CASE 29

Boeing Commercial Aircraft in 2011

Charles W.L. Hill
University of Washington

Introduction more than 3 years later than planned. Despite this,

Boeing has a very healthy backlog for the 787,
The first decade of the 20th century was one of with 827 jets ordered as of mid-2011, compared to
ups and downs for Boeing Commercial Airplane, 567 for the rival A350. Airbus has also encoun-
the commercial aircraft division of the world’s tered some production problems of its own with
largest aerospace company. In the late-1990s and the A350, and delivery of that aircraft model has
early-2000s, Boeing had struggled with a number now slipped into 2013.
of ethics scandals and production problems that Looking forward, Boeing now has some im-
had tarnished the reputation of the company and portant decisions to make regarding its venerable
led to sub-par financial performance. To make ma- narrow-bodied 737 aircraft family, which accounts
ters worse, its global rival, Airbus, had been gaining for some 60% of Boeing’s total aircraft deliveries.
market share. Between 2001 and 2005, the Euro- The main competitor for the 737 has long been Air-
pean company regularly garnered more new orders bus’ A320. In late-2010, Airbus announced that it
than Boeing. would build a new version of the A320, designed to
The tide started to turn Boeing’s way in 2003, use advanced engines from Pratt & Whitney, and es-
when it formally launched its next generation jet, the timated to be 10–15% more efficient than existing
787. Built largely out of carbon-fiber composites, the engines. Know as the A320NEO (NEO stands for
wide-bodied 787 was billed as the most fuel-efficient “new engine option”), by August 2011, the aircraft
large jetliner in the world. The 787 was forecasted had garnered an impressive 1,029 orders. Airbus’
to consume 20% less fuel than Boeing’s older wide- success here forced Boeing’s hand. Boeing, too, has
bodied jet, the 767. By 2006, the 787 was logging stated that they will offer a version of the 737 using
significant orders. This, together with strong interest new engines (this will require some redesign of the
in Boeing’s best-selling narrow bodied jet, the 737, 737, driving up Boeing’s R&D costs). However, the
helped the company to recapture the lead in new company still must decide whether to totally rede-
commercial jet aircraft orders. Moreover, in 2006 sign the 737, taking advantage of knowledge gained
Boeing’s rival, Airbus, was struggling with significant during the process of developing the 787, to build
production problems and weak orders for its new an all-new 737 out of composites that would also be
aircraft, the A380 super-jumbo. Airbus was also late designed with more efficient engines.
to market with a rival for the 787, the wide-bodied To complicate matters, for the first time in
Airbus A350, which would also be built largely out a generation there are several new entrants on
of carbon-fiber. While the 787 was scheduled to en- the horizon. The Canadian regional jet manu-
ter service in 2008, the A350 would not appear until facturer, ­Bombardier, is starting to gain orders
2012, giving Boeing a significant lead. for the ­110–130 seat narrow bodied CSeries jet,
Over the next few years, Boeing encountered which would place it in direct competition with
a number of production problems and technical the smallest of the 737 and A320 families. In ad-
design issues with the 787 that resulted in the in- dition, the Commercial Aircraft Corporation of
troduction of the 787 being delayed 5  times. The China ­(Comac) has ­announced that it will build a
787 is now scheduled to enter service in late-2011, ­170–190 seat narrow-bodied jet.

Copyright © Charles W.L. Hill, 2011

C390

DESIGN SERVICES OF
# 108137    Cust: Cengage    Au: Hill Jones   Pg. No. 390
25843_case29_ptg01_hr_C390-C405.indd 390
C/M/Y/K S4-CARLISLE 1/30/12 2:58 PM
 Case 29:  Boeing Commercial Aircraft in 2011 C391

