13 September 2011

How a Tax Issue Launched the Boeing 707

Boeing chairman Bill Allen
In a past blog post I had mentioned that while most of aviation history is a study in technological progress, it as much shaped by the individuals and their personality traits as it is any development in aeronautics. That past posting back in March 2010 dealt with C. Edward Acker's personality and how it shaped Air Florida and impacted the newly-deregulated market in the United States in the 1980s. While someone like Acker brimmed with swagger and bravado, there as many individuals in the history of aviation who, by nature of their quiet reserve, are often overlooked as movers and shakers. I recently have been reading Sam Howe Verhovek's book Jet Age: The Comet, the 707, and the Race to Shrink the World and he places Boeing's chairman at the time of the launch of the 707, Bill Allen, as one of the true visionaries and business leaders in the industry. I have to admit my own understanding of Bill Allen up to this point was that while he shaped Boeing tremendously into what it is today in the commercial airliner market, he hardly filled the role of visionary, looking very much like many of the management types that you could have pulled from central casting for a 1950s-era movie. But what was it about Bill Allen that makes him a central figure in Verhovek's book? When he assumed the leadership role in Boeing in 1950, Boeing held less than 1% of the commercial airliner business that was dominated by Douglas and Lockheed. Though stunningly successful in the Second World War with its bomber designs, Bill Allen rightly saw that the growing air travel market represented a bigger prize than any military contract. But with a fraction of the commercial market, Boeing was already seen as a three-time loser in the race- the Boeing 247 was too small compared to the Douglas DC-3, the Boeing 314s were only built in small numbers primarily for Pan Am, and the landmark Boeing 307 Stratoliner was a flop that hardly made a dent in the marketplace. 

Bill Allen wasn't a pilot and he wasn't even an engineer. He would have readily admitted to not knowing much about either when it came to aviation. But he had his start as the company lawyer who handled the legal paperwork for Bill Boeing's timber business and then his aircraft company. Before long, Allen was one of those quiet in-the-background individuals that everyone saw Boeing himself often sought out for advice. When Boeing quit the company in 1934, Philip Johnson took his place and led the company through a dramatic expansion during the Second World War- and again, Johnson came to rely on Allen for advice and counsel on company decisions. When Johnson died of a stroke in his fifties, there was only one person the rank and file at Boeing would trust- and that was Bill Allen. But he found himself a single parent to two young girls after losing his wife to cancer when the offer from the board came to him. 

Maybe it was loyalty and maybe it was that he was part of Boeing since its early days as a timber company, but he took the job- but at the time, the airline industry was content with its Douglas and Lockheed piston propliners and Allen had a tough time selling the airlines on the idea of a jet. For many airlines, the jet was an unknown. Well, it was- until the De Havilland Comet took flight and electrified the world with its speed and grace. By 1952 the British aeronautical industry was the talk of the world with Eastern's Eddie Rickenbacker and Pan Am's Juan Trippe openly discussing orders of the Comet. It was an about face by the world's airlines and the US airline industry in particular that just a year earlier thought jet technology too immature for the traveling public.

Bill Allen on the right shows the Dash 80 to Bill Boeing.

Many companies wanted government subsidy to develop a jet airliner- Boeing's own engineers had been applying their experience in developing the B-47 Stratojet and the B-52 Stratofortress towards the company's own project which was designated Model 367-80 (the Model 367 was the C-97 Stratofreighter- the Dash 80 was designated such for secrecy, leading competitors to think it was just an improved version of the C-97). The costs of developing the Dash 80 amounted to a quarter of the company's value and to go it alone without government development aid represented a tremendous financial risk. There was many pros as there were cons in Allen's mind when it came to launching a jetliner.

But, Allen's own legal background was in tax law. During the Korean War, the Congress put what was called an "excess profits" tax in place to prevent companies from profiteering from the war effort. A company's baseline was set at its profilts made during the peacetime period of 1946 to 1949. Anything above that level in profits was subject to the tax. That period was a hard time on Boeing with the cancellation of numerous wartime contracts and profits during those years were slim at best. But with the ramp up in defense spending during the Korean War, Boeing's fortunes improved dramatically and that meant that the company was fully exposed to the excess profits tax while Douglas and Lockheed's profits during that time were higher thanks to their own commercial airliner production. That meant that Boeing would owe 82 cents on every dollar of profit while Douglas only would owe 68 cents and Lockheed only 48 cents on each dollar of profit.

Having a flying prototype gave Boeing an advantage.
Under most circumstances, Bill Allen might have gone to the state of Washington Congressional delegation for a political fix. But being the tax lawyer, he saw an opportunity- Take Boeing's profits and invest them heavily into the Boeing 707 project- that amount would be deducted from the profits and written off as a business expense. Boeing wouldn't need government aid to develop a new jetliner and it reduced the company's tax exposure. Allen pitched the idea to the Boeing board as an investment in the company's future that would put it at the forefront of jetliner development. In addition, company funding of a demonstrator aircraft would not only give the airlines something to see and ride as a flying design, it would also put Boeing in the lead for the USAF's plans for a new jet tanker to support its growing B-52 Stratofortress fleet. In a stroke of what some might call genius, Bill Allen could kill three birds with one stone- reduce Boeing's tax exposure, get a flying jetliner demonstrator, and use that demonstrator to get the jet tanker contract. That was the engineering genius of the Dash 80- it appealed to both airlines and the USAF for disparate roles. Boeing's competition for the jet tanker hadn't optimized their designs as transports as fully as Boeing had with the Dash 80.

It only took a month to get the go-ahead from the board of directors. In the summer of 1952, Bill Allen issued short statement to the press:

"The Boeing Company has for some time been engaged in a company-financed project which will enable it to demonstrate a prototype jet airplane of a new design to the armed services and the commercial airlines in the summer of 1954."

The rest, as they say, is history!

Source: Jet Age: The Comet, the 707, and the Race to Shrink the World by Sam Howe Verhovek. Penguin Group, 2010, p84-110. Photos: Smithsonian, Boeing.

1 comment:

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