JET BLUES.(The Talk of the Town)(Phil Condit's resignation from Boeing )

When Phil Condit resigned as the chairman and C.E.O. of Boeing last week, the official version was that he was taking one for the team. Boeing has been embroiled in two defense-contracting scandals this year. First, news broke that in 1999 its employees had stolen thousands of documents from its chief competitor, Lockheed Martin, and used the information to win a contract to make rocket launchers. Then it emerged that Boeing had helped secure a lucrative Pentagon contract for a hundred refuelling tankers by courting an Air Force official in charge of acquisitions with the prospect of a job (which she eventually took). Boeing insisted that Condit hadn't authorized these transgressions, but Condit said he was resigning for the company's good; playing the noble samurai, he chose suicide over dishonor.

How convenient controversy can be. The contracting scandals helped obscure the real story at Boeing, which is that under Condit the company had gone into a tailspin. That may be difficult to imagine. After all, Boeing is one of only two major players--the other is Europe's Airbus--in the global market for commercial jets. It's the nation's secondbiggest defense contractor. Two years ago, it earned almost three billion dollars. What could be wrong?

Plenty. The competition between Boeing and Airbus is brutal. You might think that two companies that dominate a market would just divide it up, but Boeing and Airbus fight over every contract, turning each procurement campaign into a steel-cage match. Boeing's aggressive expansion of its defense business--which Condit orchestrated with his 1997 acquisition of McDonnell Douglas--was supposed to diversify the company and give it a stable source of revenue. But, if anything, Boeing has been too quick to look for help from the Pentagon when the rest of its business is going badly, which helps explain why the company has been so ardent in its pursuit of defense contracts. Boeing's most serious problem, though, is one faced by many big companies: its size and its past success have scared it away from real innovation.

It wasn't always like this. Boeing was built on high-stakes gambles, or what industry executives called "sporty" bets. In 1952, the legendary Boeing president Bill Allen made the bold decision to build the 707 jet, even though no one knew if there was a market for it and Boeing had little experience making commercial aircraft. The 707 turned out to be a huge hit. In the mid-sixties, Allen made an all-or-nothing bet when he decided to roll out the 747, the first wide-body passenger jet; the investment required was roughly equal to Boeing's net worth at the time. The company nearly went bankrupt, but in the end the 747 was one of the most lucrative projects in history. Even in the late nineties, the 747 was still generating thirty per cent of Boeing's total profits.

But once Boeing ...