The commercial jet business had long been subject to booms and busts: major demand for new aircraft and then years of little demand. By the second half of the 1990s, demand burgeoned as never before. Boeing, the world's leading producer of commercial airplanes, seemed in the catbird seat amid the worldwide surge of orders. This was an unexpected windfall, spurred by markets greatly expanding in Asia and Latin America at the same time as domestic demand boomed, helped by deregulation and prosperity. In the midst of these good times, Boeing in 1997 incurred its first loss in 50 years.
During this same period, Airbus (Airbus Industrie), a European aerospace consortium, an underdog, began climbing toward its long-stated goal of winning 50 percent of the over-100-seat airplane market. The battle was all-out, no-holds-barred, and Boeing was vulnerable. But in this chess game of monolithic firms, Airbus stumbled with throwing all of its resources into the world's biggest passenger jet, and Boeing seemed to emerge a winner with its Dreamliner. Then outsourcing woes afflicted them both by 2008.
Boeing's is a fabled past. The company was a major factor in the World War II war effort, and in the late 1950s led the way in producing innovative, state-of-the-art commercial aircraft. It introduced the 707, the world's first commercially viable jetliner. In the late 1960s, it almost bankrupted itself to build a jetliner twice the size of any other then in service, while the critics predicted it could never fly profitably. But the 747 dramatically lowered costs and airfares and brought passenger comfort previously undreamed of in flying. In the mid-1990s, Boeing introduced the high technology 777, the first commercial aircraft designed entirely with the use of computers.
In efforts to reduce the feast-or-famine cycles of the commercial aircraft business, Boeing acquired Rockwell International's defense business in 1996, and in 1997 purchased McDonnell Douglas for $16.3 billion.
In 1997, Boeing's commercial aircraft segment contributed 57 percent of total revenues. This segment ranged from 125-passenger 737s to giant 450–500-seat 747s. In 1997, Boeing delivered 374 aircraft, up from 269 in 1996. The potential seemed enormous: Over the next 20 years, air passenger traffic worldwide was projected to rise 4.9 percent a year and airlines were predicted to order 16,160 aircraft to expand their fleets and replace aging planes.[141] As the industry leader, Boeing had 60 percent of this market. At the end of 1997, its order backlog was $94 billion.
Defense and space operations comprised 41 percent of 1997 revenues. This included airborne warning and control systems (AWACS), helicopters, B-2 bomber subcontract work, and the F-22 fighter, among other products and systems.
Boeing proved to be poorly positioned to meet the surge in aircraft orders. Part of this resulted from its drastic layoffs of experienced workers during the industry's last slump, in the early 1990s. Though Boeing hired 32,000 new workers over 18 months starting in 1995, the experience gap upped the risk of costly mistakes. Boeing had also cut back its suppliers in strenuous efforts to slash parts inventories and increase cost efficiency.
But Boeing had other problems. Its production systems were a mess. It had somehow evolved some 400 separate computer systems, and these were not linked. Its design system was labor intensive and paper dependent, and very expensive as it tried to cater to customer choices. A $1 billion program had been launched in 1996 to modernize and computerize the production process. But this was too late: The onslaught of orders had already started. (It is something of an anomaly that a firm that had the sophistication to design the 777 entirely by computers was so antiquated in its use of computers otherwise.)
Demands for increased production were further aggravated by unreasonable production goals and too many plane models, almost an impossible product line. Problems first hit with the 747 Jumbo, and then with a new version of the top-selling 737, the so-called next-generation 737NG. Before long, every program was affected: also the 757, 767, and 777. While Boeing released over 320 planes to customers in 1997 for a 50 percent increase over 1996, this was far short of the planned completion rate. For example, by early 1998 a dozen 737NGs had been delivered to airlines, but this was less than one-third of the 40 supposed to have been delivered by then. Yet, the company maintained through September 1997 that everything was going well, that there was only a month's delay in the delivery of some planes.
Soon it became apparent that problems were much greater. In October, the 747 and 737 assembly lines were shut down for nearly a month to allow workers to catch up and ease part shortages. The Wall Street Journal reported horror stories of parts being rushed in by taxicab, of executives spending weekends trying to chase down needed parts, of parts needed for new planes being shipped out to replace defective parts on an in-service plane. Overtime pay brought some assembly-line workers incomes over $100,000, while rookie workers muddled by on the line.[142]
Despite its huge order backlog, Boeing took a loss for 1997, the first in over 50 years. See Table 10.1 for the trend in revenues and net income from 1988 to 1998.
The loss mostly resulted from two massive write-downs. One, for $1.4 billion, arose from the McDonnell Douglas acquisition and in particular from its ailing commercial aircraft operation at Long Beach, California. The bigger write-off, $1.6 billion, reflected production problems, particularly on the new 737NG. Severe price competition with Airbus resulted in not enough profits on existing business to bring the company into the black. Production delays continued, with more write-downs on the horizon.