The Competitive Environment (EADS), formed by a merger between French,

­German and Spanish interests, acquired 80% of the
By the 2000s, the market for large commercial jet shares in EADS, and BAE Systems, a British com-
aircraft was dominated by just two companies, pany, took a 20% stake.
­Boeing and Airbus. A third player in the industry,
­McDonnell Douglas, had been historically signifi-
cant, but had lost share during the 1980s and 1990s.
Development and Production
In 1997, Boeing acquired McDonnell Douglas, pri- The economics of development and production
marily for its strong military business, because in in the industry are characterized by a number of
the mid-1990s Airbus has been gaining orders at facts. First, the R&D and tooling costs associated
­Boeing’s expense. By the mid-2000s, Boeing and with developing a new airliner are very high. Boe-
Airbus were splitting the market. ing spent some $5 billion to develop the 777. Its lat-
Both Boeing and Airbus have a full range of air- est aircraft, the 787, was initially expected to cost
craft. Boeing offers 5 aircraft “families” that range in $8 ­billion to develop, but delays have increased that
size from 100 to over 500 seats. They are the narrow to at least $12 billion. Development costs for Airbus’
bodied 737 and the wide bodied 747, 767, 777 and A380 ­super-jumbo reportedly exceeded $15 billion.
787 families. Each family comes in various forms. For Second, given the high upfront costs, in order
example, there are currently 4 main variants of the 737 to break even a company must capture a significant
aircraft. They vary in size from 110 to 215 seats, and share of projected world demand. The breakeven
in range from 2,000 to over 5,000 miles. List prices point for the Airbus super-jumbo, for example, is
vary from $47 million for the smallest member of the estimated to be between 250 and 270 aircraft. Esti-
737 family, the 737–600, to $282 million for the larg- mates of the total potential market for this aircraft
est Boeing aircraft, the 747–8. The newest member of vary widely. Boeing has suggested that the total
the Boeing family, the 787, lists for between $138 mil- world market will be for no more than 320 aircraft
lion and $188 million depending upon the model.1 over the next 20  years—Airbus believes that there
Similarly, Airbus offers 5 “families,” the narrow will be demand for some 1,250 aircraft of this size.
bodied A320 family, and the wide bodied A300/310, It may take 5–10 years of production before Airbus
A330/340, A350 and A380 families. These aircraft breaks even on the A380–on top of years of negative
vary in size from 100 to 550 seats. The range of list cash flow during development.3
prices is similar to Boeing’s. The A380 super-jumbo Third, there are significant learning effects in air-
lists for between $282 million to $302 million, while craft production.4 On average, unit costs fall by about
the smaller A320 lists for between $62 million and 20% each time cumulative output of a specific model
$66.5  million.2 Both companies also offer freighter is doubled. The phenomenon occurs because managers
versions of their wide bodied aircraft. and shop floor workers learn over time how to assem-
Airbus was a relatively recent entrant into the ble a particular model of plane more efficiently, reduc-
market. Airbus began its life as a consortium be- ing assembly time, boosting productivity, and lowering
tween a French company and Germany company in the marginal costs of producing subsequent aircraft.
1970. Later, a British and Spanish company joined the Fourth, the assembly of aircraft is an enormously
consortium. Initially, few people gave Airbus much complex process. Modern planes have over 1 million
chance for success, but the consortium gained ground component parts that have to be designed to fit with
by innovating. It was the first aircraft maker to build each other, and then produced and brought together
planes that “flew by wire,” made extensive use of at the right time in order to assemble the engine. At
composites, had only two flight crew members (most several times in the history of the industry, problems
had three), and used a common cockpit layout across with the supply of critical components have held up
models. It also gained sales by being the first company production schedules and resulted in losses. In 1997,
to offer a wide bodied twin-engine jet, the A300, that Boeing took a charge of $1.6  billion against earn-
was positioned between smaller single aisle planes ings when it had to halt the production of its 737
like the 737 and large aircraft such as the Boeing 747. and 747 models due to a lack of component parts. In
In 2001, Airbus became a fully integrated com- 2008, Boeing had to delay production of the 787 due
pany. The European Defense and Space Company to a shortage of fasteners.

DESIGN SERVICES OF
# 108137
25843_case29_ptg01_hr_C390-C405.indd 391   Cust: Cengage    Au: Hill Jones   Pg. No. 391 C/M/Y/K S4-CARLISLE 1/30/12 2:58 PM
 C392 Section B:  Corporate Level Strategy Cases

Historically, airline manufacturers tried to man- Finally, all new aircraft are now designed digi-
age the supply process through vertical integration, tally, and assembled virtually before a single compo-
by making many of the component parts that went nent is produced. Boeing was the first to do this with
into an aircraft (engines were long the exception to its 777 in the early-1990s, and with its new version
this). Over the last two decades, however, there has of the 737 in the late-1990s.
been a trend to contract out production of compo-
nents and even entire sub-assemblies to indepen-
dent suppliers. On the 777, for example, Boeing
Customers
outsourced about 65% of the aircraft production, Demand for commercial jet aircraft is very volatile
by value, excluding the engines.5 While helping to and tends to reflect the financial health of the com-
reduce costs, contracting out has placed enormous mercial airline industry, which is prone to boom
onus on airline manufacturers to work closely with and bust cycles (see Exhibits 1, 2 and 3). The airline
its suppliers to coordinate the entire production industry has long been characterized by excess ca-
process. pacity, intense price competition, and a perception

Exhibit 1  Commercial Aircraft Orders 1990–2010

1600
1400
1200
1000
Orders

800
600
400
200
0
00

06
07
08
09
02
03
04
05
01
99
90
91
92
93
94
95
96
97
98

10
20
20
20
20
20
20
20
20
20
20
20
19
19
19
19
19
19
19
19
19
19

Boeing Airbus
Source: Boeing and Airbus Websites http://www.boeing.com/
http://www.airbus.com/

Exhibit 2  World Airline Industry Revenues

600

500

400
$ billions

300

200

100

0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: IATA Data.

