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C-39

11 Boeing CommerCial airCraft

IntroductIon

The first 15 years of the 21st century were a period of ups and downs for Boeing Commercial Airplane, the commercial aircraft division of the world’s largest aerospace company. In the late 1990s and early 2000s, Boeing had struggled with a number of ethics scan- dals and production problems that had tarnished the reputation of the company and led to subpar finan- cial performance. To make matters worse, its global rival, Airbus, had been gaining market share. Between 2001 and 2005, the European company regularly gar- nered more new orders than Boeing.

Boeing started to gain an edge over its rival in 2003, when it formally launched its next-generation jet, the 787. Built largely out of carbon-fiber com- posites, the wide-bodied 787 was billed as the most fuel-efficient large jetliner in the world. The 787 was forecast to consume 20% less fuel than Boeing’s older wide-bodied jet, the 767. By 2006, the 787 was log- ging significant orders. This, together with strong interest in Boeing’s bestselling narrow-bodied jet, the 737, helped the company recapture the lead in new commercial jet aircraft orders. Moreover, in 2006, Boeing’s rival Airbus was struggling with significant production problems and weak orders for its new

aircraft, the A380 super- jumbo. Airbus was also late to market with a rival for the 787, the wide-bodied Airbus A350, which would also be built largely out of carbon fiber. While the 787 was scheduled to enter service in 2008, the A350 would not do so until 2012, giving Boeing a significant lead.

Over the next few years, Boeing encountered a number of production problems and technical design issues with the 787 that resulted in the introduction of the 787 being delayed five times. The 787 finally entered service in 2011, more than 3 years later than planned. From that point on, production ramped up rapidly. By the end of 2014, Boeing had delivered 225  787s, helping to propel the company to record revenues and earnings. Boeing also had a very healthy backlog of over 843 firm orders for 787. Airbus has encountered production problems of its own with the A350, and did not deliver its first A350 until late 2014, more than 2 years behind schedule. Still, Airbus had grown its order book for the A350, and by 2014 had 779 firm orders.

By 2011, Boeing had to make another impor- tant decision regarding its venerable narrow-bodied 737 aircraft family, which accounts for some 60% of Boeing’s total aircraft deliveries. The main competitor for the 737 has long been Airbus’s A320. In late 2010, Airbus announced that it would build a new version

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of the A320 designed to use advanced engines from Pratt & Whitney that are estimated to be 10 to 15% more efficient than existing engines. Known as the A320neo (neo stands for “new engine option”), by August 2011 the aircraft had garnered an impressive 1,029 orders. Airbus’s success forced Boeing’s hand. Boeing too stated that they would offer a version of the 737, known as the 737 MAX, using new engines (which required some redesign of the 737, driving up Boeing’s R&D costs). Initially, the company was con- sidering a complete redesign of the 737 to incorporate the carbon-fiber technology used in the 787. However, it opted not to go down this road on the grounds that the redesign would have pushed out delivery of the new plane too far, enabling Airbus to gain a lead in the narrow-bodied market. By March 2015, Boeing had assembled a backlog of 2,715 orders for the 737 MAX. The first planes are scheduled to enter service in late 2017. However, by January 2015, Airbus had a backlog of 3,621 orders for the A320neo.

To complicate matters, for the first time in a gen- eration, there are several new entrants of the horizon. The Canadian regional jet manufacturer, Bombardier, is booking orders for 110- to 130-seat narrow-bodied CSeries jet, which would place it in direct competition with the smallest of the 737 and A320 family. In addi- tion, the Commercial Aircraft Corporation of China (Comac) has announced that it will build a 170- to 190-seat narrow-bodied jet.

The CompeTiTive environmenT

By the 2000s, the market for large commercial jet air- craft was dominated by just two companies, Boeing and Airbus. A third player in the industry, McDon- nell Douglas, had been significant historically but had lost share during the 1980s and 1990s. In 1997, Boeing acquired McDonnell Douglas, primarily for its strong military business. Since the mid-1990s, Airbus has been gaining orders at Boeing’s expense. By the mid- 2000s, the two companies were splitting the market, a situation that has continued to the present day.

Both Boeing and Airbus have a full range of aircraft. Boeing offers five aircraft “families” that range in size from 100 to over 500 seats. They are the

narrow-bodied 737 and the wide-bodied 747, 767, 777, and 787 families. Each family comes in various forms. For example, there are currently four main variants of the 737 aircraft. They vary in size from 110 to 215 seats, and in range from 2,000 to over 5,000 miles. List prices vary from $47 million for the smallest member of the 737 family, the 737-600, to $282 million for the largest Boeing aircraft, the 747-8. The newest member of the Boeing family, the 787, lists for between $138 million and $188 million depending upon the model.1

Similarly, Airbus offers five families: the narrow- bodied A320 family, and the wide-bodied A300/310, A330/340, A350, and A380 families. These aircraft vary in size from 100 to 550 seats. The range of list prices is similar to Boeing’s. The A380 super-jumbo lists for between $282 million to $302 million, while the smaller A320 lists for between $62 million and $66.5 million.2 Both companies also offer freighter versions of their wide-bodied aircraft.

Airbus, a relatively recent entrant into the market, began as a consortium between a French company and Germany company in 1970. Later, a British and Spanish company joined the consortium. Initially, few people gave Airbus much chance for success, but the consortium gained ground by innovating. It was the first aircraft maker to build planes that “flew by wire,” made extensive use of composites, had only two flight crew members (most had three), and used a common cockpit layout across models. It also gained sales by being the first company to offer a wide-bodied twin- engine jet, the A300, which was positioned between smaller, single-aisle planes like the 737 and large air- craft like the Boeing 747.

In 2001, Airbus became a fully integrated com- pany. The European Defense and Space Company (EADS), formed by a merger between French, Ger- man, and Spanish interests, acquired 80% of the shares in EADS, and BAE Systems, a British com- pany, took a 20% stake.

Development and Production The economics of development and production in the industry are characterized by several factors. First, the R&D and tooling costs associated with developing a new airliner are very high. Boeing spent some $5 billion to develop the 777. Its lat- est aircraft, the 787, was initially expected to cost $8 billion to develop, but delays increased that to

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at least $15 billion. Development costs for Airbus’ A380 super-jumbo reportedly exceeded $15 billion.

Second, given the high upfront costs, in order to break even a company has to capture a significant share of projected world demand. The breakeven point for the Airbus super-jumbo, for example, has been estimated to be between 250 and 270 aircraft. While it was being developed, estimates of the total potential market for this aircraft varied widely. Boe- ing suggested that the total world market would be for no more than 320 aircraft over the first 20 years of its existence—Airbus believed that there would be de- mand for some 1,250 aircraft of this size. In the event, by the end of 2014 Airbus had only delivered 152 A380s, and its order backlog was just 165, suggesting that Boeing’s demand estimates may have been closer to the mark. It now looks as if the A380 won’t break even until the 2020s, and that on top of years of nega- tive cash flow during development.3

Third, there are significant learning effects in air- craft production.4 On average, unit costs fall by about 20 percent each time cumulative output of a specific model is doubled. The phenomenon occurs because managers and shop floor workers learn over time how to assemble a particular model of plane more efficiently, reducing assembly time, boosting produc- tivity, and lowering the marginal costs of producing subsequent aircraft.