Table 10.1. Boeing's Trend of Revenues and Income, 1988–1998
(millions) | ||
|---|---|---|
Revenue | Net Income | |
Source: Boeing Annual Reports | ||
Commentary: Note the severity of the decline in revenues and profits during the industry downturn in 1993, 1994, and 1995. It is little wonder that Boeing was so ill prepared for the deluge of orders starting in 1997. Then, in an unbelievable anomaly, the tremendous increase in revenues in 1997 to the highest ever— partly reflecting the acquisitions—was accompanied by a huge loss. | ||
1988 | $16,962 | $614 |
1989 | 20,276 | 675 |
1990 | 27,595 | 1,385 |
1991 | 29,314 | 1,567 |
1992 | 30,184 | 1,554 |
1993 | 25,438 | 1,244 |
1994 | 21,924 | 856 |
1995 | 19,515 | 393 |
1996 | 22,681 | 1,095 |
1997 | 45,800 | (177) |
1998 | 56,100 | 1,100 |
As Boeing moved into 1998, analysts wondered how much longer it would take to clear up the production snafus. This would be longer than anyone had been led to believe. Unexpectedly, a new problem arose for Boeing. Disastrous economic conditions in Asia now brought major order cancellations.
Not surprisingly, Boeing's production problems resulting in delayed shipments had a serious impact on customer relations. For example, Southwest Airlines had to temporarily cancel adding service to another city because the ordered planes were not ready. Boeing paid Southwest millions of dollars of compensation for the delayed deliveries. Continental also had to wait for five overdue 737s.
Other customers switched to Boeing's only major competitor, Airbus Industrie, of Toulouse, France.
Airbus had to salivate at Boeing's troubles. It had been a distant second in market share to the 60 percent of Boeing. Now this was changing and Airbus could see achieving a sustainable 50 percent market share. See the Information Box: Importance of Market Share for a discussion of market share.
Airbus was founded in 1970 as a consortium that came to include four countries: British Aerospace, DaimlerChrysler Aerospace (Germany), France's Aerospatiale, and Spain's Casa. Each of the partners supplied components such as wings and fuselages; the partners also underwrote the consortium's capital expenses (sometimes with government loans), and were prepared to cover its operating losses.
The organizational structure seemed seriously flawed. It was politicized, with the partners voting on major issues in proportion to their country's ownership stakes. From this fragmented leadership, public squabbles frequently arose, some very serious. For example, plans to produce a new 107-seat A318 were held up by the French, who thought they were not getting their fair share of the production. Finances were also tangled with components supplied by the various countries charged to Airbus at suspiciously high prices.
The result was that in 1998, Boeing made $1.1 billion on sales of $56.1 billion, while Airbus was losing $204 million on sales of $13.3 billion. Boeing accused Airbus of selling below cost in order to steal business from Boeing, and Airbus blamed Boeing for the low bids.
The competition between the two companies became increasingly bitter after 1996. In that year, Boeing and several Airbus partners discussed a joint development of a superjumbo. The talks ended when they could not agree on a single design. But Airbus suspected Boeing was not sincerely interested in this collaboration, that its main purpose in the talks was to stall Airbus's plans.
Airbus went ahead with its plans, while Boeing pooh-poohed the idea of such a huge plane.
A slight Frenchman with a cheery disposition, Noel Forgeard, 52, joined the consortium in 1998 from Matra, a French aerospace manufacturer. He came with several major goals: to centralize decision making, to impose sensible bookkeeping, and to make Airbus consistently profitable. The task was not easy. For example, plans to build the world's largest airplane, code-named A3XX, were even threatened by disagreements over where it would be assembled. Both France and Germany thought it should be produced in their country. Forgeard stated, "The need for a single corporate entity is well recognized. Everybody here is focused on it."[143] Still, while the need for reorganizing into something like a modern corporation was evident to most executives, the major partners were divided over how to proceed.
The A3XX was designed as a double-decker plane that could carry 555 passengers comfortably—137 more than a Boeing 747-400 (it could even carry 750 people on routes around Asia where people did not care as much about seating comfort). It was expected to fly by 2004, with prices starting somewhat over $200 million. Development costs could reach $15 billion, so essentially the A3XX was a bet-the-company project with an uncertain outlook, much as was Boeing's 747 30 years before. To pay for these costs, Airbus expected to get 40 percent from suppliers such as Sweden's Saab, 30 percent from government loans arranged by its partners, and the rest from its own resources.
The huge financing needed for this venture could hardly be obtained without a corporate reorganization, one that would provide a mechanism for handling internal disputes among the various partner countries, not the least of which was where the plane would be assembled. So, Forgeard had necessity on his side for reorganizing. But the A3XX faced other issues and concerns.
Boeing's publicly expressed opinion was that such a plane would never be profitable. "Let them launch it," said one Boeing official, with a hint of malice.[144] Boeing took the position that consumers want frequent, nonstop flights, such as Southwest Airlines had brought to prominence with its saturation of city-pair routes with frequent flights. An ultra-large aircraft would mean far less frequency.[145]
Airbus, meantime, surveyed big airlines and discerned enough interest in a super-jumbo to proceed. It also consulted with more than 60 airports around the world to determine whether such a big plane would be able to take off and land easily. Weight is critical to these maneuvers, and Airbus pledged that the A3XX would be able to use the same runways as the 747 because of a new lightweight material. Instead of regular aluminum, the planes would use a product called Glare, made of aluminum alloy and glass-fiber tape.