DESIGN SERVICES OF
# 108137    Cust: Cengage    Au: Hill Jones   Pg. No. 392
25843_case29_ptg01_hr_C390-C405.indd 392
C/M/Y/K S4-CARLISLE 1/30/12 2:58 PM
 Case 29:  Boeing Commercial Aircraft in 2011 C393

Exhibit 3  World Airline Industry Net Profit ($ billions) 2001–2010

20

15

10

0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
–5

–10

–15

–20

Source: IATA Data.

Exhibit 4  Jet Fuel Prices July 2001–June 2011

4.5
4
3.5
Price per Gallon $

3
2.5
2
1.5
1
0.5
0
Jun-97
Dec-97
Jun-98
Dec-98
Jun-99
Dec-99
Jun-00
Dec-00
Jun-01
Dec-01
Jun-02
Dec-02
Jun-03
Dec-03
Jun-04
Dec-04
Jun-05
Dec-05
Jun-06
Dec-06

Source: www.iata.org

among the travelling public that airline travel is a the recession that was ushered in by the 2008–2009
commodity. After a moderate boom during the global financial crisis. High fuel prices during much
1990s, the airline industry went through a nasty of the decade made matters worse (prices for jet fuel
downturn during 2001–2005. The downturn started more than doubled between 2004 and 2006—see
in early-2001 due to a slowdown in business travel Exhibit 4). The bill for jet fuel represented over 25%
after the boom of the 1990s. It was compounded by of the industry’s total operating costs in 2006, com-
a dramatic slump in airline travel after the terrorist pared to less than 10% in 2001.7
attacks on the United States in September of 2001. During the 2001–2005 period, losses were par-
Between 2001 and 2005, the entire global airline in- ticularly severe among the big six airlines in the
dustry lost some $40 billion, more money than it had world’s largest market, the United States (American
made since its inception.6 Airlines, United, Delta, Continental, US Airways and
The industry recovered in 2006 and 2007, only Northwest). Three of these airlines (United, Delta
to rack up big losses again in 2008 and 2009 due to and Northwest) were forced to seek Chapter  11

DESIGN SERVICES OF
# 108137
25843_case29_ptg01_hr_C390-C405.indd 393   Cust: Cengage    Au: Hill Jones   Pg. No. 393 C/M/Y/K S4-CARLISLE 1/30/12 2:58 PM
 C394 Section B:  Corporate Level Strategy Cases

bankruptcy protections. Despite that demand and by their superior in flight service. In good times, the
profits plummeted at the big six airlines, some car- network carriers can recoup their costs by charging
riers continued to make profits during 2001–2005, higher prices than the discount airlines, particularly
most notably the budget airline Southwest. In addi- for business travelers, who pay more to book late,
tion, other newer budget airlines including AirTran and to fly business or first class. In the competitive
and JetBlue (which was started in 2000), gained environment of the 2000s, however, this was no
market share during this period. Indeed, between longer the case. Between 2000 and 2010, the price
2000 and 2003, the budget airlines in the United of an average round trip domestic ticket in the U.S.
States expanded capacity by 44% even as the majors increased from $317 to $338, an increase of 6.7%
slashed their carrying capacity and parked unused over the decade, while the consumer price index in-
planes in the desert. In 1998, the budget airlines held creased 26.6% (i.e. in real terms prices fell).9
a 16% share of U.S. market; by mid-2004 their share Due to the effect of increased competition, the
had risen to 29%.8 real yield that U.S. airlines got from passengers fell
The key to the success of the budget airlines is from $0.087  cents per mile in 1980 to 6.37  cents
a strategy which gives them a 30–50% cost advan- per mile in 1990, $0.0512  cents per mile in 2000,
tage over traditional airlines. The budget airlines all and $0.04 cents per mile in 2005 (these figures are
follow the same basic script–they purchase just one expressed in constant 1978 cents).10 Real yields are
type of aircraft (some standardize on Boeing 737s, also declining elsewhere. With real yields declining,
others on Airbus 320s). They hire nonunion labor the only way that airlines can become profitable is to
and cross-train employees to perform multiple jobs reduce their operating costs.
(e.g. to help meet turnaround times, the pilots might Outside of the United States, competition has in-
help check tickets at the gate). As a result of flexible tensified as deregulation has allowed low cost air-
work rules, Southwest needs only 80 employees to lines to enter local markets and capture share from
support and fly an aircraft, compared to 115 at the long established national airlines that have utilized
big six airlines. The budget airlines also favor flying the hub and spoke model. In Europe, for example,
“point-to-point,” rather than through hubs, and of- Ryanair and easyJet have adopted the business model
ten use cheap secondary airports, rather than major of Southwest, and used it to grow aggressively.
hubs. They focus on large markets with lots of traffic By the mid-2000s, large airlines in the U.S. were
(e.g. up and down the East coast). There are no frills starting to improve their operating efficiency, helped
on the flights, no in flight meals . and prices are set by growing traffic volumes, higher load factors and
low to fill up seats. reductions in operating costs, particularly labor
In contrast, the operations of major airlines are costs. Load factors refers to the percentage of a plane
based on the network or “hub and spoke” system. that is full on average, which hit a record 86% in
Under this system, the network airlines route their mid-2006 in the United States, and 81% in interna-
flights through major hubs. Often, a single airline tional markets. Load factors have remained reason-
will dominate a hub (for example, United dominates ably high since then, moving between 75% and 85%
Chicago’s O’Hare airport). This system was devel- on a monthly basis between 2006 and 2010.
oped for good reason—it was a way of efficiently
using airline capacity when there wasn’t enough de-
mand to fill a plane flying point-to-point. By using
Demand Projections
a hub and spoke system, the major network airlines Both Boeing and Airbus issue annual projects of
have been able to serve some 38,000 city pairs, some likely future demand for commercial jet aircraft.
of which generate fewer than 50 passengers per day. These projections are based upon assumptions about
But by focusing a few hundred city pairs where there future global economic growth, the resulting growth
is sufficient demand to fill their planes, and flying in demand for air travel, and the financial health of
directly between them (point-to-point) the bud- the world’s airlines.
get airlines seem to have found a way around this In its 2011 report, Boeing assumed that the world
constraint. The network carriers also suffer from a economy would grow by 3.3% per annum over the
higher cost structure due to their legacy of a union- next 20 years, which should generate growth in pas-
ized workforce. In addition, their costs are higher senger traffic of 5.1% per annum, and growth in

