues. He sat down with AW&ST Editor-in-Chief Anthony L. Velocci, Jr., and Senior Business Editor Joseph C. Anselmo to discuss major issues in the aerospace and defense industry heading into this year's Farnborough air show.

W. James McNerney, Jr.

Age: 62

Career: Began in 1975 at Procter & Gamble. Held top positions at General Electric, including president and CEO of GE Aircraft Engines. Was chairman and CEO of 3M before taking current post at Boeing in 2005.

Education: B.A. from Yale University and M.B.A. from Harvard University

Did you know: McNerney, a pitcher, played on the Yale baseball team with future U.S. President George W. Bush?

AW&ST: With a large number of orders on the books for the 787, how confident are you that Boeing will be able to manage the production ramp-up to meet your customers' delivery expectations?

McNerney: I am highly confident that the supply chain can support our orderbook. That's not to say there might be a glitch somewhere along the line, but the production is beginning to flow, and we're beginning to take normal production airplanes off the line. We're on time with our new assembly operation down in South Carolina.

Aviation Week hosted a civil aircraft manufacturing conference in May, and the biggest squawk we heard from suppliers was about handling the many engineering changes.

We're done changing. Suppliers will remain somewhat skeptical, and I'm sure they have mitigation plans in place. Having lived through three or four years of demand variability, I don't blame them. What I would say to them is that over the next 20-25 years the 787 will be one of the biggest businesses—if not the biggest new business—in aerospace. There's potential for 2,000-3,000 airplanes, if not more. And when you push the numbers around, that's a $400 billion business. There has been a lot of pain and suffering in the birthing of this airplane. Boeing and our partners paid a price. But the question becomes 'Is it worth the candle?' It is.

A year ago you were still deciding whether to reengine the 737 or develop an all-new successor. It seems like Airbus, with the sales success of the A320NEO, really backed Boeing into a corner and forced you to reengine and launch the 737 MAX.

We were looking aggressively at an all-new airplane, but the whole time had a parallel effort going on with the MAX. The question was whether our customers would wait for more capability. We also had some technical questions. We knew what the airplane looked like. We were convinced we had the technology to do it. But we didn't have the production system clearly defined, and I saw some risk in that. In our minds we were shooting for 2019, and it became clear that was going to be pushed out a little beyond 2020. And listen, the NEO's success in the marketplace did point out unmistakably that customers would embrace a lower amount of capability quickly. So that was a factor. We added all that up and decided to move with the MAX.

The NEO currently has three times as many orders as the MAX.

There's not any number that I'm looking at that says there is going to be a permanent shift in market share. Also, there are some customer discussions you may not be aware of. I'm pretty confident the [narrowbody] market share will stay about the same.

Some relatively shaky airlines have ordered a lot of airplanes from Boeing and Airbus. Are you confident Boeing has overbooked enough to protect itself from cancellations?

We've overbooked because experience tells us there will be some deferrals and cancellations. We are seeing normal amounts of that today. We don't feel overly reliant on un-creditworthy airlines—we think [Airbus] may have a greater exposure there.

So you're not worried about an order bubble?

Not overly so. If it was clear a bubble happened, we would have time to adjust production rates [by canceling planned increases]. If the world changes, we will change. But remember, roughly two-thirds of demand is for replacements. And part of the shorter cycle you're talking about is highly capable airplanes replacing less capable ones. In an era of high oil prices, the payback is very quick.

The economic lives of used jets are expiring much sooner than expected due of oil prices and technological advances in new aircraft. Given that shift, might Boeing bring an all-new successor to the MAX to market sooner than conventional wisdom would suggest?

It depends on the premium the new airplane can provide, and that gets into engine technology, technical evolution and other improvements—how much performance we can get out of a composite airframe and wing. I think the absolute earliest would be the mid to late 2020s. But the real answer is that I don't know.

What about the widebody market? You've had some 777 cancellations this year.

You need to look at Boeing's market share over the last 2-3 years and the potential based on orders and production ramp-ups. There's a significant opportunity to be the market-share leader and winner for a long period of time in widebodies. You can see the beginning of that over the last couple of years.

Speaking of widebodies, can you give us a sense of timing on the 787-10X and the 777 response to the A350?

