Boeing dilemma: restoring faith using tarnished ties.

In a speech in April 2001, Boeing Co. Chief Executive Harry C. Stonecipher, then the company's president, touted the "partnership" he helped create with the U.S. Air Force.

He singled out for praise Darleen Druyun, then the Air Force's second-ranking acquisition official, who had described herself as the "godmother" of Boeing's C-17 cargo plane.

"We all campaigned together, the service, the company and our suppliers, for the needed support in Congress," Stonecipher said at the Air Force-sponsored conference in San Antonio.

Now in his first month as chief executive, Stonecipher is attempting to recover after Boeing's top two executives left amid allegations the company recruited Druyun for a job as she negotiated a $27.6 billion aerial tanker contract.

Stonecipher's paradox: trying to restore the military's confidence in Boeing's ethics by using the very Air Force ties he cultivated as the company's second-in-command when misdeeds occurred.

"Someone's got to come in and say, 'This is not going to happen again,'" said Brian James, an analyst with Loomis Sayles & Co. He sold the 484,000 Boeing shares his company held among its $60 billion in assets.

The Pentagon has put the order for aerial tankers on hold as it investigates whether Chicago-based Boeing's ties with Druyun got the company a favorable price. A Senate panel will hold hearings after Congress resumes Jan. 20. At risk for Boeing is $23 billion more in defense contracts scheduled for awarding next year, including a $20 billion U.K. government tanker order and $3 billion in Air Force rocket launches.

Justice inquiry

Stonecipher has wasted no time renewing old ties. He has met with U.S. Deputy Defense Secretary Paul Wolfowitz, Air Force Chief of Staff John Jumper and Air Force Secretary James Roche.

"I'm going to visit with everyone so they understand we are going to address every problem they have, so I'm busy going around talking to all the people who have a position in this issue of our credibility," he said.

Stonecipher, 67, must also contend with a separate Justice Department investigation into Boeing's possession of thousands of pages of proprietary Lockheed Martin Corp. documents that may have helped win rocket-launch bidding while he was Boeing president in 1998.

The Air Force stripped the company of $1 billion in business after an inquiry in July, and the military will incur $223 million in extra costs as a result because it shifted launches to Lockheed Martin. The Air Force won't try to recover the money, a spokeswoman said.

Two separate reviews of the company's ethics programs concludes that Boeing should change its oversight of worker behavior. Another misstep could push more business to rivals Lockheed Martin, Northrop Grumman Corp. and Raytheon Co.

Boeing is counting on Stonecipher, who came out of an 18-month retirement, to use experience he gained running McDonnell Douglas before it was bought by Boeing, and his knowledge from a job leading defense contractor Sundstrand Corp.

But Stonecipher's contribution to a "win at all costs" company culture may come under scrutiny, said Keith Ashdown, vice president of Taxpayers for Common Sense, a Washington-based group that tracks government spending. "He isn't a Boy Scout in this," Ashdown said. "There are ethical issues from his tenure that are still very relevant."

'Pound of flesh'

Stonecipher's experience will ultimately make up for the political shortcomings created by his ties with Boeing during the ethical lapses, said Rich Turgeon, director of research at KeyCorp's Victory Capital Management.

"There's always going to be a bit of grousing, I think that's natural," said Turgeon, whose company held 5.2 million Boeing shares as of Sept. 30. "The best thing for Boeing is that they have a strong leader, somebody that's very capable and knows the ins and outs of Washington and the Pentagon."

James expects Boeing to assuage Congressional critics by slicing at least $1 billion off the price of the tankers. Meantime, the political concern creates an opportunity for investors, said Richard Pzena, president of Pzena Investment Management LLC, which added almost 900,000 Boeing shares in the third quarter to take its stake to 4.3 million shares.

"The only time you get to buy is at a time like this," Pzena said. "It's a great franchise at a low price."

The company is relying on defense contracts to make up for a 50 percent decline in jetliner production since 2001 as terrorist attacks reduced air travel and rival Airbus SAS grabbed market share.

Boeing began offering for sale the 7E7 jetliner, a plane with about 250 seats that's designed to be about 20 percent more fuel-efficient than the 767s it's replacing. The plane, designed partly to take sales from Airbus, won't start flying until 2008.

As company president, Stonecipher motivated managers by telling them they needed to win $1 billion of business a week to maintain annual sales, which fell 7 percent to $54 billion last year. Boeing's loss in the first nine months of this year widened to $414 million from the year-earlier $98 million.

As of Dec. 1, he hadn't negotiated a salary with Boeing and the board would decide his compensation later. Stonecipher has 1.7 million Boeing shares, options and restricted stock valued at about $70 million, according to the most recent proxy statement.

'Respected'

Stonecipher arrived at McDonnell Douglas from Sundstrand in 1994--in the midst of another crisis with the Pentagon. The C-17, one of the company's three largest military-aircraft programs, was on the verge of cancellation because of delays and cost overruns.

Stonecipher insisted on monthly quality, cost and performance goals, then touted the improvements during regular meetings with officials in Washington, said Don Kozlowski, a retired McDonnell Douglas executive who was the C-17's senior vice president. The Air Force has since agreed to buy 140 more for $24 billion.

The turnaround made Stonecipher friends in the military. "He's respected as a good, trustworthy manager," said Jacques Gansler, the Defense Department's acquisitions chief from 1997 to 2000.

Stonecipher's military ties also present hazards.

He said in his 2001 speech that the company worked with the Air Force to reduce bureaucracy on the C-17. When lower-ranking managers couldn't resolve annual contract disagreements, program managers "would settle the outstanding differences themselves, without the help of their staffs," he said.

Sen. John S. McCain, R-Ariz., and other critics say that tight relationship helped the company secure a sweetheart deal.