Fourth, the assembly of aircraft is an enormously complex process. Modern planes have over 1 million component parts that have to be designed to fit with each other, and then produced and assembled at the

right time in order to produce the engine. At several times in the history of the industry, problems with the supply of critical components have held up production schedules and resulted in losses. In 1997, Boeing took a charge of $1.6 billion against earnings when it had to halt the production of its 737 and 747 models due to a lack of component parts. In 2008, Boeing had to delay production of the 787 due to a shortage of fasteners.

Historically, airline manufacturers tried to manage the supply process through vertical integration, mak- ing many of the component parts that went into an aircraft (engines were long the exception to this). Over the last two decades, however, there has been a trend to contract out production of components and even entire subassemblies to independent suppliers. On the 777, for example, Boeing outsourced about 65 % of the aircraft production, by value, excluding the engines.5 While help- ing to reduce costs, contracting out places enormous demands on airline manufacturers to work closely with suppliers to coordinate the entire production process.

Finally, all new aircraft are now designed digitally and assembled virtually before a single component is produced. Boeing was the first to do this with its 777 in the early 1990s, and its new version of the 737 in the late 1990s.

Customers Demand for commercial jet aircraft is very volatile and tends to reflect the financial health of the commercial airline industry, which is prone to boom-and-bust cycles (see Figures 1, 2, and 3). The airline industry

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Figure 1 order for Boeing and Airbus Commercial Aircraft, 1990–2014

Source: Boeing and Airbus websites.

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has long been characterized by excess capacity, intense price competition, and a perception among the travel- ling public that airline travel is a commodity. After a moderate boom during the 1990s, the airline industry went through a nasty downturn during 2001–2005. The downturn started in early 2001, due to a slow- down in business travel after the boom of the 1990s. It

was compounded by a dramatic slump in airline travel after the terrorist attacks on the United States in Sep- tember 2001. Between 2001 and 2005, the entire global airline industry lost some $40 billion—more money than it had made since its inception.6

The industry recovered in 2006 and 2007, only to rack up big losses again in 2008 and 2009 due to

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Figure 2 World Airline industry revenues

Source: IATA Data.

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Figure 3 World Airline industry net profit 2000–2014

Source: IATA Data.

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the recession that was ushered in by the 2008–2009 global financial crisis. High fuel prices since the early 2000s have made matters worse. The bill for jet fuel represented over 25% of the industry’s total operating costs in 2006, compared to less than 10% in 2001.7 By 2014, as a result of high prices for oil and jet fuel, fuel accounted for 33% of operating expenses for U.S. air- lines. Wages and benefits were the second biggest op- erating expense, accounting for 25% of costs in 2014.8

During the 2001–2005 period, losses were particu- larly severe among the big six airlines in the world’s largest market, the United States (American Air- lines, United, Delta, Continental, US Airways, and Northwest). Three of these airlines (United, Delta, and Northwest) were forced to seek Chapter 11 bank- ruptcy protection. Even though demand and profits plummeted at the big six airlines, some carriers con- tinued to make profits during 2001–2005, most nota- bly the budget airline Southwest. In addition, newer budget airlines including AirTran and Jet Blue (which was started in 2000) gained market share during this period. Indeed, between 2000 and 2003, the budget airlines in the United States expanded capacity by 44% even as the majors slashed their carrying capac- ity and parked unused planes in the desert. In 1998, the budget airlines held a 16% share of U.S. market; by mid-2004, their share had risen to 29%.9

The key to the success of the budget airlines is a strategy that gives them a 30 to 50% cost advantage over traditional airlines. The budget airlines all fol- low the same basic script. They purchase just one type of aircraft (some standardize on Boeing 737s, others on Airbus 320s). They hire nonunion labor and cross- train employees to perform multiple jobs (e.g., to help meet turnaround times, the pilots might help check tickets at the gate). As a result of flexible work rules, Southwest needs only 80 employees to support and fly an aircraft, compared to 115 at traditional airlines. The budget airlines also favor flying “point to point” rather than through hubs, and often use cheaper sec- ondary airports rather than major hubs. They focus on large markets with lots of traffic (e.g., up and down the east coast). There are no frills on the flights; no inflight food or complementary drinks. And prices are set low to fill the seats.

In contrast, the operations of major airlines are based on the network or “hub-and-spoke” system. Under this system, the network airlines route their flights through major hubs. Often, a single airline

will dominate a hub (thus, United dominates Chi- cago O’Hare airport, American Airlines dominates Dallas, and so on). This system was developed for good reason: It was a way of efficiently using airline capacity when there wasn’t enough demand to fill a plane flying point to point. By using a hub-and-spoke system, the major network airlines have been able to serve some 38,000 city pairs, some of which generate fewer than 50 passengers per day. But by focusing a few hundred city pairs where there is sufficient de- mand to fill their planes, and flying directly between them (point to point), the budget airlines seem to have found a way around this constraint. The network car- riers also suffer from a higher cost structure due to their legacy of a unionized workforce. In addition, their costs are pushed higher by their superior in- flight service. In good times, the network carriers can recoup their costs by charging higher prices than the discount airlines, particularly for business travelers, who pay more to book late and to fly business or first class. In the competitive environment of the 2000s, however, this was no longer the case. Indeed, between 2000 and 2010, the price of an average, round-trip, domestic ticket in the United States increased from $317 to $338—an increase of 6.7% over the decade— while the consumer price index increased 26.6% (that is, in real terms, prices fell).10

Due to the effect of increased competition, the real yield that U.S. airlines got from passengers fell from 8.70 cents per mile in 1980 to 6.37 cents per mile in 1990, 5.12 cents per mile in 2000, and 4.00 cents per mile in 2005 (these figures are expressed in constant 1978 cents).11 Real yields are also declining elsewhere. With real yields declining, the only way that airlines can become profitable is to reduce their operating costs.

Outside of the United States, competition has in- tensified as deregulation has allowed low-cost airlines to enter local markets and capture share from long- established, national airlines that utilize the hub-and- spoke model. In Europe, for example, Ryan Air and Easy Jet have adopted the business model of South- west and used it to grow aggressively.

By the mid-2000s, large airlines in the United States were starting to improve their operating effi- ciency, helped by growing traffic volumes, higher load factors, and reductions in operating costs, particularly labor costs. Load factor refers to the percentage of a plane that is full on average, which hit a record 86%

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in mid-2006 in the United States, and 81% in interna- tional markets. Load factors have remained reason- ably high since then, moving between 75 and 85% on a monthly basis between 2006 and 2015.

Demand Projections Both Boeing and Airbus issue annual projects of like- ly future demand for commercial jet aircraft. These projections are based upon assumptions about future global economic growth, the resulting growth in de- mand for air travel, and the financial health of the world’s airlines.

