Boeing’s Big Bet
November 1 1994 by JP Donlon
Last April Boeing, the world’s largest aircraft manufacturer, unveiled its 777, the world’s largest twin-engine, long-distance passenger aircraft. Despite signs that the North American and European travel industry is shaking off its recession, the condition of the air line business continues to wobble. In 1993, carriers replaced about 100 aircraft, far fewer than anticipated.
Costing $4 billion to develop, the 300-to400-seat airplane is Boeing’s biggest project since it built the first 747 some 25 years ago. Designing and manufacturing commercial aircraft is always something of a crapshoot, because they take years to produce and many more years to sell enough to recover the capital investment. (To date, the 777 has 147 announced orders.) An additional complication fir the Seattle manufacturer is the current soft market for commercial aircraft sales and the fact that the 777 (“Triple 7′) is playing catch-up with McDonnell Douglas and Airbus Industrie, whose MD-11 and A330, respectively, already are in service. Airbus also has pre-empted Boeing by introducing new technology to commercial jet such as fly-by-wire” electronics controls.United Airlines has scheduled the first commercial 777 flight in May 1995.
Like GM, IBM, Eastman Kodak, and other icons of US. industry, Boeing has retained market leadership amid an industrywide decline. Boeing Chairman and CEO Frank A. Shrontz, 62, a
As early as 1989, Shrontz and Boeing President Philip M. Condit, Shrontz’s likely successor, decided the company’s future depended partly on chopping manufacturing costs by up to 30 percent. The prescription proved felicitous. At the time, order books were fat, and profits were at record levels. But an intervening cyclical downturn has taken its toll: Sales this year are expected to decline to $21 billion, down from a peak of $30 billion in 1992, while year on year, operational earnings decreased 31 percent in the first six months of 1994. The work force has been trimmed to 118,702, from a 1968 peak of 148,672. Compounding these problems, the 747 is serviceable but long in the tooth. With declining yields and increasing competition, airline carriers want efficient, lower-cost jets to improve productivity and support profitability.
Employing new composite materials, the computer-designed 777 has just two engines, and it requires only two pilots tofty. It is expected to be 20 percent less costly to operate than the jets it’s replacing. But perhaps the most significant innovation is the 777′s manufacturing process. “We used to build planes in classic serial fashion,” says Michael Boyce, director of business development. “We didn’t find most of the mistakes until we built the product. Some 30 percent of the cost was wasted effort.” In the case of the 777, seven airlines participated in the design process well before the
Since Boeing’s success is linked to that of its airline customers, how vulnerable is the company if the airlines don’t recover quickly?
Our success will remain closely tied to the fortunes of our airline customers. However, I don’t think our future is in jeopardy if the recovery is slower than anticipated. We’re positioned to continue operating at a lower production rate.
Will there be additional consolidation in the industry?
There’s further movement toward consolidation of some international traffic, but there are also quite a few start-ups. In the end, we may have fewer global carriers, but more domestic, short-haul airlines.
At $4 billion, Boeing’s 777 is the most expensive project since the 747 was introduced 25 years ago. It is also a product of the company’s new process redesign. How much rides on it?
A good part of our future success on the commercial side of the business depends on this plane. We invested heavily in it with both dollars and talent. I think we picked a winner: It’s more efficient and comfortable. The cost of carrying passengers could be less. And it has tremendous growth capability.
How many do you have to sell before the program is profitable?
We don’t release that information. We generally capitalize some of our costs over a traditional block of something on the order of 300. I don’t think we’re in any danger of not achieving a break-even quantity for the program.
Is there a time limit within which you expect to reach a certain level?
We believe we will sell many more than 300 or 400, but giving you a timeframe is difficult. For example, we almost canceled the 737 program early on, because we were only selling about one a month. Ironically, the 737 turned out to be our most successful program to date.
We have the capability to build seven 777s a month. So far, we have rolled out four, with a few more out either in flight testing or awaiting FAA certification.
Will you get the three-hour FAA certification without going through the normal two-year use and service requirement?
We aim to be certified when we deliver the first plane to United Airlines in May. I’m not sure we’ll get the full 180 minutes from some of the international certifying agencies, but our airline contracts are flexible and will allow us some delay. Besides that, few routes in the world actually require 180 minutes; usually 120 minutes satisfy all the current operation of twin engines over water. Having 180 minutes in hand is just a security blanket we’d like.
What do you offer the certifying agencies as proof of the 777′s reliability in lieu of flying experience and service?
We designed the 777 to be a “service ready” airplane, meaning we have done extensive tests and tinkered with systems and maintenance to make it as reliable as possible as soon as it is rolled out. In addition, we’re putting a tremendous number of hours on the airplane in test flights, and we’re going to try it in a simulated service environment for an extended period of time.
The 777 hit the market after McDonnell Douglas’ MD-11 and Airbus’ A330 and A340. Was it part of your strategy to come late and “leapfrog” into position?
Getting to the market first doesn’t necessarily make you the winner. In our industry, it depends on which airplane has the most economic and passenger appeal.
In the past, you’ve come late to the market and succeeded. Is that so you can see what your competitors come up with and correct their mistakes in your product?
I’d mislead you if I said that was a conscious strategy in every case. We certainly wouldn’t delay a product just to see what the other competitors are doing.
ABSENCE OF MAGIC
With the 777, you involved your customers at an early stage in the design-to-build process, which you’ve never done before. In addition, you moved from computer plans to assembly without a mock-up or another intermediary model. What worried you the most about that?