DESIGN SERVICES OF
# 108137    Cust: Cengage    Au: Hill Jones   Pg. No. 394
25843_case29_ptg01_hr_C390-C405.indd 394
C/M/Y/K S4-CARLISLE 1/30/12 2:58 PM
 Case 29:  Boeing Commercial Aircraft in 2011 C395

cargo traffic of 5.6% per year. On this basis, Boeing robust demand for very large aircraft, and particu-
forecast demand for some 33,500 new aircraft val- larly its A380 offering.
ued at more than $4 trillion over the next 20 years. Boeing has a different view of the future. The
Of this, some 15,370 aircraft will be replacement for company has theorized that hubs will become in-
aircraft retired from service, and the remaining air- creasingly congested, and that many travelers will
craft will satisfy an expanded market. In 2030, Boe- seek to avoid them. Boeing thinks that passengers
ing estimates that the total global fleet of aircraft will prefer frequent nonstop service between the cities
be 39,530 up from 17,330 in 2005. Boeing believes they wish to visit. Boeing also sees growth in travel
that North America will account for 22% of all new between city pairs as being large enough to support
orders, Asia Pacific for 34% and Europe for 23%. an increasing number of direct long-haul flights. The
Passenger traffic is projected to grow at 7% per an- company notes that continued liberalization of regu-
num in Asia, versus 2.3% in North America and 4% lations governing airline routes around the world
in Europe.11 will allow for the establishment of more direct flights
Regarding the mix of orders, Boeing believes that between city pairs. As in the United States, the com-
70% of all orders by units will be for narrow bodied pany believes that long haul low-cost airlines that fo-
aircraft such as the 737 and A320, 22% will be for cus on serving city pairs and avoid hubs will emerge.
wide-bodied twin aisle jets such as the 787 and 747, In sum, Boeing believes that airline travelers will
and 3% for large aircraft such as the 747 and A380. demand more frequent nonstop flights, not larger
The latest Airbus forecast covers 2010–2029. aircraft.13 To support this, the company has data
Over that period, Airbus forecasts world passenger showing that all of the growth in airline travel since
traffic to grow by 4.8% per annum, and predicts 1995 has been met by the introduction of new non-
demand for 25,850 new aircraft worth $3.2  tril- stop flights between city pairs, and by an increased
lion. (Note that Airbus excludes regional jets from frequency of flights between city pairs, and not by an
its forecast, there are some 2,000 regional jet deliv- increase in airplane size. For example, Boeing notes
eries included in Boeing’s forecasts). Airbus believes that following the introduction of the 767, airlines
that demand for very large aircraft will be robust, introduced more flights between city pairs in North
amounting to 1,740 large passenger aircraft and America and Europe, and more frequent departures.
freighters in the 747 range and above, or 18% of the In 1984, 63% of all flights across the North Atlantic
total value of aircraft delivered.12 were in the 747. By 2004, the figure had declined to
The difference in the mix of orders projected by 13%, with smaller wide bodied aircraft such as the
Boeing and Airbus reflect different views of how fu- 767 and 777 dominating traffic. Following the intro-
ture demand will evolve. Airbus believes that hubs duction of the 777, which can fly nonstop across the
will continue to play an important role in airline Pacific, and is smaller than the 747, the same process
travel, particularly international travel, and that occurred in the North Pacific. In 2006, there were 72
very large jets will be required to transport people daily flights serving 26 city pairs in North America
between hubs. Airbus bases this assumption partly and Asia.
on an analysis of data over the last 20 years, which
shows that traffic between major airline hubs has
grown faster than traffic between other city pairs. Boeing’s History14
Airbus also assumes that urban concentrations
will continue to grow. Airbus states that demand William Boeing established the Boeing Company in
is simply a function of where people want to go, 1916 in Seattle. In the early-1950s, Boeing took an
and most people want to travel between major ur- enormous gamble when it decided to build a large
ban centers. The company notes, for example, that jet aircraft that could be sold both to the military
90% of travelers from the United States to China as a tanker, and to commercial airlines as a passen-
go to 3 major cities. Fifty other cities make up the ger plane. Known as the “Dash 80,” the plane had
remaining 10%, and Airbus believes that very few swept back wings and 4 jet engines. Boeing invested
of these cities will have demand large enough to $16 million to develop the Dash 80, 2/3 of the com-
justify a nonstop service from North America or pany’s entire profits during the post war years. The
­Europe. Based on this assumption, Airbus sees Dash 80 was the basis for 2 aircraft—the KC-135