In its 2014 report, Boeing assumed that the world economy would grow by 3.2% per annum over the next 20 years, which should generate growth in pas- senger traffic of 5.0% and growth in cargo traffic of 4.7% per annum. On this basis, Boeing forecast de- mand for some 36,770 new aircraft valued at more $5.2 trillion over the next 20 years. In 2033, Boeing estimates that the total global fleet of aircraft will be 42,180, up from 17,330 in 2005. Boeing believes that North America will account for 21% of all new orders by unit share, Asia Pacific for 37%, and Europe for 20%. Passenger traffic is projected to grow at 6.3% per annum in Asia, versus 2.9% in North America and 3.9% in Europe.12

Regarding the mix of orders, Boeing believes that 70% of all orders by units will be for narrow-bodied aircraft such as the 737 and A320, 22% will be for wide-bodied, twin-aisle jets such as the 787 and 747, and less than 2% for large aircraft such as the 747 and A380, with regional jets accounting for the balance.

The latest Airbus forecast covers 2014–2033. Over that period, Airbus forecasts world passenger traf- fic to grow by 4.7% per annum and predicts demand for 31,358 new aircraft worth $4.6 trillion. (Note that Airbus excludes regional jets from its forecast; there are some 2,400 regional jet deliveries included in Boe- ing’s forecasts). Airbus believes that demand for very large aircraft will be more robust, amounting to 1,501 large passenger aircraft and freighters in the 747 and A380 range and above, or 4% of the total units of aircraft delivered.13

The difference in the mix of orders projected by Boeing and Airbus reflect different views of how fu- ture demand will evolve. Airbus believes that hubs will continue to play an important role in airline travel, particularly international travel, and that very large

jets will be required to transport people between hubs. Airbus bases this assumption partly on an analysis of data over the last 20 years, which shows that traffic be- tween major airline hubs has grown faster than traffic between other city pairs. Airbus also assumes that ur- ban concentrations will continue to grow. Airbus states that demand is simply a function of where people want to go, and most people want to travel between major urban centers. The company notes, for example, that 90% of travelers from the United States to China go to three major cities. Fifty other cities make up the remaining 10%, and Airbus believes that very few of these cities will have demand large enough to justify nonstop service from North America or Europe. Based on this assumption, Airbus sees continued demand for very large aircraft, particularly its A380 offering.

Boeing has a different view of the future. The com- pany has theorized that hubs will become increasingly congested, and that many travelers will seek to avoid them. Boeing thinks that passengers prefer frequent, nonstop service between the cities they wish to visit. Boeing also sees growth in travel between city pairs as being large enough to support an increasing num- ber of direct, long-haul flights. The company notes that continued liberalization of regulations governing airline routes around the world will allow for the es- tablishment of more direct flights between city pairs. As in the United States, the company believes that long-haul, low-cost airlines will emerge that focus on serving city pairs and avoid hubs.

In sum, Boeing believes that airline travelers will demand more frequent nonstop flights, not larger air- craft.14 It cites data showing that all growth in airline travel since 1995 has been met by the introduction of new, nonstop flights between city pairs, and by an in- creased frequency of flights between city pairs, and not by an increase in airplane size. For example, Boe- ing notes that following the introduction of the 767, airlines introduced more flights between city pairs in North America and Europe, and more frequent de- partures. In 1984, 63% of all flights across the North Atlantic were made by the 747. By 2004, the figure had declined to 13%, with smaller, wide-bodied aircraft such as the 767 and 777 dominating traffic. Following the introduction of the 777, which can fly nonstop across the Pacific and is smaller than the 747, the same process occurred in the North Pacific. In 2006, there were 72 daily flights serving 26 city pairs in North America and Asia.

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Boeing’S hiSTory15

William Boeing established the Boeing Company in 1916 in Seattle. In the early 1950s, Boeing took an enormous gamble when it decided to build a large jet aircraft that could be sold both to the military as a tanker and to commercial airlines as a passenger plane. Known as the Dash 80, the plane had swept- back wings and four jet engines. Boeing invested $16 million to develop the Dash 80, two-thirds of the company’s entire profits during the postwar years. The Dash 80 was the basis for two aircraft—the KC-135 Air Force tanker and the Boeing 707. Introduced into service in 1957, the 707 was the world’s first commer- cially successful passenger jet aircraft. Boeing went on to sell some 856 Boeing 707s, along with 820 KC-135s. The final 707, a freighter, rolled off the production line in 1994 (production of passenger planes ended in 1978). The closest rival to the 707 was the Douglas DC 8, of which some 556 were ultimately sold.

The 707 was followed by a number of other suc- cessful jetliners, including the 727 (entered service in 1962), the 737 (entered service in 1967), and the 747 (entered service in 1970). The single-aisle 737 went on to become the workhorse of many airlines. In the 2000s, a completely redesigned version of the 737 that could seat between 110 and 180 passengers was still selling strong. Cumulative sales of the 737 totaled 6,500 by mid-2006, making it by far the most popular commercial jet aircraft ever sold.

It was the 747 “jumbo jet,” however, that probably best defined Boeing. In 1966, when Boeing’s board took the decision to develop the 747, they were widely viewed as betting the company on the jet. The 747 was born out of the desire of Pan Am, then America’s larg- est airline, for a 400-seat passenger aircraft that could fly 5,000 miles. Pan Am believed that the aircraft would ideal for the growing volume of transconti- nental traffic. However, beyond Pan Am, which com- mitted to purchasing 25 aircraft, demand was very uncertain. Moreover, the estimated $400 million in development and tooling costs placed a heavy burden on Boeing’s financial resources. To make a return on its investment, the company estimated it would have to sell close to 400 aircraft. To complicate matters fur- ther, Boeing’s principal competitors, Lockheed and McDonnell Douglas, were each developing 250-seat jumbo jets.

Boeing’s big bet turned out to be auspicious. Pan Am’s competitors feared being left behind, and by the end of 1970 almost 200 orders for the aircraft had been placed. Successive models of the 747 extended the range of the aircraft. The 747-400, introduced in 1989, had a range of 8,000 miles and a maximum seating capacity of 550 (although most configurations seated around 400 passengers). By this time, both Douglas and Lockheed had exited the market, giving Boeing a lucrative monopoly in the very large com- mercial jet category. By 2005, the company had sold some 1,430 747s, and was actively selling its latest ver- sion of the 747 family, the 747-8, which was scheduled to enter service in 2008.

By the mid-1970s, Boeing was past the breakeven point on all of its models (707, 727, 737, and 747). The positive cash flow helped to fund investment in two new aircraft, the narrow-bodied 757 and the wide-bodied 767. The 757 was designed as a replace- ment to the aging 727, while the 767 was a response to a similar aircraft from Airbus. These were the first Boeing aircraft to be designed with two-person cock- pits (rather than three-person). Indeed, the cockpit layout was identical, allowing crew to shift from one aircraft to the other. The 767 was also the first aircraft for which Boeing subcontracted a significant amount of work to a trio of three Japanese manufacturers— Mitsubishi, Kawasaki, and Fuji—that supplied about 15% of the airframe. Introduced in 1981, both aircraft were successful. Some 1049 757s were sold during the life of the program (which ended in 2003). Over 950 767s had been sold by 2006, and the program was still ongoing.

