How Boeing Got Going

By Coco Masters / Everett

It was the jet that Boeing didn't build that averted what could have become one of the worst crash landings in the company's 91-year history--and cleared Boeing to conquer the skies again. In October 2002, executives of the aircraft manufacturer met with a group of global airline representatives at a conference center on the Seattle waterfront. The executives were trying desperately to figure out what to build next to hold off a soaring Airbus. One Boeing boss drew a graph on a whiteboard, the axes being cruising range and passenger numbers. Then he asked the airline representatives to locate their ideal position on the graph.

The distribution of the data points showed the company that airlines favored efficiency over speed--the exact opposite of what Boeing was thinking. Two months later, Boeing ditched plans for a high-speed, high-cost jetliner to embark on a new program, the 7E7--E for efficiency--that has since changed global aviation and airframe manufacturing. Fast-forward five years to the prize: the 787 Dreamliner--a midrange cruiser that has already logged 47 clients for 684 jet orders, worth $114 billion in sales.

The 787, made in a completely new system, has also remade Boeing. The top-down, we-know-everything assembler had to evolve into a more cooperative, power-sharing systems integrator. Opening its eyes and ears to client partners is one lesson that Boeing (now based in Chicago) has learned. And it wasn't an easy one. Not long ago, the company was under fire for losing ground to Airbus, based in Toulouse, France, the competitor that had just primed its ascendancy by investing $10 billion in a modern-day Spruce Goose, the 555-seat A380. In 2003 a paper by two professors at the State University of New York at Buffalo even suggested that Boeing would be out of the jetliner business by 2013--the year the largest 787 model, the 787-10, is now set to launch. The 787-8 will fly from Paine Field in Everett, Wash., later this month to begin the shortest flight-test schedule in the company's history.

"There is an arsenal of lessons learned," said Scott Strode, Boeing's vice president of airplane development and production for the 787, during the airplane's July premiere in Seattle. "There's room to improve, but that will not change the fundamental belief that distribution and sharing is a good thing."

That includes sharing the jet's risks by getting more partner manufacturers worldwide to do the heavy lifting and take exposure for the $10 billion project onto their books. Boeing has taken risks with new materials and technologies and fashioned the Dreamliner into something that beleaguered airlines and their passengers might actually enjoy. Analysts say the 787 might be the first plane that passengers actually choose to fly because of new interior amenities, such as more pressurization, more humidity, bigger windows, more room as well as a lower carbon footprint per seat. That hits a sweet spot with airlines when coupled with savings in operations and maintenance costs.

Airbus, which was formed as a consortium of manufacturers, has long been a company that thrived on a shared approach, although most of what it is sharing now is pain. The company's woes--ranging from 10,000 announced layoffs this past spring to the two-year production delays (costing an additional $3 billion) of the A380 have wiped out the lead it had on Boeing. Total orders so far this year show Boeing with 701, 13 more than Airbus. In the weeks following the highly publicized 787 rollout on July 8, Boeing posted its largest quarterly profit in nearly four years, at $1.1 billion. And for the first time, its commercial-airplane unit earned more than its defense side; half-year revenues increased 15%, to $16.3 billion, with a 13% increase on airplane deliveries over 2006. (Defense revenues increased 5%, to $15.7 billion.) Boeing's backlog of orders increased 47%, to a record $208 billion, more than seven times the unit's 2006 revenues.

Clearly, Boeing learned by asking. "They went out there and had to come up with a winner," says Ray Neidl, U.S. director of Calyon Securities. "That aircraft would have to be a mainstay in the international, wide-bodied, long-distance competition for years to come." The lesson was kicked off by Airbus' announcement of the giant A380 in 2000, when it was still called the A3XX program. Boeing initially parried with plans for the Sonic Cruiser, to travel nearly the speed of sound, or 20% faster than the Mach 0.85 of conventional jets. "It would have been great for North American, European and Asian markets, but it would have entailed higher operating costs and higher fuel burn," says Neidl. Airlines, racked by higher fuel costs, needed relief. So the company changed course to what is now a 20% more fuel-efficient jet (compared to a 767-300ER), the 787--or what Boeing nicknamed the "son of the Sonic Cruiser."