DESIGN SERVICES OF
# 108137
25843_case29_ptg01_hr_C390-C405.indd 395   Cust: Cengage    Au: Hill Jones   Pg. No. 395 C/M/Y/K S4-CARLISLE 1/30/12 2:58 PM
 C396 Section B:  Corporate Level Strategy Cases

Air Force tanker and the Boeing 707. Introduced sold nearly 1,430 747s, and was actively selling its
into service in 1957, the 707 was the world’s first latest version of the 747 family, the 747–8 which was
commercially successful passenger jet aircraft. Boe- scheduled to enter service in 2008.
ing went on to sell some 856 Boeing 707s along with By the mid-1970s Boeing was beyond the break
820 KC-135s. The final 707, a freighter, rolled off even point on all of its models (707, 727, 737 and
the production line in 1994 (production of passen- 747). The positive cash flow helped to fund invest-
ger planes ended in 1978). The closest rival to the ment in two new aircraft, the narrow bodied 757
707 was the Douglas DC8, of which some 556 were and the wide bodied 767. The 757 was designed as
ultimately sold. a replacement to the aging 727, while the 767 was
The 707 was followed by a number of other suc- a response to a similar aircraft from Airbus. These
cessful jetliners including the 727 (which entered were the first Boeing aircraft to be designed with
service in 1962), the 737 (which entered service in two person cockpits, rather than three. Indeed, the
1967), and the 747 (which entered service in 1970). cockpit layout was identical, allowing crew to shift
The single aisle 737 went on to become the work- from one aircraft to the other. The 767 was also the
horse of many airlines. In the 2000s, a completely re- first aircraft for which Boeing subcontracted a sig-
designed version of the 737 that could seat between nificant amount of work to a trio of three Japanese
110 and 180 passengers was still selling strong. Cu- ­manufacturers—Mitsubishi, Kawasaki, and Fuji—
mulative sales of the 737 totaled 6,500 by mid-2006, who supplied about 15% of the airframe. Intro-
making it by far the most popular commercial jet duced in 1981, both aircraft were successful. Some
aircraft ever sold. 1049 757s were sold during the life of the program
It was the 747 “jumbo jet,” however, that prob- (which ended in 2003). By 2006, over 950 767s had
ably best defined Boeing. In 1966, when Boeing’s been sold, and the program was still ongoing.
board made the decision to develop the 747, they The next Boeing plane was the 777. A two-engine
were widely viewed as betting the entire company wide bodied aircraft with seating capacity of up to
on the jet. The 747 was born out of the desire of Pan 400 and a range of almost 8,000 miles, the 777, was
Am, then America’s largest airline, for a 400  seat initiated in 1990. The 777 was seen as a response
passenger aircraft that could fly 5,000  miles. Pan to Airbus’ successful A330 and A340 wide bodied
Am believed that the aircraft would be ideal for the aircraft. Development costs were estimated at some
growing volume of trans-continental traffic. How- $5 billion. The 777 was the first wide bodied long-
ever, beyond Pan Am, which committed to pur- haul jet to have only two engines. It was also the first
chasing 25 aircraft, demand was very uncertain. to be designed entirely on computer. To develop the
Moreover, the estimated $400  million in develop- 777, for the first time Boeing used cross-­functional
ment and tooling costs placed a heavy burden on teams composed of engineering and production em-
Boeing’s financial resources. To make a return on its ployees. It also bought major suppliers and custom-
investment, the company estimated it would need to ers into the development process. As with the 767,
sell close to 400 aircraft. To complicate matters fur- a significant amount of work was outsourced to
ther, Boeing’s principal competitors, Lockheed and foreign manufacturers including the Japanese trio of
McDonnell Douglas, were each developing 250 seat Mitsubishi, Kawasaki, and Fuji who supplied 20%
jumbo jets. of the 777 airframe. In total, some 60% of parts for
Boeing’s big bet turned out to be auspicious. Pan the 777 were outsourced. The 777 proved to be an-
Am’s competitors feared being left behind, and by the other successful venture—by mid-2006, 850 777s
end of 1970, almost 200 orders for the aircraft had had been ordered, far greater than the 200 or so re-
been placed. Successive models of the 747 extended quired to break even.
the range of the aircraft. The 747–400, introduced In December 1996, Boeing stunned the aerospace
in 1989, had a range of 8,000 miles and a maximum industry by announcing it would merge with long-
seating capacity of 550 (although most configura- time rival McDonnell Douglas in a deal estimated
tions seated around 400 passengers). By this time, to be worth $13.3  billion. The merger was driven
both Douglas and Lockheed had exited the market by Boeing’s desire to strengthen its presence in the
giving Boeing a lucrative monopoly in the very large defense and space side of the aerospace business, ar-
commercial jet category. By 2005, the company had eas in which McDonnell Douglas was traditionally