The next Boeing plane was the 777. A two-engine, wide-bodied aircraft with seating capacity of up to 400 and a range of almost 8,000 miles, the 777 pro- gram was initiated in 1990. The 777 was seen as a response to Airbus’ successful A330 and A340 aircraft. Development costs were estimated at some $5 billion. The 777 was the first wide-bodied, long-haul jet to have only two engines. It was also the first to be designed virtually. To develop the 777, for the first time Boeing used cross-functional teams composed of engineering and production employees. It also brought major suppliers and customers into the development process. As with the 767, a significant amount of work was outsourced to foreign manu- facturers, including the Japanese trio of Mitsubishi, Kawasaki, and Fuji, who supplied 20% of the 777

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airframe. In total, some 60% of parts for the 777 were outsourced. The 777 proved to be another successful venture: By mid-2006, 850 777s had been ordered— far greater than the 200 or so required to break even.

In December 1996, Boeing stunned the aerospace industry by announcing it would merge with long- time rival McDonnell Douglas in a deal estimated to be worth $13.3 billion. The merger was driven by Boeing’s desire to strengthen its presence in the defense and space side of the aerospace business areas, where McDonnell Douglas was traditionally strong. On the commercial side of the aerospace business, Douglas had been losing market share since the 1970s. By 1996, Douglas accounted for less than 10% of pro- duction in the large commercial jet aircraft market and only 3% of new orders placed that year. The dearth of new orders meant the long-term outlook for Douglas’s commercial business was increasingly murky. With or without the merger, many analysts felt that it was only a matter of time before McDonnell Douglas would be forced to exit from the commercial jet aircraft busi- ness. In their view, the merger with Boeing merely accelerated that process.

The merger transformed Boeing into a broad based aerospace business within which commercial aerospace accounted for 40 to 60% of total revenue depending upon the stage of the commercial produc- tion cycle. In 2001, for example, the commercial air- craft group accounted for $35 billion in revenues out of a corporate total of $58 billion, or 60%. In 2005, with the delivery cycle at a low point (but the order cycle rebounding), the commercial airplane group ac- counted for $22.7 billion out of a total of $54.8 bil- lion, or 41%. The balance of revenue was made up by a wide range of military aircraft, weapons and de- fense systems, and space systems.

In the early 2000s, in a highly symbolic act, Boe- ing moved its corporate headquarters from Seattle to Chicago. The move was an attempt to put some dis- tance between top corporate officers and the commer- cial aerospace business, the headquarters of which remained in Seattle. The move was also intended to signal to the investment community that Boeing was far more than its commercial businesses.

To some extent, the move to Chicago may have been driven by a number of production missteps in the late 1990s that hit the company at a time when it should have been enjoying financial success. Dur- ing the mid-1990s, orders had boomed as Boeing

cut prices in an aggressive move to gain share from Airbus. However, delivering these aircraft meant that Boeing had to more than double its production sched- ule between 1996 and 1997. As it attempted to do this, the company ran into some server production bottle- necks.16 It scrambled to hire and train some 41,000 workers, recruiting many from suppliers—a move it came to regret when many of the suppliers could not meet Boeing’s demands and shipments of parts were delayed. In the Fall 1997, things got so bad that Boe- ing shut down its 747 and 737 production lines so that workers could catch up with out-of-sequence work and wait for back ordered parts to arrive. Ultimately, the company had to take a $1.6-billion charge against earnings to account for higher costs and penalties paid to airlines for the late delivery of jets. As a result, Boeing made very little money out of its mid-1990s order boom. The head of Boeing’s commercial aero- space business was fired, and the company committed itself to a major acceleration of its attempt to over- haul its production system, elements of which dated back half a century.

Boeing in The 2000s

In the 2000s, three things dominated the development of Boeing Commercial Aerospace. First, the company accelerated a decade long project aimed at improving the company’s production methods by adopting the lean production systems initially developed by Toyota and applying them to the manufacture of large jet aircraft. Second, the company considered and then rejected the idea of building a successor to the 747. Third, Boeing decided to develop a new wide-bodied long-haul jetliner, the 787.

lean Production at Boeing Boeing’s attempt to revolutionize the way planes are built dates back to the early 1990s. Beginning in 1990, the company started to send teams of executives to Japan to study the production systems of Japan’s leading manufacturers, particularly Toyota. Toyota had pioneered a new way of assembling automobiles, known as lean production (in contrast to convention- al mass production).

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Toyota’s lean production system was developed by one of the company’s engineers, Ohno Taiichi.17 After working at Toyota for 5 years and visiting Ford’s U.S. plants, Ohno became convinced that the mass-production philosophy for making cars was flawed. He saw numerous problems, including three major drawbacks. First, long production runs created massive inventories, which had to be stored in large warehouses. This was expensive because of the cost of warehousing and because inventories tied up capital in unproductive uses. Second, if the initial machine settings were wrong, long production runs resulted in the production of a large number of defects (that is, waste). And third, the mass-production system was unable to accommodate consumer preferences for product diversity.

In looking for ways to make shorter production runs economical, Ohno developed a number of tech- niques designed to reduce setup times for produc- tion equipment, a major source of fixed costs. By using a system of levers and pulleys, he was able to reduce the time required to change dies on stamp- ing equipment from a full day in 1950 to 3 minutes by 1971. This advance made small production runs economical, which allowed Toyota to respond bet- ter to consumer demands for product diversity. Small production runs also eliminated the need to hold large inventories, thereby reducing warehous- ing costs. Furthermore, small production runs and the lack of inventory meant that defective parts were produced only in small numbers and entered the as- sembly process immediately. This reduced waste and made it easier to trace defects to their source and fix the problem. In sum, Ohno’s innovations enabled Toyota to produce a more diverse product range at a lower unit cost than was possible with conventional mass production.

Impressed with what Toyota had done, in the mid- 1990s, Boeing started to experiment with applying Toyota-like lean production methods to the manu- facture of aircraft. Production at Boeing used to be all about producing parts in high volumes, and then storing them in warehouses until they were ready to be used in the assembly process. After visiting Toyota, engineers realize that Boeing was drowning in inven- tory. A huge amount of space and capital was tied up in items that didn’t add value. Moreover, expensive, specialized machines often took up a lot of space and were frequently idle for long stretches of time.

Like Ohno at Toyota, the company engineers started to think about how they could modify equip- ment and processes at Boeing to reduce waste. Boeing set aside space and time for teams of creative plant employees—design engineers, maintenance techni- cians, electricians, machinists, and operators—to experiment with machinery. They called these teams “moonshiners.” The term “moonshine” was coined by Japanese executives who visited the United States af- ter World War II. They were impressed by two things in the United States—supermarkets and the stills built by people in the Appalachian hills. They noticed that people built these stills with no money. They would use salvaged parts to make small stills that produced alcohol that they sold for money. The Japanese took this philosophy home with them and applied it to industrial machinery—which is where Boeing execu- tives saw the concept in operation in the 1990s. With the help of Japanese consultants, they decided to ap- ply the moonshine creative philosophy at Boeing to produce new, “right-sized” machines with very little money which then could be used to make money.

