Boeing Chairman, President and CEO Jim McNerney has no illusions about capturing the spotlight at this year's Paris air show. That will likely shine on rival Airbus, which is expected to announce more orders for its re-engined A320 narrowbody, dubbed the NEO (new engine option). Shortly before he left for the Paris air show, McNerney sat down in his office at Boeing's Chicago headquarters with AW&ST Editor-in-Chief Anthony L. Velocci, Jr., and Senior Business Editor Joseph C. Anselmo to outline the strategies and technologies his company is considering in response to the NEO and explain why he thinks Boeing will prosper in a leaner defense environment.

AW&ST: Boeing's stated preference is to respond to the A320NEO with an all-new narrowbody, the so-called New Small Airplane (NSA). But Airbus is predicting it will win so many NEO orders that you'll be forced to respond sooner by offering a re-engined 737.

McNerney: They will announce tons of orders at the show. My guess is that most of them will be from Airbus customers—either replacing existing A320 orders or moving up as part of a launch deal. If I thought we risked losing meaningful market share by waiting and doing a new airplane, we would not do it—we would re-engine. And that is the judgment that has to be made: Compared with a NEO [available] in 2016, will our customers wait until 2019-20 for an all-new airplane that is double-digit better [in performance]? We've done studies that show it would be one heck of an airplane. Now we are doing the homework of making sure that we know how to produce it. Quite frankly, we're going through a lot of the work we didn't do on the front end of the 787.

How much longer until you have to make a decision?

A320NEO is entering service in 2015-16. If we're going to re-engine, we need to decide by the end of the year, or we lose that window.

Some analysts have speculated that the NEO could enable Airbus to win away Boeing customers. Do you worry about that?

It would depend on why and whether it was significant. I don't want to lose 10% of the market. If Southwest ordered 1,000 NEOs today, that would have our attention.

If Boeing decided to go with the NSA as an all-new successor to the 737, would you seek to revolutionize the single-aisle fuselage, much as you did for widebodies with the 787's composite fuselage?

The difficult part in making this new airplane decision is how much of the 787's structural technology can [be leveraged]. How much weight and maintenance improvement can we get into that airplane, based on the hard-fought learning from the 787 development program? Now that we know what we're doing with this stuff—after proving for a period of time that we didn't—we have our arms around a fundamental competitive advantage. We can sort of know where the engine [performance] will be, plus or minus 10%. So the call is the airframe. In all likelihood, if we launched the new airplane, there would either be composites or some aluminum alloys that are so special they could compete with composites. Composites are what we're leaning toward.

What are your R&D folks telling you?

They're on fire about composites. We see all kinds of reformulation to make them lighter, stronger and less costly to manufacture. Composites that don't have to be put into an autoclave would take a huge amount of capital out of the manufacturing process. Different matrices, different resins—we're at the very beginning of the learning curve.

Beyond the NSA, Boeing is studying the 787-10X derivative and a refresh of the 777-300ER. How much of that could you do in parallel?

We've just come off choking on two big development programs [the 787 and 747-8]. We're very mindful of avoiding a repeat. If we did do the NSA, the way we see the sequencing is we would look at a derivative of the 787, some improvements to the 777, and then we would do the new airplane. Neither of the first two are huge development efforts—the big one would be the NSA. Then, in the next decade, we'd be faced with a 777 replacement. That is an airplane that is ideally suited to our kind of composite manufacturing. The strength-to-weight ratio is really nice with a fuselage that big.

A year ago, we asked you about the potential of Boeing partnering with Embraer. Your response was, 'I think it's something we should look into.' Have you?

Yes, we're still studying it. Boeing has a strategy of designing, producing and supporting airplanes that are viewed as part of our core market, which tends to be in the 125-[seat]-and-above range. We are open to folks who play in different spaces but want to abut that space.

Bombardier is developing a new jet, the CSeries, that falls within that 125-seat space. Are you saying Boeing could go into a partnership to challenge the CSeries?

If we entered into partnerships, it would be about preserving our strength, rather than entering someone else's market below us. It's more about protecting our core. That's the strategic mind-set, and to the extent we have dialogue with anybody, it is framed in that way.

If Boeing opts to re-engine the 737, would you offer Pratt & Whitney's Geared Turbofan (GTF) as a second engine option?