Boeing is planning to shift the emphasis on speed to the production line. It took a page from lean manufacturing to help manage its restructured partner base and outsourcing of parts. The company has pushed outsourcing to new levels, about 70% of the aircraft. (Boeing and Airbus both averaged about 50% on previous jets.) The change in supply management has increased competition among suppliers and subcontractors, which will allow Boeing to speed up final assembly of the 787. The goal is three days, in contrast to 14 days for the 777. Boeing hopes to produce up to 16 aircraft a month, which would mean exceeding the 112 planned deliveries in 2008 and 2009.

As chief of the 787 program, Mike Bair has always had a firm grip on the Dreamliner's development, but that's because he knows when to let go. Bair says Boeing made as significant a change in how it approached systems, avionics and hydraulics as it did in giving more responsibility to its high-cost partner manufacturers such as Kawasaki Heavy Industries of Japan and Italy's Alenia/ Vought Aircraft Industries. For example, the specification control document, which explains how to build an electrical-distribution system, was about 2,500 pages for the 777. "[Partners] had to figure out 2,500 pages of stuff, and we monitored them applying 2,500 pages of stuff," says Bair.

On the 787, the equivalent assignment was 25 pages. "For high-level requirements, you go design it," says Blair. "We're not going to micromanage how you do it." Bair says this accomplishes three things: partners can show their expertise; there is no duplication of work; and innovation can flourish where "in the past it was our way or no way." He doesn't consider these new methods revolutionary."It's just that we've never done it to this degree before," he says.

Boeing hired North Carolina--based New Breed Logistics to manage the lightly tooled final assembly of the major composite parts coming in to Boeing's Everett plant from as far away as Italy, Japan and Australia. To Richard Aboulafia, vice president of analysis for Teal Group, an aerospace and defense consultancy, the 787's production process qualifies it as the iPod of aerospace--essentially not only the new face of aviation but of American manufacturing as well. "Look at your iPod. Where was it built? Who the hell cares? That's not where the value is," he says. "You design, you integrate, you sell, you support, you finance. There's a lot to be said for putting it together under your roof, but leave bending metal or pouring plastic to someone else."

Bair says the 787 has been a more complicated management process because Boeing doesn't have day-to-day inside control but says the diversity of cultural perspective and expertise has strengthened the team. Also playing in Boeing's game: financiers and bankers. What do bankers know about building aircraft? "They gave us some great advice in terms of configuration in the airplane, going to a more standard aircraft and having the ability to switch engine manufacturers," says Randy Tinseth, vice president of marketing. The payoff: higher residual value of the airplane. Aboulafia says getting that kind of endorsement probably took a lot of hand holding and diplomacy, but the lesson is to get out there with the best business case you can offer: "Any doubts that the partners have are gone, of course, because this is the most successful launch in the history of any aircraft."

Technically, a key selling point is the use of carbon-fiber composites in 50% of the Dreamliner by weight (80% by volume), adding to the new jet's reputation as a "game changer." Carbon-reinforced plastic in places such as the wings, fuselage and floorboards not only makes the aircraft lighter--and reduces fuel consumption--but also provides the opportunity to change systems integration, rework maintenance programs, overhaul cabin interiors and upgrade aerodynamic performance. Boeing is working with the world's largest producer of carbon fiber, Tokyo-based Toray Industries, which is still fine-tuning its mass production (this is the first large-scale work Toray has done) and tooling. But with the use of more carbon-fiber composites in aircraft--the A350 will also be 50%--Boeing is on top of the trend.

In the $60 billion duopoly of airplane manufacture, however, the question is: For how long? The two companies enjoy one of the more entertaining rivalries in business, never passing on an opportunity to slag each other's products. While many clients think the 787 is the best solution for the increasing demand in the point-to-point market, for instance, Airbus knocks the 787-8 as too small. Tinseth says Boeing initially wanted to make the 787 larger, but airlines talked the company out of it, trading size for range, so the new aircraft could replace the 767s in their fleets. "We still believe there's a market for big airplanes. It's just not as big as [Airbus] thinks it is," says Tinseth.