The moonshine teams were trained in lean pro- duction techniques, given a small budget, and then set loose. Initially many moonshine teams focused on redesigning equipment to produce parts. Underly- ing this choice was a Boeing study which showed that more than 80% of the parts manufactured for aircraft are less than 12 inches long, and yet the metalwork- ing machinery is huge, inflexible, and could only eco- nomically produce parts in large lots.18

Soon empowered moonshine teams were design- ing their own equipment—small-scale machines with wheels on that could be moved around the plant and took up little space. A case in point: One team replaced a large stamping machine that cost six figures and was used to produce L-shaped metal parts in batches of 1,000 with a miniature stamping machine powered by a small, hydraulic motor that could be wheeled around the plant. With the small machine, which cost a cou- ple of thousand dollars, parts could be produced very quickly in small lots, eliminating the need for inventory. They also made a sanding machine and a parts cleaner of equal size. Now the entire process—from stamping the raw material to the finished part—is completed in minutes (instead of hours or days) just by configur- ing these machines into a small cell and having them serviced by a single person. The small scale and quick turnaround now make it possible to produce these

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parts just in time, eliminating the need to produce and store inventory.19

Another example of a moonshine innovation concerns the process for loading seats onto a plane during assembly. Historically, this was a cumbersome process. After the seats would arrive at Boeing from a supplier, wheels were attached to each seat, and then the seats were delivered to the factory floor in a large container. An overhead crane lifted the container up to the level of the aircraft door. Then the seats were unloaded and rolled into the aircraft before being in- stalled. The process was repeated until all of the seats had been loaded. For a single-aisle plane, this could take 12 hours. For a wide-bodied jet, it would take much longer. A moonshine team adapted a hay eleva- tor to perform the same job. It cost a lot less, delivered seats quickly through the passenger door, and took just 2 hours, while eliminating the need for cranes.20

Multiply such examples and soon you start to have a very significant impact on production costs. A drill machine was built for 5% of the cost of a full-scale ma- chine from Ingersoll-Rand; portable routers were built for 0.2% of the cost of a large, fixed router; one process that took 2,000 minutes for a 100-part order (20 min- utes per part because of setup, machining, and transit) now takes 100 minutes (1 minute per part); employees building 737 floor beams reduced labor hours by 74%, increased inventory turns from 2 to 18 per year, and re- duced manufacturing space by 50%; employees build- ing the 777 tail cut lead time by 70% and reduced space and work in progress by 50%; and production of parts for landing gear support used to take 32 moves from machine to machine and required 10 months—now it takes 3 moves and 25 days.21

In general, Boeing found that it was able to pro- duce smaller lots of parts economically, often from machines that it had built, which were smaller and cost less than the machines available from outside vendors. In turn, these innovations enabled Boeing to switch to just-in-time inventory systems and re- duce waste. Boeing was also able to save on space. By eliminating large production machinery at its Auburn facility, replacing much of it with smaller more flex- ible machines, Boeing was able to free up 1.3 million square feet of space, and sold seven buildings.22

In addition to moonshine teams, Boeing adopted other process improvement methodologies, using them when deemed appropriate. Six Sigma quality improve- ment processes are widely used within Boeing. The

most wide-reaching process change, however, was the decision to switch from a static assembly line to a mov- ing line. In traditional aircraft manufacture, planes are docked in angled stalls. Ramps surround each plane, and workers go in and out to find parts and install them. Moving a plane to the next workstation was a complex process. The aircraft had to be down jacked from its workstation, a powered cart was bought in, the aircraft was towed to the next station, and then it was jacked up. This could take two shifts. Much time was wasted bringing parts to a stall, and moving a plane from one stall to the next.

In 2001, Boeing introduced a moving assembly line into its Renton plant near Seattle, which manu- factures the 737. With a moving line each aircraft is attached to a “sled” that rides a magnetic strip embed- ded in the factory floor, pulling the aircraft at a rate of 2 inches per minute, moving past a series of stations where tools and parts arrive at the moment needed, allowing workers to install the proper assemblies. The setup eliminates wandering for tools and parts, as well as expensive tug pulls or crane lifts (just having tools delivered to workstations, rather than having work- ers fetch them, was found to save 20 to 45 minutes on every shift). Preassembly tasks are performed on feeder lines. For example, inboard and outboard flaps are assembled on the wing before it arrives for joining to the fuselage.23

Like a Toyota assembly line, the moving line can be stopped if a problem arises. Lights are used to in- dicate the state of the line. A green light indicates a normal work flow, the first sign of a stoppage brings a yellow warning light, and if the problem isn’t solved within 15 minutes, a purple light indicates that the line has stopped. Each work area and feeder line has its own lights, so there is no doubt where the problem is.24

The cumulative effects of these process innova- tions have been significant. By 2005, assembly time for the 737 had been cut from 22 days to just 11 days. In addition, work-in-process inventory had been reduced by 55 percent and stored inventory by 59 percent.25 By 2006, all of Boeing’s production lines except that for the 747 had shifted from static bays to a moving line. The 747 shifted to a moving line in the late 2000s.

the Super-Jumbo Decisions In the early 1990s, Boeing and Airbus started to con- template new aircraft to replace Boeing’s aging 747.

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The success of the 747 had given Boeing a monopoly in the market for very large jet aircraft, making the plane one of the most profitable in the jet age, but the basic design dated back to the 1960s, and some believed there might be sufficient demand for a super- jumbo aircraft with as many as 900 seats.

Initially, the two companies considered establish- ing a joint venture to share the costs and risks asso- ciated with a developing a super-jumbo aircraft, but Boeing withdrew in 1995 citing costs and uncertain demand prospects. Airbus subsequently concluded that Boeing was never serious about the joint venture, and the discussions were nothing more than a ploy to keep Airbus from developing its own plane.26

After Boeing withdrew, Airbus started to contem- plate a competitor to the 747. The plane, dubbed the A3XX, was to be a super-jumbo with capacity for over 500 passengers. Indeed, Airbus stated that some versions of the plane might carry as many as 900 passengers. Airbus initially estimated that there would be demand for some 1,400 planes of this size over 20 years, and that development costs would total around $9 billion (estimates ultimately increased to some $15 billion). Boeing’s latest 747 offering—the 747-400—could carry around 416 passengers in three classes.

Boeing responded by drafting plans to develop new versions of the 747 family, the 747-500X and the 747-600X. The 747-600X was to have a new (larger) wing, a fuselage almost 50 feet longer than the 747- 400, would carry 550 passengers in three classes, and have a range of 7,700 miles. The smaller 747-500X would have carried 460 passengers in three classes and had a range of 8,700 miles.

After taking a close look at the market for a super- jumbo replacement to the 747, in early 1997 Boeing announced that it would not proceed with the pro- gram. The reasons given for this decision included the limited market and high development costs, which at the time were estimated to be $7 billion. There were also fears that the wider wing span of the new planes would mean that airports would have to redesign some of their gates to accommodate the aircraft. Boe- ing, McDonnell Douglas (prior to the merger with Boeing), and the major manufacturers of jet engines all forecast demand for about 500–750 such aircraft over the next 20 years. Airbus alone forecast demand has high as 1,400 aircraft. Boeing stated that the frag- mentation of the market due to the rise of “point-to- point” flights across oceans would limit demand for a

super-jumbo. Instead of focusing on the super-jumbo category, Boeing stated that it would develop new ver- sions of the 767 and 777 aircraft that could fly up to 9,000 miles and carry as many as 400 passengers.