Airbus promised ambitious plans for passenger comfort in this behemoth. It built a full-size 237-foot mockup of the interior to show prospective customers, and enlisted 1,200 frequent flyers to critique the cabin mockup. To reduce claustrophobia, the designers added a wide staircase between upper and lower decks. Early plans also included exercise rooms and sleeping quarters fitted with bunk beds.
Airbus claimed that the 555-seat A3XX would be 15 percent cheaper to operate per seat-mile than Boeing's 747. Boeing maintained this was wildly optimistic. United Airlines Frederick Brace, vice president of finance, also expressed doubts: "The risk for Airbus is whether there's a market for A3XX. The risk for an airline is: Can we fill it up? We have to be prudent in how we purchase it."[146]
Airbus was well positioned to supply planes to airlines whose needs Boeing couldn't meet near term. Some thought it was even producing better planes than Boeing.
United Airlines chose Airbus's A320 twinjets over Boeing's 737s, saying passengers preferred the Airbus product. Several South American carriers also chose A320s over the 737, placing a $4 billion order with Airbus. For 1997, Airbus hacked out a 45 percent market share, the first time Boeing's 60 percent market share had eroded.
The situation worsened drastically for Boeing in 1998. US Air, which had previously ordered 400 Airbus jets, announced in July that it would buy 30 more. But the biggest defection came in August when British Airways announced plans to buy 59 Airbus jetliners and take options for 200 more. This broke its long record as a Boeing-loyal customer. The order, worth as much as $11 billion, would be the biggest victory of Airbus over Boeing.[147]
Beyond the production delays of Boeing, Airbus had other competitive strengths. While it had less total production capability than Boeing (235 planes vs. Boeing's 550), the Airbus production line was efficient and the company had done better in trimming its costs. This meant it could go head-to-head with Boeing on price. And price seemed to be the name of the game in the late 1990s. This contrasted with earlier days when Boeing rose to world leadership with performance, delivery, and technology being more important than cost. "They [the customers] do not care what it costs us to make the planes," Boeing Chairman and Chief Executive Philip Condit admitted. With airline design stabilized, he saw the airlines buying planes today as chiefly interested in how much carrying capacity they could buy for a buck.[148]
Increasingly passengers were grousing about the cramped interiors of planes designed for coast-to-coast trips, and the dearth of lavatories to accommodate 126 to 189 passengers on long flights. Passenger rage appeared to be cropping up more and more. Forbes magazine editorialized that "the first carrier that makes an all-out effort to treat passengers as people rather than oversized sardines will be an immense money-maker."[149]
Boeing's new 737-700s and 737-800s were notorious for giving customer comfort low priority. Airbus differentiated itself from Boeing by designing its A320 150-seat workhorse with a fuselage 7½ inches wider than Boeing's, thus adding an inch to every seat in a typical six-across configuration.
In the first four months of 1999, Airbus won an amazing 78 percent of orders. US Airways Chairman Stephen Wolf, whose airline had ordered 430 Airbus planes since 1996, said, "Airbus aircraft offer greater flexibility for wider seats, more overhead bin space, and more aisle space—all important in a consumer-conscious business."[150]
Philip Condit became chief executive in 1996, just in time for the emerging problems. He had hardly assumed office before he was deeply involved in the defense industry's merger mania, first buying Rockwell's aerospace operation and then McDonnell Douglas. Condit later admitted that he probably spent too much time on these acquisitions, and not enough time on watching the commercial part of the operation.[151]
Condit's credentials were good. His association with Boeing began in 1965 when he joined the firm as an aerodynamics engineer. The same year, he obtained a design patent for a flexible wing called the sailwing. Moving through the company's engineering and managerial ranks, he was named CEO in 1996 and chairman in 1997. Along the way, he earned a master's degree in management from the Massachusetts Institute of Technology in 1975, and in 1997 a doctorate in engineering from Science University of Tokyo, where he was the first Westerner to earn such a degree.
Was Condit's pursuit of the Rockwell and McDonnell Douglas mergers a major blunder? While analysts did not agree on this, prevailing opinion was more positive than negative, mostly because these businesses could smooth the cyclical nature of the commercial sector.
Interestingly, in the face of severe adversity, no heads rolled, as they might have in other firms. See the Issue Box: Management Climate during Adversity.
The airlines' unexpected buying binge, which was brought about by worldwide prosperity fueling air travel, maybe should have been anticipated. However, even the most prescient decision maker probably would have missed the full extent of this boom. For example, orders jumped from 124 in 1994 to 754 in 1996. With hindsight, we know that Boeing made a grievous management mistake in trying to bite off too much, by promising expanded production and deliveries that were wholly unrealistic. We know what triggered such extravagant promises: trying to keep ahead of arch-rival Airbus.
Huge layoffs in the early 1990s contributed to the problems of gearing up for new business. An early retirement plan had been taken up by 9,000 of 13,000 eligible people. This was twice as many as Boeing expected, and it removed a core of production-line workers and managers who had kept a dilapidated system working. New people could not be trained or assimilated quickly enough to match those lost.
