Boing 787 Discussion

Boeing 787 Case Discussion

Suri Gurumurthi, Ph.D.

World economy

(GDP)

Airplane fleet Number of passengers

Airline traffic (RPKs)

Cargo traffic (RTKs)

3.2% 3.2% 4.0%

5.0% 5.8%

Key Growth Rates

747 and larger Twin-aisle Single-aisle Regional Jets

$290

$1,470 $1,360

$80

Market Potential for Boeing Products ($B)

747 and larger

Twin-aisle Single-aisle Regional Jets

980

6,750

19,160

2,510

Airplanes Delivery Projections

747 and larger

Twin-aisle Single-aisle Regional Jets

910 3,480

11,450

3,1601,340

8,290

23,540

2,630

Airplanes in Service 2007 2027

Aviation Market (2007-2027)

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Region Regional Jets Single-aisle Twin-aisle 747 and larger Total Deliveries

Asia-Pacific 430 5,440 2,810 480 9,160

North America 1,190 6,080 1,190 90 8,550

Europe 320 4,880 1,490 210 6,900

Middle East 60 660 690 170 1,580

Latin America 110 1,340 250 - 1,700 Russia and Central Asia 340 460 130 20 950

Africa 60 300 190 10 560

World 2,510 19,160 6,750 980 29,400

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Aviation Market

Values in 2007 $B Regional Jets Single-aisle Twin-aisle 747 and largerTotal Market Value

Asia-Pacific $13 $400 $630 $150 $1,190

North America $40 $420 $250 $30 $740

Europe $10 $350 $320 $60 $740

Middle East $2 $50 $160 $50 $260

Latin America $3 $90 $50 $1 $140 Russia and Central Asia $10 $30 $20 $4 $60

Africa $2 $20 $40 $1 $60

World $80 $1,360 $1,470 $290 $3,200 4

Aviation Market

Boeing 787 Concept Progression in 747, 767, 777 families…

787 family (large aircraft) • 787-8, 210-250 passengers, 8200 mile range • 787-9, 250-290 passengers, 8500 mile range • 787-3, 290-330 passengers, 3000 mile range

Technology advancements aimed at efficiency • 50% of structure is composite materials • One-piece fuselage section (reduced material usage) • New engines from GE and Rolls-Royce • 20% improvement in fuel-burn over similar aircraft • 10% reduction in cash-seat-mile

Priced between $150M and $200M

Globally distributed development and assembly process • 600+ suppliers • 70-80% of work done outside Boeing (company claims otherwise)

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Cost-Profit Model (Thought Experiment!)

• Suppose profit margin for Boeing = 25% x 150B = 37.5B • COGS = 150 Billion x 0.75 = 112.5B • If we assume 20% work share for Boeing ; • 0.2 x 112.5= 22.5B (Boeing’s share of the cost!) • This indicates that Outsourcing may be a profitable and GOOD

strategy!

• However, balance against the risks to the brand from outsourcing so heavily

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Supply Chain Design: Global Development & Assembly

Supplier / Company Location Role Boeing Commercial Airplanes (announced Nov and Dec 2003) Washington

Airplane development, integration, final assembly, program leadership

Alenia/Vought Aircraft Industries (announced Nov 2003) Italy, Texas

Horizontal stabilizer, center fuselage, aft fuselage

Boeing Fabrication (announced Nov 2003)

Washington, Canada, Australia

Vertical tail assembly, movable trailing edges, wing-to-body fairing, interiors

Spirit Aerosystems Inc. (announced as Boeing-Wichita Nov 2003; Apr 2004)

Kansas, Oklahoma Fixed and movable leading edges, flight deck, part of forward fuselage, engine pylons

Fuji Heavy Industries (announced Nov 2003) Japan

Center wing box, integration of the center wing box with the main landing gear wheel well

Kawasaki Heavy Industries (announced Nov 2003) Japan

Main landing gear wheel well, main wing fixed trailing edge, part of forward fuselage

Mitsubishi Heavy Industries (announced Nov 2003) Japan Wing box

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Supply Chain Models of Design and Development

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• “Build to Print”: • Boeing works with suppliers to develop the

component design and then finalize • Outsource the production • Risky in terms of development costs • Boeing will own the IP of their work

• “Build to Spec”: • Boeing communicates requirements; • Supplier has to own the design • Outsourcing the Design • Far riskier in terms of quality, timeliness • Supplier owns the IP

Supplier / Company Location Role

Hamilton Sundstrand (announced Feb 2004, Mar 2004, Jul 2004, Sep 2004) Connecticut

Auxiliary power unit, environmental control system, remote power distribution units, electrical power generating and start system, primary power distribution, nitrogen generation, ram air turbine emergency power system, electric motor hydraulic pump subsystem

Rockwell Collins (announced Feb 2004, Jun 2004) Iowa

Displays, communications/ surveillance systems, pilot control system

Honeywell (announced Feb 2004, Jul 2004, Dec 2004) Arizona

Navigation, maintenance/crew information systems, flight control electronics, exterior lighting

GE Aviation (formerly Smiths Aerospace) (announced Feb. 2004, Jun. 2004) United Kingdom

Common core system, landing gear actuation and control system, high lift actuation system

Goodrich (announced Mar 2004; Apr 2004, Jun 2004, Nov 2004, Dec 2004) North Carolina

Fuel quantity indicating system, nacelles, proximity sensing system, electric brakes, exterior lighting, cargo handling system

Messier-Dowty (announced Mar 2004) France Landing gear structure

Dassault Systèmes (announced Feb 2004) France Global collaboration tools/software 10