DESIGN SERVICES OF
# 108137    Cust: Cengage    Au: Hill Jones   Pg. No. 396
25843_case29_ptg01_hr_C390-C405.indd 396
C/M/Y/K S4-CARLISLE 1/30/12 2:58 PM
 Case 29:  Boeing Commercial Aircraft in 2011 C397

strong. On the commercial side of the aerospace catch up with out of sequence work, and wait for
business, Douglas had been losing market share since backordered parts to arrive. Ultimately, the company
the 1970s. By 1996, Douglas accounted for less than had to take a $1.6 billion charge against earnings to
10% of production in the large commercial jet air- account for higher costs and penalties paid to air-
craft market and only 3% of new orders placed that lines for the late delivery of jets. As a result, Boeing
year. The dearth of new orders meant the long-term made very little money out of its mid-1990s order
outlook for Douglas’s commercial business was in- boom. The head of Boeing’s commercial aerospace
creasingly murky. With or without the merger, many business was fired, and the company committed it-
analysts felt that it was only a matter of time before self to a major acceleration of its attempt to overhaul
McDonnell Douglas would be forced to exit from its production system, elements of which dated back
the commercial jet aircraft business. In their view, the half a century.
merger with Boeing merely accelerated that process.
The merger transformed Boeing into a broad-
based aerospace business within which commercial Boeing in the 2000s
aerospace accounted for 40–60% of total revenue,
depending upon the stage of the commercial pro- In the 2000s, 3 things dominated the development of
duction cycle. In 2001, for example, the commercial Boeing Commercial Aerospace. First, the company
aircraft group accounted for $35 billion in revenues accelerated a decade-long project aimed at improv-
out of a corporate total of $58 billion, or 60%. In ing the company’s production methods by adopting
2005, with the delivery cycle at a low point (but the the lean production systems initially developed by
order cycle rebounding), the commercial airplane Toyota and applying them to the manufacture of
group accounted for $22.7 billion out of a total of large jet aircraft. Second, the company considered,
$54.8 billion, or 41%. A wide range of military air- and then rejected, the idea of building a successor
craft, weapons and defense systems, and space sys- to the 747. Third, Boeing decided to develop a new
tems comprised the balance of their revenue. wide bodied long haul jetliner, the 787.
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
Lean Production at Boeing
distance between top corporate officers and the Boeing’s attempt to revolutionize the way planes
commercial aerospace business, the headquarters of could be built began in the early-1990s. Beginning
which remained in Seattle. The move was also in- in 1990, the company started to send teams of ex-
tended to signal to the investment community that ecutives to Japan to study the production systems of
Boeing was far more than its commercial businesses. Japan’s leading manufacturers, particularly Toyota.
To some extent, the move to Chicago may have Toyota had pioneered a new way of assembling au-
been driven by a number of production missteps in tomobiles, known as lean production (in contrast to
the late-1990s that occurred at a time when the com- conventional mass production).
pany should have been enjoying financial success. Toyota’s lean production system was developed
During the mid-1990s orders had boomed as Boeing by one of the company’s engineers, Ohno Taiichi.16
cut prices in an aggressive move to gain share from After working at Toyota for 5  years and visiting
Airbus. However, delivering these aircraft meant Ford’s U.S. plants, Ohno became convinced that
that Boeing had to more than double its production the mass production philosophy for making cars
schedule between 1996 and 1997. As it attempted to was flawed. He saw numerous problems, including
do this, the company ran into some server produc- 3 major drawbacks. First, long production runs cre-
tion bottlenecks.15 The company scrambled to hire ated massive inventories, which had to be stored in
and train some 41,000 workers, recruiting many large warehouses. This was expensive because of the
from suppliers, a move it came to regret when many cost of warehousing and because inventories tied up
of the suppliers could not meet Boeing’s demands, capital in unproductive uses. Second, if the initial
and shipments of parts were delayed. In the Fall of machine settings were wrong, long production runs
1997, things got so bad that Boeing shut down its resulted in the production of a large number of de-
747 and 737 production lines so that workers could fects (that is, waste). And third, the mass production