Boeing had begun switching to the Japanese practice of lean inventory management that delivers parts and tools to workers precisely as needed, so that production costs could be reduced. Partly due to this change, and to the early 1990s downturn, Boeing's supplier base changed significantly. Some suppliers quit the aviation business; others had suffered so badly in the slump that their credit was affected and they were unable to boost capacity for the suddenly increased business. The result was serious parts shortages.
Complicating production problems was Boeing's long-standing practice of customizing. Because it permitted customers to choose from a host of options, Boeing was fine-tuning not only for every airline, but for every order. For example, it offered the 747's customers 38 different pilot clipboards, and 109 shades of the color white.[152] Such tailoring added significantly to costs and production time. This perhaps was acceptable when these costs could be easily passed on to customers in a more leisurely production cycle, but it was far from maximizing efficiency. With deregulation, fare wars made extreme customizing archaic. Boeing apparently got the message with the wide-bodied 777, designed entirely by computers. Here, choices of parts were narrowed to standard options, such as carmakers offer in their transmissions, engines, and comfort packages.
Cut-rate pricing between Boeing and Airbus epitomized the situation by the mid-1990s. Then, costs became critical if a firm was to be profitable. In that climate, Boeing was so obsessed with maintaining its 60 percent market share that it fought for each order with whatever price it took. Commercial airline production had somehow become a commodity business, with neither Boeing nor Airbus having products all that unique to sell. Innovation seemed disregarded, and price was the only factor in getting an order. So, every order became a battleground, and prices might be slashed 20 percent off list in order to grab all the business possible.[153] And Boeing did not have the low-cost advantage over Airbus.
Such price competition worked to the advantage of the airlines, and they grew skillful at gaining big discounts from Boeing and Airbus by holding out huge contracts and negotiating hard.
The cumbersome production systems of Boeing—cost inefficient—became a burden in this cost-conscious environment. While some of the problems could be attributed to computer technology not well applied to the assembly process, others involved organizational myopia regarding even such simple things as a streamlined organization and common parts. For example, before recent changes, the commercial group had five wing-design groups, one for each aircraft program. This was reduced to one. Another example cited in Forbes tells of different tools needed in the various plane models to open their wing access hatches.[154] Why not use the same tool?
There is a paradox in Boeing's dilemma. Its 777 was the epitome of high technology and computer design, as well as efficient production planning. Yet, much of the other production was mired in a morass with supplies, parts management, and production inefficiency.
Harry Stonecipher, former CEO of McDonnell Douglas before the acquisition and then president and chief operating officer of Boeing, cited arrogance as the mindset behind Boeing's problems. He saw this as coming from a belief that the company could do no wrong, that all its problems came from outside, and that business as usual would solve them.[155]
Adding to the production and cost-containment difficulties of Boeing were increased regulatory demands. These came not only from the U.S. Federal Aviation Administration, but also from the European Joint Airworthiness Authority (a loose grouping of regulators from more than 20 European countries). The first major consequence of this increased regulatory climate concerned the new 730NG. Boeing apparently thought it could use the same over-the-wings emergency exits as it had on the older 737. But the European regulators wanted a redesign. They were concerned that the older type of emergency exits would not permit passengers in the larger version of the plane to evacuate quickly enough. So Boeing had to design two new over-the-wing exits on each side. This was no simple modification because it involved rebuilding the most crucial aspect of the plane. The costly refitting accounted for a major part of the $1.6 billion write-down Boeing took in 1997.
Europe's Airbus Industrie had made no secret of its desire to achieve parity with Boeing and have 50 percent of the international market for commercial jets. This mindset led to the severe price competition of the latter 1990s as Boeing stubbornly tried to maintain its 60 percent market share even at the expense of profits. While its total production capacity was somewhat below that of Boeing, Airbus had already overhauled its manufacturing process and was better positioned to compete on price. Airbus' competitive advantage seemed stronger with single-aisle planes, those in the 120–200 seat category, mostly 737s of Boeing and A320s of Airbus. But this accounted for 43 percent of the $40 billion expected to be spent on airliners in 1998.[156]
The future was something else. Airbus placed high stakes on a superjumbo successor to the 747, with seating capacity well beyond that of the 747. Such a huge plane would operate from hub airports such as New York City's JFK. Meantime, Boeing staked its future on its own 767s and 777s, which could connect smaller cities around the world without the need for passenger concentration at a few hubs.
Have you ever heard of a firm complaining of too much business? Probably not, but then we're confronted with Boeing's immersion in red ink, caused by trying to cope with too many orders. However, Boeing's feast of too much business abruptly ended. Financial problems in Asia brought cancellations and postponements of orders and deliveries.
By 2001 the competition between Airbus and Boeing continued unabated. Airbus had gone ahead with its superjumbo, the world's largest passenger jet, now named the A380, with delivery to start in 2006 for a list price of $239 million. In its standard configuration, it would carry 555 passengers between airport hubs. With delivery still five years away, Airbus already had orders for 72 of the jumbos, and expected to reach the 100 milestone early in 2002. It would break even with 250 of the wide bodies.