Airbus, however, continued to push forward with plans to develop the A3XX. In December 2000, with more than 50 orders in hand, the board of EADS, Airbus’ parent company, approved develop- ment of the plane, which was now dubbed the A380. Development costs at this point were pegged at $12 billion, and the plane was forecast to enter service in 2006 with Singapore Airlines. The A380 was to have two passenger decks, more space per seat, and wider aisles. It would carry 555 passengers in great comfort, something that passengers would appreciate on long transoceanic flights. According to Airbus, the plane would carry up to 35% more passengers than the most popular 747-400 configuration, yet cost per seat would be 15 to 20% lower due to operating efficien- cies. Concerns were raised about turnaround time at airport gates for such a large plane, but Airbus stated that dual boarding bridges and wider aisles meant that turnaround times would be no more than those for the 747-400.

Airbus also stated that the A380 was also designed to operate on existing runways and within existing gates. However, London’s Heathrow airport found that it had to spend some $450 million to accom- modate the A380, widening taxiways and building a baggage reclaim area for the plane. Similarly, 18 U.S. airports had reportedly spent some $1 billion just to accommodate the A380.27

the 787 While Airbus pushed forward with the A380, Boeing announced, in March 2001, the development of a radically new aircraft. Dubbed the sonic cruiser, the plane would carry 250 passengers 9,000 miles and fly just below the speed of sound, cutting 1 hour of transatlantic flights and 3 hours of transpacific flights. To keep down operating costs, the sonic cruiser would be built out of low-weight, carbon-fiber “composites.” Although the announcement created considerable interest in the aviation community, in the wake of the recession that hit the airline industry after September 11, 2001, both Boeing and the airlines became consid- erably less enthusiastic. In March 2002, the program was cancelled. Instead, Boeing said that it would

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develop a more conventional aircraft using compos- ite technology. The plane was initially known as the 7E7, with the E standing for “efficient” (the plane was renamed the 787 in early 2005).

In April 2004, the 7E7 program was formally launched with an order for 50 aircraft worth $6 billion from All Nippon Airlines of Japan. It was the largest launch order in Boeing’s history. The 7E7 was a twin- aisle, wide-bodied, two-engine plane designed to car- ry 200 to 300 passengers up to 8,500 miles, making the 7E7 well suited for long-haul, point-to-point flights. The range exceeded all but the longest range plane in the 777 family, and the 7E7 could fly 750 miles more than Airbus’ closest competitor, the mid-sized A330- 200. With a fuselage built entirely out of composites, the aircraft was lighter and would use 20% less fuel than existing aircraft of comparable size.

The plane was also designed with passenger com- fort in mind. The seats would be wider, as would the aisles, and the windows were larger than in existing aircraft. The plane would be pressurized at 6,000 feet altitude, as opposed to 8,000 feet, which is standard industry practice. Airline cabin humidity was typical- ly kept at 10% to avoid moisture buildup and corro- sion, but because composites don’t corrode, humidity would be closer to 20 to 30%.28

Initial estimates suggested that the jet would cost some $7–8 billion to develop and enter service in 2008. Boeing decided to outsource more work for the 787 than on any other aircraft to date. Some 35% of the plane’s fuselage and wing structure would be built by Boeing. The trio of Japanese companies that worked on the 767 and 777, Mitsubishi Heavy Indus- tries, Kawasaki Heavy Industries, and Fuji Heavy Industries, would build another 35%, and some 26% would be built by Italian companies, particularly Alenia.29 For the first time, Boeing asked its major suppliers to bear some of the development costs for the aircraft.

The plane was to be assembled at Boeing’s wide- bodied plant in Everett, Washington. Large sub- assemblies were to be built by major suppliers, and then shipped to Everett for final assembly. The idea was to “snap together” the parts in Everett in three days, cutting down on total assembly time. To speed up transportation, Boeing would adopt air freight as its major transportation method for many components.

Airbus’ initial response was to dismiss Boeing’s claims of cost savings as inconsequential. They pointed

out that even if the 787 used less fuel than the A330, that was equivalent to just 4% of total operating costs.30 However, even by Airbus’ calculations, as fuel prices starting to accelerate, the magnitude of the savings rose. Moreover, Boeing quickly started to snag some significant orders for the 787. In 2004, Boeing booked 56 orders for the 787 and, in 2005, some 232 orders. Another 85 orders were booked in the first 9 months of 2006 for a running total of 373—well beyond the breakeven point.

In December 2004, Airbus announced that it would develop a new model, the A350, to compete directly with the 787. The planes were to be long-haul, twin-aisle jets, seating 200 to 300 passengers, and con- structed of composites. The order flow, however, was slow, with airlines complaining that the A350 did not match the Boeing 787 on operating efficiency, range, or passenger comfort. Airbus went back to the draw- ing board, and in mid-2006 it announced a new ver- sion of the A350, the A350 XWB (for extra wide body). Airbus estimated that the A350 XWB would cost $10 billion to develop and enter service in 2012, several years behind the 787. The two-engine A350 XWB will carry between 250 and 375 passengers and fly up to 8,500 miles. The largest versions of the A350 XWB will be competing directly with the Boeing 777, not the 787. Like the 787, the A350 XWB will be built primarily of composite materials. The “extra wide body” is designed to enhance passenger comfort. To finance the A350 XWB, Airbus stated that it would seek launch aid from Germany, France, Spain, and the United Kingdom, all countries where major parts of Airbus are based.31

TrAde TenSionS

It is impossible to discuss the global aerospace industry without touching on trade issues. Over the last 3 decades, both Boeing and Airbus have charged that their competitor benefited unfairly from gov- ernment subsidies. Until 2001, Airbus functioned as a consortium of four European aircraft manu- facturers: one British (20.0% ownership stake), one French (37.9% ownership), one German (37.9% ownership), and one Spanish (4.2% ownership). In the 1980s and early 1990s, Boeing maintained that subsidies from these nations allow Airbus to

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set unrealistically low prices, to offer concessions and attractive financing terms to airlines, write off development costs, and use state-owned airlines to obtain orders. According to a study by the United States Department of Commerce, Airbus received more than $13.5 billion in government subsidies between 1970 and 1990 ($25.9 billion if commer- cial interest rates are applied). Most of these sub- sidies were in the form of loans at below-market interest rates and tax breaks. The subsidies financed research and development and provided attractive financing terms for Airbus’s customers. Airbus re- sponded by pointing out that Boeing had benefited for years from hidden U.S. government subsidies, particularly Pentagon R&D grants.

In 1992, the two sides appeared to reach an agreement that put to rest their longstanding trade dispute. The 1992 pact, which was negotiated by the European Union on behalf of the four member states, limited direct government subsidies to 33% of the total costs of developing a new aircraft and spec- ified that and such subsidies had to be repaid with interest within 17 years. The agreement also limited indirect subsidies such as government-supported military research that has applications to commer- cial aircraft to 3% of a country’s annual total com- mercial aerospace revenues, or 4% of commercial aircraft revenues of any single company on that country. Although Airbus officials stated that the controversy had now been resolved, Boeing officials argued that they would still be competing for years against subsidized products.