DESIGN SERVICES OF
# 108137
25843_case29_ptg01_hr_C390-C405.indd 397   Cust: Cengage    Au: Hill Jones   Pg. No. 397 C/M/Y/K S4-CARLISLE 1/30/12 2:58 PM
 C398 Section B:  Corporate Level Strategy Cases

system was unable to accommodate consumer pref- stills that produced alcohol that they sold for money.
erences for product diversity. The Japanese took this philosophy back home with
In looking for ways to make shorter production them, and applied it to industrial machinery—which
runs economical, Ohno developed a number of tech- is where Boeing executives saw the concept in opera-
niques designed to reduce setup times for produc- tion in the 1990s. With the help of Japanese consul-
tion equipment, a major source of fixed costs. By tants, they decided to apply the moonshine creative
using a system of levers and pulleys, he was able to philosophy at Boeing—to produce new “right-sized”
reduce the time required to change dies on stamp- machines with very little money that could be used
ing equipment from a full day in 1950 to 3 minutes to make money.
by 1971. This advance made small production runs The moonshine teams were trained in lean pro-
economical, which allowed Toyota to respond bet- duction techniques, given a small budget, and then
ter to consumer demands for product diversity. set loose. Initially, many of the moonshine teams
Small production runs also eliminated the need to focused on redesigning equipment to produce parts.
hold large inventories, thereby reducing warehous- Underlying this choice was a Boeing study, which
ing costs. Furthermore, small product runs and the showed that more than 80% of the parts manufac-
lack of inventory meant that defective parts were tured for aircraft are less than 12  inches long, and
produced only in small numbers and entered the as- yet the metal working machinery is huge, inflex-
sembly process immediately. This reduced waste and ible, and could only economically produce parts in
made it easier to trace defects to their source and large lots.17
fix the problem. In sum, Ohno’s innovations enabled Soon, empowered moonshine teams were design-
Toyota to produce a more diverse product range at a ing their own equipment—small-scale machines with
lower unit cost than was possible with conventional wheels on that could be moved around the plant, and
mass production. that took up little space. One team replaced a large
Impressed with what Toyota had done, in the stamping machine that cost 6-figures and was used
mid-1990s, Boeing started to experiment with ap- to produce L-shaped metal parts in batches of 1,000
plying Toyota-like lean production methods to the with a miniature stamping machine powered by a
production of aircraft. Production at Boeing was small hydraulic motor that could be wheeled around
formerly focused upon producing parts in high vol- the plant. With the small machine, that cost a couple
umes, and then storing them in warehouses until of thousand dollars, parts could be produced very
they were ready to be used in the assembly process. quickly in small lots, eliminating the need for inven-
After visiting Toyota, engineers realized that Boe- tory. They also made a sanding machine and a parts
ing was drowning in inventory. A huge amount of cleaner of equal size. Now the entire process—from
space and capital was tied up in things that didn’t stamping the raw material to the finished part—is
add value. Moreover, expensive specialized machines completed in minutes (instead of hours or days) just
often took up a lot of space, and were frequently idle by configuring these machines into a small cell and
for long stretches of time. having them serviced by a single person. The small
Like Ohno at Toyota, the company engineers scale and quick turnaround now made it possible
started to think about how they could modify equip- to produce these parts just-in-time, eliminating the
ment and processes at Boeing to reduce waste. Boe- need to produce and store inventory.18
ing set aside space and time for teams of creative Another example of a moonshine innovation
plant employees—design engineers, maintenance concerns the process for loading seats onto a plane
technicians, electricians, machinists and operators— during assembly. Historically, this was a cumber-
to start experimenting with machinery. They called some process. After the seats would arrive at Boeing
these teams “moonshiners.” The term “moonshine” from a supplier, wheels were attached to each seat,
was coined by Japanese executives who visited the and then the seats were delivered to the factory floor
United States after World War II. They were im- in a large container. An overhead crane lifted the
pressed by two things in the U.S.—supermarkets, container up to the level of the aircraft door. Then,
and the stills built by people in the Appalachian hills. the seats were unloaded and rolled into the aircraft,
They noticed that people built these stills with no before being installed. The process was repeated un-
money. They would use salvaged parts to make small til all of the seats had been loaded. For a single aisle