In March 2001, Boeing scrapped plans for an updated but still smaller 747-X project. Instead it announced plans for a revolutionary delta-winged "Sonic Cruiser," carrying 150 to 250 passengers higher and faster than conventional planes. The savings in time would amount to 50 minutes from New York City to London, and almost two hours between Singapore and London. Further time savings would come from the plane flying to point-to-point destinations, bypassing layovers at such congested hubs as London and Hong Kong. Delivery was expected in 2007 or 2008.
Both companies had undergone major organizational changes. As of January 1, 2001, Airbus was no longer a four-nation consortium, but now a unit of European Aeronautic Defence & Space (EADS), an integrated company with centralized purchasing and management systems. Operations were streamlined toward bottom-line responsibilities.
Boeing had previously diversified itself away from so much dependence on commercial aircraft through its acquisitions of Rockwell's aerospace and defense business, McDonnell Douglas, Hughes Space & Communications, and several smaller companies. Boeing expected that within five years more than half its revenues would come from new business lines, including financing aircraft sales, providing high-speed Internet access, and managing air-traffic problems.[157]
The airline industry's woes that began with 9/11 intensified in 2002. By late that year two major carriers, US Airways and United, were in bankruptcy, and other airlines— with the exception of a few discount carriers, notably Southwest and JetBlue—were experiencing horrific losses. Airlines were placing no new orders and even reneging on accepting delivery of previously ordered planes. Boeing's jet production fell to half of what it had been a year earlier, and forecasts for 2003 and 2004 were little better.
In this environment, the competition between Airbus and Boeing for winning the few customers still buying became even fiercer and was influenced almost entirely by price. The biggest prize was capturing the 120-plane order from British budget carrier, easyJet, and this customer milked its power position to the utmost, repeatedly sending Boeing and Airbus back to improve their offers.
During the aviation slump in the early 1990s, Boeing had beefed up its order backlog by selling at steep discounts—only to find itself in a serious bind in 1997 when it could not keep up with the built-up demand, and production costs skyrocketed. Now, Boeing refused to follow Airbus into unprofitable terrain, and Airbus got the easyJet order. Though Airbus claimed it was not selling its planes at a loss, many people in the industry thought otherwise.
In late December 2002, Boeing announced it was shelving the ambitious development program for its high-speed Sonic Cruiser. In talks with potential customers to gauge interest in such a plane in this post-9/11 environment, few expressed any interest; most wanted a replacement plane that would be cheaper to operate than existing ones. So, Boeing began changing its focus to developing a new 250-seat plane that would be 20 percent cheaper to operate than existing jetliners.[158]
The competition between Boeing and Airbus grew ever fiercer in 2003. This was to prove a watershed year as, for the first time, Airbus delivered more planes than Boeing. By selling fleets of A320 variations to low-cost carriers like JetBlue, Airbus captured 52 percent of the commercial jet market. It already had 95 orders for its A380 superjumbo jet seating 550 passengers that was expected to enter service in 2006, and this was very close to its declared goal of 100. Furthermore Airbus thought it had a chance to sell to the U.S. military. A $23 billion deal for Boeing to supply the U.S. Air Force with 100 modified 767 jetliners for midair refueling was terminated as the company became immersed in a contract-for-job scandal that cost CEO Philip Condit his job and landed chief financial officer Michael Sears in prison. Further shenanigans involved documents stolen from Lockheed, resulting in the loss of $1 billion in space-launch contracts.
Meanwhile, Boeing announced that it would stop making its twin-engine 757 because of waning interest. It was in preliminary planning for a new model, called the 7E7, a long-range jet that would seat 200–250 and be 20 percent cheaper to own and operate than other planes. This could enter service around 2008. Boeing had not had a new model since 1995, and badly needed a success with the new plane. The company suffered serious setbacks elsewhere. It had to take write-offs on its slow-selling single-aisle 717, and also had written off $2.4 billion of its commercial satellite and launch business.
But Boeing achieved profitability by revamping assembly lines, contracting out fabrication of parts, and laying off 32,000 workers since 9/11. Union leaders claimed the result was an aging skilled workforce and rock-bottom morale.[159]
In early 2004, Airbus captured a $7 billion, 110-plane order from Air Berlin, a discount airline that was Germany's No. 2 carrier. What made the situation all the more galling for Boeing was that Air Berlin had always flown Boeing 737s. A debate brewed among executives and customers over why the once dominant Boeing was losing order after order.
Stonecipher blamed the company's sales force for not doing a better job of nurturing relationships. But some in the industry blamed Boeing's failures on poor pricing strategy, an unwillingness to bend, a distorted notion that quality was still more important to airlines than price—all this at a time when airlines were struggling mightily to reduce costs.
Compounding the situation, Boeing was trying to gain commitments for its new 7E7 widebody, soon to be renamed a 787 Dreamliner. Airbus was countering with its A350, which would be derived from its current A330 model. While Japan Airlines late in 2004 agreed to order 30 787s from Boeing and take options for 20 more, this brought total orders and commitments for the plane to 112, but this was still well short of the goal of 200 by the end of 2004.
