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Shortly after the historic merger between aerospace giants Boeing and McDonnell Douglas took effect in August, Boeing CEO Phil Condit and President Harry Stonecipher embarked on "Phil and Harry's Excellent Adventure," a barnstorming tour of the $48 billion combined company's far-flung facilities. Wearing shirt sleeves and baseball caps, the two shook workers' hands and signed shirts, hats, and even a dog. At one stop, Condit told cheering workers, "This is a neat company. We're going to knock the world on its ear."

Over the long term, he's almost certainly right. But for the moment, Boeing itself has been knocked--and it has landed on a part of its corporate anatomy a wee bit south of the ear. As it struggles to digest McDonnell Douglas and portions of Rockwell, both acquired to strengthen its defense and space capabilities, Boeing is being flooded with the sharpest increase in airliner orders in its 81-year history. During Chinese President Jiang Zemin's recent visit, for example, Beijing booked its biggest order ever, 50 planes worth $3 billion. Boeing has been overwhelmed by its good fortune.

A lot of planes. To meet the unprecedented demand, the company tried to ramp up production from 18 jets a month in 1995 to 43 by early next year. In the process, however, it ran short of crucial parts, from fasteners to decals; and despite frantic hiring, Boeing could not get enough skilled workers. Giant 747s and smaller 737s moved down assembly lines before scheduled work could be completed. In order to catch up, the company finally had to halt the two lines for a month, resulting in a stunning $1.6 billion charge in the third quarter.

Production problems are likely to cost another billion dollars or so over the next year. Concerned that the rush of orders could affect the safety of the planes, the Federal Aviation Administration last month stepped up surveillance in Boeing plants. As a result of the stoppages, deliveries to airlines will be delayed up to two months. Some stockholders have sued, claiming that Boeing withheld information that could have affected share prices. The company's stock hit an all-time high of $60 in midsumme r, then fell as news of the difficulties spread, closing in the mid-$40s range last week.

Boeing officials argue that the worst is behind them and that parts production already is running at a rate of more than 40 planes a month. The 747 line is about to resume, and 737s, the company says, should be rolling again by Thanksgiving. Construction of 757, 767, and 777 models has not been significantly affected. Boeing expects to build planes at capacity at least through 2002.

Ups and downs. The boom-and-bust cycle is nothing new in the large-airplane-building business. Boeing almost went bankrupt in 1971 after it bet the company on the 747--only to have a world recession eliminate demand. The last big surge in orders came in the late 1980s, when airlines ordered more planes than they turned out to need. The Persian Gulf war weakened their business, just as they were taking delivery of a record number of new planes. Airlines parked surplus planes in the desert, ran at a loss, and ordered few new ones. Not until airlines began making substantial profits in 1995 did they begin to place orders again.

Over the years, this brutal pattern has reduced the worldwide aircraft business to two main manufacturers: Boeing and archrival Airbus Industrie, the big European consortium. Lockheed dropped out of the airliner market in 1981. Venerable Douglas, whose market share has been gnawed away by the Big Two for more than a decade, was absorbed first by McDonnell and now by Boeing. Last week, Boeing announced that what's left of Douglas, which has its main plants in Long Beach, Calif., will be scaled back substantially. Production of MD-80 and MD-90 twinjets, which compete directly with Boeing 737 models, will cease when current orders run out in 1999.

Douglas will continue to build one big MD-11 trijet a month, mostly for use as freighters. The fate of the brand-new MD-95, a 100-seat aircraft designed for regional markets whose first, and so far only, customer is AirTran (the former Valujet) is to be decided next year. Some argue that the MD-95 would be a valuable addition to the new Boeing's line, since it does not now produce an airplane family that small. But Ron Woodard, president of Boeing's commercial airplane company, says the MD-95 will survive after the AirTrans 50-plane order is filled only if the cost of building them can be reduced.

Earlier this year, the European Union used the Douglas acquisition to threaten antitrust action. The Europeans were alarmed about 20-year agreements Boeing had struck with American Airlines, Delta, and Continental to buy only Boeing planes. These pacts, the Europeans argued, unfairly shut out Airbus. To avoid sanctions, Boeing was forced to scrap the agreements.

For the next 20 years, both Airbus and Boeing forecast enormous growth in air travel that will, by their independent estimates, require about 16,000 new planes. Woodard aims to get two thirds of those sales, Boeing's customary share. Airbus, however, eventually hopes to win half the market. The biggest growth is forecast to be in Asia; China alone, Boeing believes, will take 10 percent of all new planes.

But the two companies have markedly different visions of what their fleets will look like. Boeing, which has the profitable jumbo market to itself with its long-range, 400-seat 747s, expects that the big future growth in air travel will be in direct international flights between secondary cities served by planes smaller than 747s. That's what is happening on the North Atlantic where the most popular plane these days, by far, is the Boeing 767, an intermediate-size twinjet.

In the future, Boeing expects its 777 twinjet to dominate travel over the Pacific, and that's how it's betting. In fact, last January the company canceled plans to launch an all-new 747 that could carry more passengers; executives feared that too few would be sold to be profitable. Airbus, however, projects that 1,400 planes larger than the 747 will be needed (more than all the 747s built in nearly 30 years) and is proposing to launch a 500-seat super-jumbo, code-named the A3XX.

For decades, 75 to 80 percent of Boeing's revenues have come from the roller-coaster commercial airplane business. But when Phil Condit, an aeronautical engineer who has spent his career at Boeing, became CEO in 1996, he sought ways to smooth out the company's revenue stream with other lines of business that didn't rise and fall with commercial airplane sales. The best course, he concluded, was to go heavily into space and defense, areas in which Boeing had expertise but not much business. "We quickly concluded that given the rate of new program development, growing internally wasn't going to get us there," he says. And so, in rapid order last year, Boeing acquired the aerospace portion of Rockwell, which built the space shuttle, the first round of global positioning satellites, and rocket engines. Then it gobbled up McDonnell Douglas, the nation's leading builder of fighter aircraft and a major provider of satellite launch services. "Independently, none of us would be big players," he says. "Collectively, we had a real opportunity. A lot of people talk about strategic decisions. This one really was."

With the new pieces of Boeing, the commercial airplane share of the company's annual revenues dropped to about 60 percent. "Stand alone, space and defense is a $20 billion business," Condit says, "and it's got some real growth possibilities in the future." The mushrooming market for space-based telecommunications means that space alone, says Wolfgang Demisch, an analyst for BT Alex. Brown, "has a trillion-dollar business potential. They are doing precisely the right thing."

Targeting space. Consider, for example, how Boeing can bring the new pieces of its company together to design and construct Teledesic, the 288-satellite "Internet in the sky" under development for Microsoft's Bill Gates and cellular pioneer Craig McCaw. The former Rockwell can build the satellites. The former McDonnell Douglas can build the boosters, powered by Rockwell's Rocketdyne engines, to launch the satellites. Boeing's commercial experience can help cut costs and speed development. And the milit ary side of the company can try to convince the Pentagon that leasing a portion of Teledesic's capacity would permit the military to send and receive high-speed data transmissions anywhere in the world--without having to invest taxpayer money in developing the infrastructure.