The trade dispute heated up again in 2004, when Airbus announced the first version of the A350 to compete against Boeing’s 787. Signs from Airbus that it would apply for $1.7 billion in launch aid to help fund the development of the A350 raised a red flag for the U.S. government. As far as the United States was concerned, this was too much. In late 2004, U.S. Trade Representative Robert Zoellick issued a statement for- mally renouncing the 1992 agreement and calling for an end to launch subsidies. According to Zoellick, “Since its creation 35 years ago, some Europeans have justified subsidies to Airbus as necessary to support an infant industry. If that rationalization were ever valid, its time has long passed. Airbus now sells more large civil aircraft than Boeing.” Zoellick went on to claim that Airbus has received some $3.7 billion in launch aid for the A380, plus another $2.8 billion in

indirect subsidies including $1.7 billion in taxpayer- funded infrastructure improvements, for a total of $6.5 billion.

Airbus shot back that Boeing too continued to enjoy lavish subsidies, and that the company had received some $12 billion from NASA to develop tech- nology, much of which has found its way into com- mercial jet aircraft. The Europeans also contended that Boeing would receive as much as $3.2  billion in tax breaks from Washington State, where the 787 is to be assembled, and more than $1 billion in loans from the Japanese government to three Japanese suppliers, who will build over one-third of the 787. Moreover, Airbus was quick to point out that a trade war would not benefit either side, and that Airbus purchased some $6 billion a year in supplies from companies in the United States.

In January 2005, both the United States and the European Union (EU) agreed to freeze direct subsi- dies to the two aircraft makers while talks continued. However, in May 2005 news reports suggested, and Airbus confirmed, that the jet maker had applied to four EU governments for launch aid for the A350, and that the British government would announce some $700 million in aid at the Paris Air Show in mid-2005. Simultaneously, the EU offered to cut launch aid for the A350 by 30%. Dissatisfied, the U.S. side decided that the talks were going nowhere, and on May 31 the United States formally filed a request with the World Trade Organization (WTO) for the establishment of a dispute resolution panel to resolve the issues. The EU quickly responded by filing a countersuit with the WTO claiming that U.S. aid to Boeing exceeded the terms set out in the 1992 agreement.32

In early 2011, the WTO ruled on the complaint by Boeing and on Airbus’s counterclaim. The WTO stated that Airbus had indeed benefited from some $15 billion in improper launch aid subsidies over the prior 40 years, and that this practice must stop. Boeing, however, had little time to celebrate. In a sep- arate ruling, the WTO stated that Boeing too had ben- efited from improper subsidies, including $5.3  billion from the United States government to develop the 787 (the WTO stated that most of these subsidies were in the form of payments from NASA to develop space technology that subsequently had commercial applications). Both sides in the dispute appealed these rulings, a process that could drag out for years.33

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The nexT ChApTer

Huge financial bets have been placed on somewhat different visions of the future of airline travel, Airbus with the A380 and Boeing with the 787. By mid-2011, Airbus had delivered 51 A380s and had a backlog of 236 or order. The rate of new orders had been slow, however. Boeing has a backlog of 827 787s on order. Airbus also hedged its bets by announcing the A350 XWB, and after a slow start the aircraft has amassed some 567 orders as compared to 827 for the 787.

Both companies have had substantial production problems and faced significant delays. In mid-2006, Airbus announced that deliveries for the A380 would be delayed by 6 months while the company dealt with “production issues” arising from problems installing the wiring bundles in the A380. Estimates suggested that the delay would cost Airbus some $2.6 billion over the next 4 years.34 Within months, Airbus had re- vised the expected delay to 18 months and stated that the number of A380s it now needed to sell in order to break even had increased from 250 to 420. The com- pany also stated that, due to production problems, it would only be able to deliver 84 A380 planes by 2010, compared to an original estimate of 420 (in fact, it delivered only half of this amount).35

Boeing ran into a number of production and design problems with the 787 that resulted in five delay an- nouncements, pushing out the first deliveries more than 3 years. For the 787, Boeing outsourced an unprecedent- ed amount of work to suppliers. This was seen at the time as a risky move, particularly given the amount of new technology incorporated into the 787. As it turned out, several suppliers had problems meeting Boeing’s quality specifications, supplying substandard parts that had to be reworked or redesigned. The issues included a shortage of fasteners, a misalignment between the cock- pit section and the fuselage, and microscopic wrinkles in the fuselage skin. In addition, Boeing found that it had to redesign parts of the section where the wing meets the fuselage. Boeing executives complained that their engineers were often fixing problems “that should not have come to us in the first place.”36

Some company sources suggested that Boeing erred by not managing its supplier relationships as well as it should have done. In particular, there may have been a lack of ongoing communication between Boeing and key suppliers. Boeing tended to throw design

specifications “over the wall” to suppliers, and then was surprised when they failed to comply fully with the company’s expectations. In addition, Boeing’s depen- dency on single suppliers for key components meant that a problem with any one of those suppliers could create a bottleneck that would hold up production.

In an attempt to fix some of the supply-chain is- sues, in 2009 Boeing purchased a Vought Industries Aircraft plant for $580 million. Vought had been in a joint venture with the Italian company, Alenia Aero- nautical, to make fuselage parts for the 787. Vought had not been able to keep up with the demands of the program, and Boeing’s acquisition has seen as a move to exert more control over the production process, and inject capital into Vought.

In another development, Boeing quietly launched the 747-8 program in November 2005. This plane is a completely redesigned version of the 747 and incorpo- rates many of the technological advances developed for the 787, including significant use of composites. It is offered in both a freighter and intercontinental passenger configuration that carries 467 passengers in a three-seat configuration and has a range of 8,000 miles (the 747-400 can carry 416 passengers). The 747-8 uses the fuel-efficient engines developed for the 787, and has the same cockpit configuration as the 737, 777, and 787. Development costs were estimated to be around $4 billion. By July 2011, Boeing had or- ders for 78 747-8 freighters and 36 passenger planes. The first deliveries of the freighter version were made in 2011, and the passenger version in 2012. Demand for the aircraft has been slow to build, however, with the passenger version in particular failing to garner sales due to the 787. At the end of 2014, Boring only had 36 orders for the 747-8 on its books, most of which were freighters.

By 2010, the main issue confronting both Airbus and Boeing is what to do about their aging narrow- bodied planes, the A320 and the 737. These aircraft are the workhorses of many airlines, comprising some 70% of all units produced by the two manufacturers. Strong demand is expected for this category going for- ward. Both Boeing and Airbus would probably prefer to wait for a few more years before bearing the R&D costs associated with new product development. The argument often made is that this will give time for new technologies to mature, and make for a better aircraft at the end of the day. However, events have conspired to force their hands.