Boeing continued to attribute Airbus's success in the marketplace as due to billions of dollars of European subsidies that allowed it to underbid Boeing. Airbus maintained its success was planes that could be built more quickly and cheaply than Boeing's.[160]
In December 2004, Boeing had one source of satisfaction. Airbus disclosed that its flagship A380 superjumbo jetliner had cost overruns approaching $2 billion or about 12 percent in excess of the plane's original budget. The first flight of the huge A380 was expected in March 2005. Airbus saw no problem with this budget overage, and said it will have "no impact on the overall profitability of the program."[161]
Harry Stonecipher had been brought back from retirement at Boeing in early 2004 to try to repair relationships with Washington that were damaged by legal and ethics standards involving some Boeing employees, following a string of scandals at Boeing, mostly involving conflicts of interest on government interactions. For example, Boeing's finance chief improperly engaged in employment talks with an Air Force procurement official while she had authority over billions of dollars worth of Boeing contracts. Stonechiper helped draft a code of conduct that prohibited any behavior that might embarrass the company. Alas, after 15 months, Stonecipher himself was dismissed for unethical conduct after directors learned about an extramarital affair that violated this very code of conduct.[162]
In 2005, Jim McNerney, 56 years old, became the third top executive at Boeing in three years. He was the former head of 3M Corp., and General Electric's jet engine division. While many people expected him to take immediate and drastic actions, he spent months of what he called "deep dives" to learn as much as possible about Boeing's massive commercial airplanes and defense unit. In January 2006, he presented an agenda to "help Boeing lose the baggage of its rocky past while using its size and intellectual talent to produce better financial results."[163]
The year 2006 was to see a monumental swing in the two competitors' fortunes. Boeing's new 787 Dreamliner was proving a real winner with orders surging, even though delivery would not be until 2008. This was no ordinary plane. With its plastic fuselage, it was a sleek aircraft that would carry 250 to 330 people, cruise near the speed of sound (650 mph), have a range of over 10,000 miles, and Boeing claimed would cut fuel bills by 20 percent and maintenance costs 30 percent. No one had ever built a commercial airplane with a plastic fuselage (actually, it was carbon fiber embedded in epoxy). As a further production innovation, for the first time Boeing was outsourcing more than half the parts of the plane to be manufactured in six different countries. The projected $130 million cost per plane was modest compared with the alternatives, and especially Airbus's superjumbo A380, now projected to cost about $300 million.
Airbus faltered in 2006 as the A380 experienced further delivery delays. These were already costing the company at least $2.5 billion over the $12 billion originally planned; the cost of fines, canceled orders and lost future orders were additional. The blow to prestige might be even greater. Rising fuel prices and a recent trend toward long-haul flights that avoided busy hub airports cast doubt on the whole A380 decision of a huge plane designed to fly between major hub airports. Boeing's new 787 and 777 models were marketed as more comfortable and more efficient. Shares of Airbus's parent company, EADS, fell sharply and forced the departure of Noel Forgeard and his colleague, Gustav Humbert on July 2, 2006. Mr. Forgeard was criticized for selling some of his EADS shares a few months before the profit warning, but denied accusations of insider trading.[164]
Going into the last quarter of 2006, Airbus's production problems became a crisis situation, and talk was of shifting more work to other nations as well as other restructuring efforts. Airline executives publicly complained about their inability to plan schedules and related investments due to the uncertainty about A380 delivery. On top of this, European and U.S. aviation regulators determined that the A380's powerful wake required changes in air-traffic-control rules. These new requirements could increase congestion at some large airports and reduce the attractiveness of operating the A380. The giant plane on which Airbus was staking so much, was assuming the stance of an albatross.[165]
On July 9, 2007, Boeing unveiled its first fully assembled Dreamliner to an audience of thousands. It had rolled out the red carpet and set out 15,000 seats for spectators at one end of the 787 factory north of Seattle. Tom Brokaw served as master of ceremonies, and the premiere was broadcast live on the Internet and on satellite television in nine languages to more than 45 countries. More thousands of employees and retirees watched via satellite at the NFL stadium where the Seattle Seahawks play and Boeing also hosted viewing parties for customers and suppliers around the world.
The plane was already a huge hit with airlines, with 762 orders from 52 carriers by the end of December 2007. This would sell out delivery positions through 2015. It was the first all-new jet since 1995 and the 777. Made mostly of carbon-fiber composites, it was lighter, more durable, and less prone to corrosion than aluminum. As such, this midsize, long-range jet would burn less fuel, be cheaper to maintain, and offer more passenger comforts than any comparable plane. No wonder carriers were beating down the door to place orders.
Unfortunately, the plane these tens of thousands of people came to see on July 9, this prototype, was missing tens of thousands of parts. As the guests strolled around the plane, few realized that more than 1,000 temporary fasteners were embedded under its shiny coat of Boeing blue and white paint. When boxes and crates for the fuselage section had been opened, workers found them filled with thousands of brackets, clips, wires and other components that should have been installed. Many of these had no paperwork at all, or had instructions written in Italian. In no way was the Dream-liner going to meet its delivery schedule.