Airbus' counterstroke to the Dreamliner is a bigger (average 314 seats), more technologically advanced, fuel-efficient A350, an "Xtra Wide-Body" plane planned for rollout in 2013. The goal is to compete with the Dreamliner for new business while rendering the economics of Boeing's transoceanic 777 obsolete. Boeing is already headed for a larger plane, the 787-10, a potential 320-seater, primarily because of demand from airlines like Dubai-based Emirates and Australia's Qantas Airways.

To Airbus, the message of Boeing's 787-10 is clear: "The fact that the airplane is on the drawing board today is an accolade to the competitive threat from the A350-1000," says Chris Jones, vice president of marketing for Airbus. Qantas has placed 65 firm orders for the 787 and has the option of 20 more. But an Emirates spokeswoman says the airline is still undecided over the 787 or the A350. Emirates is the largest purchaser of the A380, at 55 orders.

Boeing says it isn't sweating the A350. First, it has a five-year technology lead over the A350-900. "When all the dust settles, the important thing is that we keep progressing," says Bair. "They will figure it out, but we will be five and six years into knowing what we know and be that much better at it." And the 47-strong customer base that Boeing has for the 787 shows validation of the company's vision and its intent to dislodge Airbus' grip on the medium-range market. Boeing is trying to make the 787 easier to buy too. It offers airlines the choice of two engines, made by either GE or Rolls-Royce. Airbus offers only a customized Rolls-Royce Trent engine because the engines GE offered to A350 customers fit only two of the three versions. GE won't make an engine for the A350-1000 to compete with the one it has developed for the 777.

The spacing between rollouts of its 787 models also gives Boeing a slight advantage. Boeing plans to have about two to three years between its 787-8, 787-9 and 787-10, in order to have time to work out any bugs that might arise during test flights. But Airbus will have only one year between its 350-900, 350-800 and 350-1000 launches, meaning it has to be closer to flawless, a status it clearly hasn't reached with the A380.

Some Airbus watchers blame the A380--with 165 orders--for hogging valuable resources and causing delays in the A350 schedule. The two planes stand for Airbus' somewhat divergent views on how to meet the needs of travelers as all aspects of flying grow. Critics say the company overestimated the double-decker market--and overcommitted with its investment of $16 billion. On Oct. 15, the A380 will be delivered to launch customer Singapore Airlines after more than a year's delay. "Airbus was thinking that people wanted massive airplanes to go between the continents," says Neidl. "What's wrong with that is that they don't." The A380 might work for flights to hubs such as London's Heathrow but probably not for intermediate cities, where passengers prefer direct service. And while seat-mile costs can be reduced for an airline with such an aircraft, too many seats to fill can erode yields.

Analyst Aboulafia offers this blunt assessment: "It's probably the single biggest mistake in aviation history. Even if the development program weren't technically botched, you still have the problem that it's just the wrong plane." Boeing expects to deliver its revamped 747-8 in 2010, costing about $4 billion to develop and probably priced at about $292 million, vs. about $319 million for the competing A380.

Demand for aircraft is now. "This is the first simultaneous civil and military upturn I've seen in 20 years," says Aboulafia. "And the angle of that upturn is very steep." The International Air Transport Association predicts that 2007 will be the first profitable year for airlines since 2000. True, net profit of about $5 billion is paltry at best in a $470 billion industry, but it puts the airlines in a buying mood. Boeing is sold out for both 2007 and 2008 and expects to deliver 445 airplanes this year and 520 next year.

Want to buy a Dreamliner? Sorry, production is spoken for until 2015--underlining the company's need for a speedy new production line, since it could sell more if it could make more. Not long ago, it seemed as if Boeing couldn't make anything. Tim Clark, president of Emirates, said in January 2005, "Boeing has struggled with the development work needed to take the company into the 21st century." Boeing has now arrived, and so will the 787--the first Dreamliner goes to All Nippon Airways in May. Sure, Boeing's CEO, Jim McNerney, worries about the 787 every day. "Only the paranoid survive when you are doing these airplane programs," he has said. Yet it looks as if Boeing, by letting go of some of the details and focusing on the big picture, has eased its ride to the top.