We're still sorting through the technical costs and timing of both of those, and we are watching the competition and trying to assess what they're going to come up with [on the A350-1000]. Supply chain is a bigger issue on the 777, especially if we go in the direction of a composite wing and other [enhancements]. I would characterize the 777 as a medium-risk proposition and the 787-10 as low-risk. So it gets down to cost, risk, competitive timing and customer demand. The one we don't fully understand yet is competitive timing.

You've put out a request for proposals for a next-generation 777 engine. Do Rolls-Royce or Pratt & Whitney have something interesting to offer that could unseat incumbent General Electric?

We're very happy with GE on the current 777. They have deep knowledge of the application, an engine we like and the evolution of the engine gives them a strong case. But we're going to listen to what the other guys have to say, because they've also been evolving technology. If one of them has a significantly better or more reliable engine, we'd have to think about our customers. A number of new large engines have been developed since the GE90 family.

Is there a move afoot within Boeing to move back toward a more vertically integrated model?

There's some of that. We are not abandoning the global partnership model, but we're going to do more engineering and have more visibility into their production. We're already doing more of the engineering on the 787-9 in-house. We're also insisting on common IT [information technology] visibility in the supply chain.

How much more will you be doing in-house?

Roughly speaking, we were doing 40% of engineering and now we're doing 60%, so that's a 50% increase. The other thing we wanted was more in-house experience building the composite parts. That was one of the rationales for acquiring Vought.

Boeing and Embraer recently entered into a partnership, including cooperation on Embraer's KC-390 transport. Where is all this going?

We're further ahead on the defense side, and the KC-390 agreement is one example. There are two or three program areas where discussions are pretty specific. On the commercial side, it's a wide-ranging discussion that hasn't landed on something yet, but we hope it does. These are highly complementary organizations that get along culturally. I'm confident this will [lead to] in cooperation in two or three concrete areas.

The defense industry is heading into a very difficult climate. How do you balance the need for affordability with investments in new technologies to sustain your long-term competitiveness?

This downturn will be significant, and it will be sustained. The question is how deep, and that is caught up in politics right now. The first order of business is to remain affordable. So we're focused very heavily on Chinooks, Apaches, F/A-18s, F-15s, tankers and GMD [Ground-Based Midcourse Defense]—just keep them going, and then take a lot of cost out of our organization to remain affordable. We've been on a path in the last 18 months, and extended out another year or so, to get $2-3 billion out of the cost of the [defense] business on a permanent basis. But we also are preserving and even increasing our R&D budget. There are capabilities we don't want to stop investing in, such as unmanned and C4ISR [command, control, communications, computers, intelligence, surveillance and reconnaissance]. We're willing to go through some significant organizational pain to preserve our ability to invest in R&D.

It's vital to keep design teams intact, because once they disperse they will be very difficult to reconstitute.

There are fewer new programs in advanced work, and that's where we keep a lot of the design and functional talent. I feel exactly the same way you do. We've got to hold on to that seed corn as long as we can.

How about international growth?

There are a number of recent military sales we've had around the world—the U.K., United Arab Emirates, Australia, Canada—that will help sustain this business through the downturn. Our commercial footprint around the world is a distinct advantage. It gives us a far bigger international presence than most of our competitors on the defense side. We're able to establish company-to-country relationships that really help us drive sales.

What do you think of Elon Musk and SpaceX, and what is Boeing's future in the space business?

My hat's off to those guys for integrating the [Dragon cargo carrier] and getting it up there and back. But the question around space is more the size of the market. We're focused on things that complement and will eventually compete with them. But we're also focused on a lot of things they can't do: deep space, crew handling and integration tasks. At some point, deep space will become a big deal. That's a place where Boeing has unique capabilities.

Airbus has established an A320 assembly line in China and has announced it will set one up in Mobile Ala. Can you see a day when Boeing has an assembly facility outside the U.S.?

Our globalization efforts have focused on technology cooperation in airplane components and services. As the market outside the U.S. grows, the pressure to look at more manufacturing—including, possibly, assembly outside this country—will grow. At some point it may make sense. It's just not part of our plans right now.

So that's not going to happen during your tenure at Boeing?

Probably not. That was an inside fastball you just threw at me. You slipped a succession question in there very nicely. I'm 62 years old. I'm not going anywhere anytime soon.