We'd have to look at all alternatives, but I think the GTF has become a very viable option for a re-engined airplane, or a new airplane down the road. They're proving the technology. We want to see more of the reliability and maintenance test results, but we're heartened by the number of applications out there. They're winning a lot of business.

CFM is the sole engine provider on the 737NG. If you re-engined the 737, would that exclusivity still apply?

That's something we have to sort out. There's some gray area in our agreement that we have to understand. Part of it is determined by the amount of change we do to the airplane. Until that is known, the question can't be answered. Obviously, if we have an obligation we would honor it.

A respected Wall Street analyst told us he senses the commercial aircraft sector is close to a cyclical peak and that many of the orders the original equipment manufacturers are taking now are unlikely to materialize. Can you relate to that?

I don't see a peak, nor do I see the orderbook as particularly weak. We're having to take up rates because we can't fill orders. We've sold more 777s so far this year than we've sold in many entire years. The narrowbody demand is so strong that we're going to raise our 737 production [to 42 a month by 2014]. The reason the strength may be more enduring is that there is a heavy demand for replacement aircraft, driven by fuel prices. It is not just demand fueled by GDP growth. As for our customers, I don't see a big change in their quality or ability to finance the airplanes.

Is the supply chain prepared for the ramp-up?

The constraint to taking up rates is the ability of the supply chain to get there. Most suppliers see the opportunity and are working with us. But fresh off of our experience with the 787, we're spending an inordinate amount of time at a very granular level with each of our suppliers to make sure they can support this ramp-up. It's about supplier readiness. The market is there.

The layout of your new 787 final assembly plant in North Charleston, S.C., will be more efficient than the 787 factory in Everett, Wash., and you don't have union restrictions to contend with. It's interesting that you'll be building seven planes a month in Everett and just three in the new, more efficient plant.

Look, we haven't built the first airplane yet in Charleston. We have a long way to go to realize the full potential. Everett is also a very efficient and high-quality plant. Those workers know how to build an airplane. So even if they cost a little bit more, they offset that with efficient time management. Time will tell which plant is more efficient and produces the highest quality. Having choices as you manage a big company like Boeing is important. No one has an entitlement to production forever. Everybody has to earn their way.

The National Labor Relations Board is alleging Boeing illegally retaliated against union workers for striking by opening a non-union production line in Charleston. Have you ever heard of the government trying to dictate where in the U.S. a company should locate its jobs?

Never. These charges have no basis in law. We haven't moved work anywhere. We've started new work in Charleston, and we're adding a few thousand jobs in the Puget Sound, in Everett and Renton. If they win—which they won't—it will result in more jobs being shipped outside the U.S. faster than any single action the [Obama] administration can take. And boy, that doesn't make any sense.

Is there a chance that all of the focus on Boeing's commercial business has shortchanged your defense unit?

Not at all. I would say 80% of the questions I answer around the world are related to commercial airplanes. But internally we focus half our time on BDS [Boeing Defense, Space & Security] and half on commercial. There is more innovation going on in defense now than at any point in a long time, and there needs to be because [we're all in] a tough budgetary environment.

What changes do you expect to see from Leon Panetta as the new U.S. defense secretary?

I think he will find a way to implement the $400 billion-plus challenge that [outgoing Secretary Robert] Gates has put on the organization, which essentially means flat budgets. One thing that is going to change is that proven capability programs are going to be cool again. We have a richer mix of those than most people: Apaches, Chinooks, F-18s, F-15s, the current generation of satellites versus the new generation. We happen to have the 90% solution at one-third of the cost in a lot of categories. That kind of capability is more valued than it was when there was lots of money around.

What about the loss of the Indian fighter competition?

We're winning far more than our share of international business. It has gone from 7% of BDS to 25%. We were disappointed by the Indian fighter decision, but we've been fortunate enough to win the vast majority of programs [Boeing competes for] in India. We still haven't had a de-brief. We thought it was a little unusual that both American aircraft were downselected and the two Europeans weren't. We just want to make sure we understand why.

W. James McNerney, Jr.

Age: 61

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

Career: Began in 1975 at Procter & Gamble and has held a variety of senior posts at General Electric and 3M.

Did You Know: McNerney was appointed by U.S. President Barack Obama to chair the President's Export Council, an advisory committee on international trade.