Supply Chain Design: Global Development & Assembly

Boeing 787 Program Timeline

Apr 2006: Boeing inks $6B deal with Japanese carbon-fiber company

Apr 2005: External design finalized

Jan 2005: First composite fuselage section rolled- out

June 2004, Air New Zealand places 2 orders and 16 options

April 2004, First batch of 50 orders from All Nippon Airways

Dec 2003: Everett, WA finalized as assembly site

2000-2003: 7E7 program planned

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11 Dec 2008: Firm orders rise to 910 (most for 787-

8)

Aug 2008: First order cancelled by Azerbaijan Airlines

Jul 2008: Roll-out ceremony

Jun 2008: “Power-on” milestone…

May 2007: Final assembly started…

Jan- May 2007: Major sub-assemblies rolled-out

Dec 2006: “Virtual Roll-out” of assembly. process

June 2006: Major assembly operations started

Modular Assembly: Boeing 787 Dreamlifter

• 747 cargo aircraft specially developed for 787 assembly • Major subassemblies of 787 are manufactured world-wide and shipped

for final assembly to Everett, WA. • Aims to reduce subassembly delivery times from 30 to 1 day target

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Source: Boeing.com

Source: Boeing.comSource: Boeing.com

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-200

0

200

400

600

800

1000

1200

2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003

Ax is

T itl

e

Orders

737

747

767

777

787

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Marketing Success! Boeing Order Backlog

Reality Bites: Boeing 787 Program Delays

Quality and safety implications of fuselage problems

Center wing-box (where wings attach) needed strengthening- redesign effort required from Fuji Heavy Industries

Boeing bought out Vought’s share in Global Aeronautica

Supplier had no previous experience assembling the fuselage; subsequent operations moved to Everett, WA

Fuselage assembly problems at major supplier: Global Aeronautica (alliance between Vought Aircraft and Italy’s Alenia) in South Carolina

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Reality Bites: Boeing 787 Program Delays

First flight delayed to Q2 2009; first delivery Q1 2011

Boeing announces 4500 job cuts

Boeing Machinists strike in 2008; Boeing deliveries hurt

Series of delays announced starting 2007…Mike Bair replaced

80% of Dreamliner is fabricated by outside suppliers- less control for Boeing

Software glitches- different sub-systems found not working well together

Aircraft tests heavier than designed

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Reality Bites: Boeing 787 Program Delays

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Whose fault is it anyway…?

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• Some reports blame relatively small tools and fixtures firm for delays

“Yet the impact of a little-known Texas company that fell months behind building tools needed to assemble the plane highlights how a hiccup can play havoc with Boeing's tight 787 timetable.

The company, Advanced Integration Technology, has fallen short supplying Vought Aircraft Industries, itself the Dreamliner's most troubled supplier.” – Chicago Tribune, December 2007

• Advanced Integration Technologies disputes the claim

“We had no impact,” AIT President Ed Chalupa recently told Aerospace Engineering & Manufacturing magazine regarding 787 delays. “All of our tools were available. They did not stop one production item. You saw that the airplane rolled out the day it was supposed to. That means our tools were ready and working.”– SAE.org, September 2008

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Remedies

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• Boeing in-sources the work

“Determining the sequence of putting parts together has been a huge source of delays. Boeing, anticipating that suppliers would be doing the work, did not engage in the long, detailed engineering planning required to put tasks in order. "We were wrong" in thinking Boeing could quickly pick up where suppliers had failed, (program manager) Shanahan said.” – International Herald Tribune, January 2008

• Boeing looking to shift work back over long term

“Boeing officials are visiting those companies and expect, in coming weeks, to be able to project when that work can be done there, on schedule and at a scale that will allow 787 production to increase”– International Herald Tribune, January 2008

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Wall Street Cares about Execution…

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Company Role in Program October 10th 2007

January 15th 2008

% Change

Boeing Lead Firm $98.3 $79.3 (19%)

Spirit Aerosystems Fuselage parts $36.5 $26.1 (28%)

BE Aerospace Cabin and seating $43.3 $40.1 (7%)

Honeywell Cockpit $60 $56.7 (6%)

Rockwell Collins Information Systems $73.3 $65.1 (11%)

LMI Aerospace Structural Components $27.6 $23 (17%)

Titanium Metals Metal Supply $33.3 $23.4 (30%)

Precision Castparts Structural, airfoil, turbine castings

$146.7 $118.6 (19%)

Source: 24/7 WallStreet 19

Customers care about Execution…

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• Customers’ fleet planning affected “British airlines face increased costs running into hundreds of millions of pounds,

and expansion plans being blown off course…” – Business Week, April 2008

• Major customers change business plans, and orders… “All Nippon Airways of Japan, the launch customer for the 787, said Thursday its

board had decided to order nine 767-300ERs to help it with lift capacity because the 50 Dreamliners it has ordered will be 14 to 36 months late”– SeattlePI, September 2008

• Boeing faces penalties and direct losses from delays, as many customers seek compensation

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Employees care about Execution…

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• Boeing machinists strike work “At the heart of the scrimmage between the International Association of Machinists

and Aerospace Workers and Boeing’s management is the growing use of contract workers at factories doing the same jobs as full-time union employees” – MSNBC, September 2008

• Boeing reports 38% drop in 3Q earnings over 2007 “Boeing had been gaining a lot of orders at the expense of Airbus because Airbus had

such long delivery lags on some of the planes. Now Boeing's delivery lags are going up. This puts Airbus back into the game”– Standard and Poors Analyst on MarketPlace Public Radio, October 2008

• Impact on supply chain “Vendors including Spirit (Aerosystems) have reduced hours or fired workers and

withdrawn or lowered profit forecasts.” – MSNBC, September 2008

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Epilogue…

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Boeing 787 Orders to Date (Green= Delivered)

Epilogue

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Airbus A350 Orders to Date