The mess was the result of global outsourcing. It had seemed so cost effective to authorize a team of parts suppliers from around the world to design and build major sections of the plane, and then bring all these disparate sections to the Seattle plant to be snapped together. This would be the extreme use of outsourcing and would represent a manufacturing innovation of no small moment. But many of these carefully selected suppliers, instead of using their own engineers to do the design work, farmed this out to smaller companies. The result was that many of the items failed to conform to a rigid set of engineering tolerances. Efforts to correct the situations were hampered by the distances and language problems. Sometimes suppliers' underlying problems were worse than expected. And maybe the schedule was just too ambitious.
As of December 2007, the Dreamliner was at least six months behind schedule, and the goal of delivering 109 planes by the end of 2009 seemed an illusion. Instead of being well into flight tests, Boeing's primary efforts had to be helping suppliers around the world bring their factories up to speed. Delays would be costly, because the company could face millions of dollars in penalty payments to customers. Some of the airlines had counted of using their planes during the 2008 Summer Olympics.
Boeing faced another major disappointment in early 2008, as it pursued another Air Force contract for tanker planes (remember, it lost a previous contract because of unethical practices). See the following Information Box: Boeing Loses Huge contract.
By August 2009, problems with the flexibility of wings brought the fifth delay for the 787 Dreamliner. Boeing's shares, already sinking in June, lost 25 percent more by July 10. Customers were complaining, sometimes loudly. But amazingly there were few cancellations. Boeing still had commitments for 850 planes at $180 million each, making the Dreamliner still the fastest selling commercial aircraft ever. Many of Boeing's customers, some of the loudest complainers, were not displeased with the delays. With the recession, they had little cash and few credit options. Boeing still had a sizable lead over Airbus, who had only half the orders of the 787, with promised delivery at least three years after the 787. With the planned narrow-body plane to replace the 737, its jet order list was nearly 3,000 planes, worth $260 billion in sales.
Even relations with the Pentagon were in reasonable shape, with sales in 2008 of $3.2 billion, and the Air Force's tanker contract still probable with a midair refueling system based on the 777 rather than its 767. Boeing's international military sales had more than doubled in the last five years to 16 percent of total business.[166]
Invitation to Make Your Own Analysis and Conclusions
Since 2005, sales have been robust for both Boeing and Airbus with their various planes. In early January 2008, their combined orders were for nearly 7,000 planes, valued at more than $750 billion before discounts. As the world moved toward a recession due to the mortgage crisis, they faced several tough questions: Have their customers ordered more planes than they could afford? How many will renege or even go out of business before the planes can be made, perhaps years in the future? (For example, the Dreamliner is booked up until 2014.) How much should production facilities be expanded to handle this increased volume?
The uncertainty was confounded by the credit crunch, record fuel prices, a weak dollar, and an uncertain economy. Adding to the concern were that many of the recent orders were placed by new carriers and leasing companies not even in business a few years before, or else came from countries like China and India where air travel was surging now, but would this demand hold up?
What would you do about production if you were the decision maker at Boeing and Airbus?
Source: J. Lynn Lunsford and Daniel Michaels, "As Orders Soar, Flight Check Begins," Wall Street Journal, January 11, 2008, p. A7.
Do you think Boeing should have anticipated the impact of Asian economic difficulties long before it did?
If it had more quickly anticipated the drying up of the Asian market forplanes, could Boeing have prevented most of the problems that confrontedit? Discuss.
Do you think top management at Boeing should have been fired after thedisastrous miscalculations in the late 1990s? Why or why not?
A major stockholder grumbles, "Management worries too much about Air-bus, and to hell with the stockholders." Evaluate this statement. Do you thinkit is valid?
Do you think that at this point, 2008, the superjumbo A380 should be abandoned? Defend your recommendation.
Do you think Stonecipher should have been fired for having an affair with an employee? Why or why not?
Discuss synergy in mergers. Why does synergy so often seem to be lackingdespite expectations?
You are a skilled machinist for Boeing and have always been proud of partici-pating in the building of giant planes. You have just received notice of anotherlengthy layoff, the second in five years. Discuss your likely attitudes and actions.
How wise do you think it was for Airbus to "bet the company" on the super-jumbo A380, the world's largest jet?
Do you think Airbus's more passenger-friendly planes gave it a significant competitive advantage? Why or why not? Discuss as many aspects of this as you can.
How can arrogance in an organization be combated?
Before
You are a management consultant advising top management at Boeing. Itis 1993 and the airline industry is in a slump, but early indications are thatthings will improve greatly in a few years. What would you advise that mighthave prevented the problems Boeing faced a few years later? Be as specificas you can, and support your recommendations as to practicality and prob-able effectiveness.
After
It is late 1998, and Boeing has had to announce drastic cutbacks, with little improvement likely before five years, and Boeing's stock has collapsed and Airbus is charging ahead. What do you recommend now?(You may need to make some assumptions; if so, state them clearly and keep them reasonable.)
It is 2005, and you have been brought in as vice president of sales. What do you propose to counter the aggressive and successful efforts of Airbus to win customers?
Be a devil's advocate. You are a union leader and the 32,000 layoffs after 9/11appall you. Array all the arguments you can muster for Boeing to reconsider such massive layoffs. Be as persuasive as you can.