No one knew whether the new design/process system would work as advertised, or whether we would have to back up and do it the old way. Making the cost and schedule decisions involved with that kept me awake some nights. And we certainly took a big risk when we gave up a safety valve such as a mock-up.
Did involving customers prove more problematic than you anticipated?
There was no magic in it. The system was less user-friendly than we expected. The other problem was that we designed all the airplane parts simultaneously rather than sequentially. This allowed us to design the systems to fit the structure. However, all the releases began to come out at once, and the parallel-processing system bogged down in handling that.
You have been quoted as saying that much depends on eliminating cost-between 25 percent and 30 percent-in traditional design and manufacturing. How far along are you in reaching this goal?
We are not even halfway there. We started this effort when we were doing very well on orders and sales. Since then, the market has gone south, and our production rate has dropped dramatically. Normally when that happens, your margins deteriorate, because the fixed costs eat you up. One evidence that we are making some progress in at least controlling our cost is that our margins have been holding steady, notwithstanding a precipitous drop in our baseline. But we are nowhere near cutting 25 percent to 30 percent of our cost. So far, we have the concept but not the implementation.
How did you know in 1989.90 that Boeing had to transform its design and manufacturing processes? At the time, the company was at the height of its sales volume, and things seemed to be looking up. Most companies tend to wait until crisis strikes before they reinvent themselves.
It wasn’t a revelation; it was a growing recognition that we could no longer succeed in the business simply by delivering improved product performance. We had to pay attention to our customers, who increasingly were preoccupied with product prices. Then we had to examine the process we used to deliver those products. So, rather than put all of our resources in product performance, we put some in process performance. The best time to do that is when you have the resources to make it happen. If we had waited until the bottom fell out, we would have been under much more constraint.
THE JET SET
Do you plan to collaborate on building a super jumbo jet capable of carrying 600 to 800 passengers?
We are working with the Europeans on this project. We already know how to build such an airplane, as do other companies. The question is whether it will be acceptable from economic and ecological standards. First, investors must believe the market is big enough to make the jet a financial success. And we have to convince ourselves that we can produce an airplane that’s economical enough to penetrate that market. A bigger airplane doesn’t necessarily mean a cheaper one to operate. Meeting noise and air pollution standards is another challenge.
No matter what, I don’t think one company can do it alone, so the question becomes, can organizations with different cultures and objectives work together and put up the necessary resources?
Carriers such as British Airways think there is a market. How many carriers have to knock on your door before you’ll do it?
More than one. British Airways is very enthusiastic about the project. On the other hand, it is one of the few significantly profitable carriers in the world. Much of the rest of the industry is still trying to climb out of a hole. They’re not anxious to plunk down a large amount of money on a super jumbo jet to be delivered at the end of the century.
How long would such a project take?
It shouldn’t take significantly longer than building a new subsonic airplane. Once a decision is made to launch it, it might be five years.
Have you thought about making second-generation Concorde?
I don’t think you can take the Concorde’s technology and update it enough to cross the profitability threshold. You have to start with a clean sheet of paper.
Do you believe that if you don’t obsolete your own product, the competition will do it for you? And does this suggest that you should replace the 747?
We give virtually no thought to whether a new product will curtail the life of an old one when we’re deciding to go ahead or not. Trying to stretch out the life of a product that is about to be superseded by something else doesn’t make sense.
I think the 747 will be around for another 30 years. We will continue to improve it, because it occupies a significant niche in the spectrum between big airplanes and little ones.
Aren’t you competing with your older aircraft in that airlines stay with their existing planes for as long as they fly safely?
Sure. One of our challenges is to price the new product in a way that forces the old ones out of the system. However, today most old airplanes go out of the system largely because of noise regulations, not economics.
To avoid buying a new plane, many airlines use “hush kits” to meet new noise pollution standards. Doesn’t that hurt your sales?
Some airlines do that, simply because they don’t have the resources to reinvest in new products, or we can’t give them a new product with enough efficiency improvement to justify scrapping the old one. Eventually, though, they will need to buy new planes.
On the international side, the Chinese seem to present the most lucrative opportunity in terms of buying new planes, since they so desperately need an internal transportation system.
While, we do not currently have a “done deal” with the Chinese, we’re optimistic about their continuing requirements for aircraft. I believe we’re going to sell them a significant number over time. They clearly need some help with their infrastructure, and we have invested heavily there to help them with crew training, air traffic control, and modernization.
Let’s switch gears and talk about your defense business. Defense contracts have slipped from $6 billion to around $4 billion; how will you maintain your market position in the defense procurement area?
Boeing traditionally has tried to do essentially everything in the aerospace market, but now we have to be more focused. For example, we’re not going to build ammo boxes anymore.
Long-term, we have to do a better job than our bigger, richer defense competitors if we’re going to profit. We have not been the big player for a long time, hut we are on the front end of most of the new programs that have a chance to continue, such as the F-22, the Comanche, the V-22, and the space station.
SEEKING THE COMFORT ZONE
What would you most like to accomplish between now and whenever the board asks you to retire?
I don’t plan to stay beyond age 65. But in the meantime, I would like us to make significant progress on our process redesign. We can’t go back now, but we’re not yet at the point where we’ve gotten everyone on board. That’s my No. 1 priority. The second is to get the 777 entrenched in the marketplace.
I’d like to leave feeling the company was on the road to success. We’re in a cyclical business, and obviously everybody wants to go out on the top of the cycle. That’s not always possible, but as long as I’m comfortable that we’re heading in the right direction, I’d be happy to play some golf.