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First, new engine technologies developed by Pratt & Whitney reportedly increase fuel efficiency by 10 to 15%. Airlines want the new engines on their aircraft, but this requires some redesign of the A320 and 737. The wings of the 737, in particular, are too low slung to take the new engines, so Boeing would have to do some major redesign work.

Second, there are several potential new entrants into the narrow-bodied segment of the market. The Canadian regional jet manufacturer, Bombardier, is developing a 110- to 150-seat aircraft that makes ex- tensive use of composites to reduce weight. This will reduce operating costs by about 15% compared to the older 737 and A320 models. Known as the CSeries, as of early 2015 Bombardier had 243 firm orders for this aircraft plus options for another 162. The first CSeries aircraft are expected to enter service in 2015.

In addition, the Commercial Aircraft Corpora- tion of China (Comac) has announced that it will build a 170- to 190-seat narrow-bodied jet. Scheduled for introduction in 2016, this will compete with the larger 737 and A320 models. The European low-cost airline, Ryanair, has entered into a codevelopment agreement with Comac and has talked about a 200+ plane order that could go as high as 400. Up until this point Ryanair has been a Boeing customer. Boeing must decide how to confront these growing threats.

Responding to these threats, Airbus in late 2010 announced that it would introduce a rede- signed version of the A320 that utilizes the Pratt & Whitney engine. Known as the A320neo (“new engine option”), the offering has garnered strong interest from airlines, racking up over 1,000 orders by August 2011.

These developments presented Boeing with a major strategic dilemma. Should they continue to evaluate what to do with the 737, perhaps waiting a few more years before making the heavy investment associated with redesign? This would allow them to design a high-technology successor to the 737 that would incorporate many of the technologies devel- oped for the 787. Alternatively, should they jump into the fray immediately and offer a redesigned version of the 737 that can utilize new engine tech- nology? Ultimately, Boeing’s hand was forced by de- mands from longstanding customers such as South- west Airlines for an updated version of the 737 that would match the A320neo (reportedly, Southwest threatened to start ordering Airbus planes if Boeing did not move forward with the 737MAX program).

The 737MAX is now in development at Boeing, with the first planes expected to enter service at the end of 2017.37

NOTEs

1. www.boeing.com 2. www.airbus.com 3. J. Palmer, “Big Bird,” Barron’s, December 19,

2005, pp. 25-29; www.yeald.com/Yeald/a/33941 /both_a380_and_787_have_bright_futures.html.

4. G. J. Steven. “The Learning Curve: From Aircraft to Spacecraft,” Management Accounting, May 1999, pp. 64–66.

5. D. Gates, “Boeing 7E7 Watch: Familiar Suppliers Make Short List,” Seattle Times.

6. The figures are from the International Airline Travelers Association (IATA).

7. IATA press release, “2006 Loss Forecast Drops to US$1.7 Billion,” August 31, 2006.

8. Air Transport Association, Industry Review and Outlook, April 29, 2015.

9. Anonymous, “Turbulent Skies: Low Cost Air- lines,” The Economist, July 10, 2004, pp. 68–72; Anonymous, “Silver Linings, Darkening Clouds,” The Economist, March 27, 2004, pp. 90–92.

10. Air Transport Association, “The Economic Climb Out for U.S. Airlines,” ATA Economics, August 3, 2011. Accessed on www.airlines.org

11. Data from the Air Transport Association, www. airlines.org.

12. Boeing, Current Market Outlook, 2014. Archived on www.boeing.com

13. www.airbus.com/en/myairbus/global_market_for- cast.html.

14. Presentation by Randy Baseler, vice president of Boeing Commercial Airplanes, Farnborough Air Show, July 2006. Archived at www.boeing.com/ nosearch/exec_pres/CMO.pdf.

15. This material is drawn from an earlier version of the Boeing case written by Charles W. L. Hill. See C. W. L. Hill, “The Boeing Corporation: Com- mercial Aircraft Operations,” in C. W. L. Hill and G. R. Jones (eds.), Strategic Management, 3rd ed. (Boston: Houghton Mifflin, 1995). Much of Boe- ing’s history is described in R. J. Sterling, Legend and Legacy (St Martin’s Press, New York, 1992).

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16. S. Browder, “A Fierce Downdraft at Boeing,” Businessweek, January 26, 1988, p. 34.

17. M. A. Cusumano, The Japanese Automobile Indus- try (Cambridge, Mass.: Harvard University Press, 1989); Ohno Taiichi, Toyota Production System (Cambridge, Mass.: Productivity Press, 1990); J. P. Womack, D. T. Jones, and D. Roos, The Machine That Changed the World (New York: Rawson Asso- ciates, 1990).

18. J. Gillie, “Lean Manufacturing Could Save Boe- ing’s Auburn Washington Plant,” Knight Ridder Tribune Business News, May 6, 2002, p. 1.

19. P. V. Arnold, “Boeing Knows Lean,” MRO Today, February 2002.

20. Boeing press release, “Converted Farm Machine Improves Production Process,” July 1, 2003.

21. P. V. Arnold, “Boeing Knows Lean”; “Build in Lean: Manufacturing for the Future,” www.boeing.com /aboutus/environment/create_build.htm; J. Gillie, “Lean Manufacturing Could Save Boeing’s Auburn Washington Plant.”

22. J. Gillie, “Lean Manufacturing Could Save Boeing’s Auburn Washington Plant.”

23. P. V. Arnold, “Boeing Knows Lean.” 24. M. Mecham, “The Lean, Green Line,” Aviation

Week, July 19, 2004, pp. 144–148. 25. Boeing press release, “Boeing Reduces 737

Airplane’s Final Assembly Time by 50 Percent,” January 27, 2005.

26. Anonymous, “A Phony War,” The Economist, May 5, 2001, pp. 56–57.

27. J. D. Boyd, “Building Room for Growth,” Traffic World, August 7, 2006, p. 1.

28. W. Sweetman, “Boeing, Boeing, Gone,” Popular Science, June 2004, p. 97.

29. Anonymous, “Who Will Supply the Parts?,” Seattle Times, June 15, 2003.

30. W. Sweetman, “Boeing, Boeing, Gone.” 31. D. Michaels and J. L. Lunsford, “Airbus Chief

Reveals Plans for New Family of Jetliners,” The Wall Street Journal, July 18, 2006, p. A3.

32. J. Reppert-Bismarck, and W. Echikson, “EU Countersues Over U.S. Aid to Boeing,” The Wall Street Journal, June 1, 2005, p. A2; United States Trade Representative Press Release, “United States Takes Next Steps in Airbus WTO Litiga- tion,” May 30, 2005.

33. N. Clark, “WTO Rules U.S. Subsidies for Boeing Unfair,” New York Times, March 31, 2011.

34. Anonymous, “Airbus Agonistes,” The Wall Street Journal, September 6, 2006, p. A20.

35. Anonymous, “Forecast Dimmer for Profit on Air- bus’ A380,” Seattle Times, October 20, 2006, Web Edition.

36. J. Weber, “Boeing to Rein in Dreamliner Outsourc- ing,” Bloomberg Businessweek, January 16, 2009.

37. Staff reporter, “American Airlines Orders 200 Boeing 737s, 260 More From Airbus,” Associated Press, July 19, 2011.

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