A business columnist writes: Boeing could "have told customers 'no thanks' to more orders than its factories could handle... [It] could have done itself a huge favor by simply building fewer planes and charging more for them."[168] Debate the merits of this suggestion.
Debate the controversy of Airbus Chairman Forgeard's decision to go for broke with the A3XX superjumbo. Is the risk/reward probability worth such a mighty commitment? Debate as many pros and cons as you can, and also consider how much each should be weighted or given priority consideration.(Do not consider what actually happened in 2006. You are not prescient at the time of the decision.)
What is the situation with Boeing today? Has it remained profitable? How is the competitive position with Airbus?
What is the situation with the A380 superjumbo of Airbus? Has it been abandoned?
What is the situation with the 787 Dreamliner? Is it meeting all expectations, or have unexpected engineering problems assailed it?
Did Boeing succeed in getting the Air Force tanker contract with Airbus rescinded?
[141] Boeing 1997 Annual Report.
[142] Frederic M. Biddle and John Helyar, "Behind Boeing's Woes: Clunky Assembly Line, Price War with Airbus," Wall Street Journal, April 24, 1998, p. A16.
[143] Alex Taylor II, "Blue Skies for Airbus," Fortune, August 2, 1999, p. 103.
[144] Steve Wilhelm, "Plane Speaking," Puget Sound Business Journal, June 18, 1999, p. 112.
[145] Ibid.
[146] "Blue Skies for Airbus," p. 108.
[147] "British to Order Airbus Airliners," Cleveland Plain Dealer, August 25, 1998, p. 6-C.
[148] Howard Banks, "Slow Learner," Forbes, May 4, 1998, p. 54.
[149] "Plane Discomfort," Forbes, September 6, 1999, p. 32.
[150] "Blue Skies for Airbus," p. 104.
[151] Howard Banks, "Slow Learner," Forbes, May 4, 1998, p. 56.
[152] John Greenwald, "Is Boeing Out of Its Spin?" Time, July 13, 1998, p. 68.
[153] "Behind Boeing's Woes..." A1, A16.
[154] Banks, p. 60.
[155] Bill Sweetman, "Stonecipher's Boeing Shakeup," Interavia Business & Technology, September 1998, p. 15.
[156] Banks, p. 60.
[157] Compiled from such sources as: David J. Lynch, "Airbus Comes of Age with A380," USA Today (June 21,2001), pp. 1B, 2B; J. Lynn Lunsford, Daniel Michaels, and Andy Pasztor, "At Paris Air Show, Boeing-AirbusDuel Has New Twist," Wall Street Journal (June 15, 2001), p. B4.
[158] Sources: J. Lynn Lunsford, "Boeing to Drop Sonic Cruiser, Build Plane Cheaper to Operate," Wall Street Journal, December 19, 2002, p. B4; Daniel Michaels and J. Lynn Lunsford,"Airbus is Awarded easyJetOrder for 120 New Planes Over Boeing," Wall Street Journal, October 15, 2002, pp. A3 and A6; and ScottMcCartney and J. Lynn Lunsford, "Skies Darken for Boeing, AMR and UAL as Aviation Woes Grow," Wall Street Journal, October 17, 2002, pp. A1 and A9.
[159] J. Lynn Lunsford, "Boeing May Risk Building New Jet," Wall Street Journal, October 15, 2003, pp. A1, A13;and Daniel Michaels, "Airbus Sees Military-Sales Opening," Wall Street Journal, September 15, 2003, p. A8.
[160] Compiled from J. Lynn Lunsford, "Behind Slide in Boeing Orders: Weak Sales Team or Firm Prices?"Wall Street Journal, December 23, 2004, pp. A1 and A6; Daniel Michaels, "Airbus Firms Up Plans for aNew Jet," Wall Street Journal, September 30, 2004, p. A3.
[161] David Gauthier-Villars, Pierre Briancon and Daniel Michaels,"Airbus Discloses Cost Overruns on BigA380 Jet," Wall Street Journal, December 16, 2004, pp. A3 and A10.
[162] Carol Hymowitz, "The Perils of Picking CEOs," Wall Street Journal, March 15, 2005, pp. B1 and B4.
[163] J. Lynn Lunsford, "Piloting Boeing's New Course," Wall Street Journal, June 13, 2006, pp. B1 and B3.
[164] Compiled from a number of sources, such as Mark Tatge, "Global Gamble," Forbes, April 17, 2006, pp. 78–82; J. Lynn Lunsford, "Piloting Boeing's New Course," Wall Street Journal, June 13, 2006, pp. B1and B3; Daniel Michaels, "Airbus Problems Lead to Ouster of Key Executives," Wall Street Journal, July 3, 2006, pp. A1 and A2.
[165] Simon Clow and Daniel Michaels, "Airbus Work May Move Elsewhere as a Broad Revamp Is Consid-ered," Wall Street Journal, September 29, 2006, p. A10.
[166] Christopher Steiner, "Not Grounded, Forbes, August 3, 2009, pp. 28–29.
[167] For example, Banks, p. 54.
[168] Holman W. Jenkins Jr., "Boeing's Trouble: Not Enough Monopolistic Arrogance," Wall Street Journal, December 16, 1998, p. A23.