DESIGN SERVICES OF
# 108137    Cust: Cengage    Au: Hill Jones   Pg. No. 398
25843_case29_ptg01_hr_C390-C405.indd 398
C/M/Y/K S4-CARLISLE 1/30/12 2:58 PM
 Case 29:  Boeing Commercial Aircraft in 2011 C399

plane this could take 12  hours. For a wide bodied wasted bringing parts to a stall, and moving a plane
jet, it would take much longer. A moonshine team from one stall to the next.
adapted a hay elevator to perform the same job. It In 2001, Boeing introduced a moving assembly
cost a lot less, delivered seats quickly through the line into its Renton plant near Seattle, which manu-
passenger door, and took just 2 hours, while elimi- factures the 737. With a moving line, each aircraft
nating the need for cranes.19 is attached to a “sled” that rides a magnetic strip
Multiply the examples given here, and soon embedded in the factory floor, pulling the aircraft at
there would be a very significant impact on pro- a rate of 2 inches per minute, moving past a series
duction costs. A drill machine was built for 5% of stations where tools and parts arrive at the mo-
of the cost of a full scale machine from Ingersoll- ment need, allowing workers to install the proper
Rand; portable routers were built for 0.2% of the assemblies. The setup can eliminate wandering for
cost of a large fixed router; one process that took tools and parts, as well as expensive tug pulls or
2,000 minutes for a 100 part order (20 minutes per crane lifts (only having tools delivered to worksta-
part because of setup, machining and transit) now tions, rather than having workers fetch them, was
takes 100 minutes (one minute per part); employ- found to save 20–45 minutes on every shift). Preas-
ees building 737 floor beams reduced labor hours sembly tasks can be performed on feeder lines. For
by 74%, increased inventory turns from 2 to 18 per example, inboard and outboard flaps can be assem-
year, and reduced manufacturing space by 50%; bled on the wing before it will arrive for joining to
employees building the 777 tail cut lead time by the fuselage.22
70% and reduced space and work in progress by Like a Toyota assembly line, the moving line can
50%; production of parts for landing gear support be stopped if a problem arises. Lights indicate the
used to take 32 moves from machine to machine, state of the line. A green light will indicate a normal
and required 10  months—production now takes work flow, the first sign of a stoppage brings a yellow
3 moves and 25 days.20 warning light, and if the problem isn’t solved within
In general, Boeing found that it was able to pro- 15 minutes, a purple light will indicate that the line
duce smaller lots of parts economically, often from has stopped. Each work area and feeder line has will
machines that it built itself, which were smaller and require its own lights, so there is no doubt where the
cost less than the machines available from outside problem may occur.23
vendors. In turn, these innovations enabled Boeing The cumulative effects of these process innova-
to switch to just-in-time inventory systems and re- tions have been significant. By 2005, assembly time
duce waste. Boeing was also able to save on space. for the 737 had been cut from 22 days to just 11 days.
By eliminating large production machinery at its Au- In addition, work in process inventory had been re-
burn facility, replacing much of it with smaller more duced by 55% and stored inventory by 59%.24 By
flexible machines, Boeing was able to free up 1.3 mil- 2006, all of Boeing’s production lines, except for the
lion square feet of space, and sold 7 buildings.21 747, had shifted from static bays to a moving line.
In addition to moonshine teams, Boeing also The 747 is scheduled to shift to moving line when
adopted other process improvement methodolo- Boeing starts production of the 747–8.
gies, using them when deemed appropriate. Six
Sigma quality improvement processes are widely
used within Boeing. The most wide reaching process
The Super-Jumbo Decisions
change, however, was the decision to switch from a In the early-1990s Boeing and Airbus started to con-
static assembly line to a moving line. In traditional template new aircraft to replace Boeing’s aging 747.
aircraft manufacture, planes are docked in angled The success of the 747 had given Boeing a monop-
stalls. Ramps surround each plane, and workers go oly in the market for very large jet aircraft, making
in and out to find parts and install them. Moving a the plane one of the most profitable in the jet age,
plane to the next work station was a complex pro- but the basic design dated back to the 1960s, and
cess. The aircraft had to be lowered from its work some believed there might be sufficient demand for a
station, a powered cart was brought in, the aircraft ­super-jumbo aircraft with as many as 900 seats.
was towed to the next station, and then it was lifted Initially, the two companies considered estab-
again. This could take two shifts. A lot of time was lishing a joint venture to share the costs and risks

DESIGN SERVICES OF
# 108137
25843_case29_ptg01_hr_C390-C405.indd 399   Cust: Cengage    Au: Hill Jones   Pg. No. 399 C/M/Y/K S4-CARLISLE 1/30/12 2:58 PM
 C400 Section B:  Corporate Level Strategy Cases

associated with a developing a super-jumbo aircraft, of EADS, Airbus’ parent company, approved devel-
but Boeing withdrew in 1995 citing costs and un- opment of the plane, which was now dubbed the
certain demand prospects. Airbus subsequently con- A380. Development costs at this point were pegged
cluded that Boeing was never serious about the joint at $12 billion, and the plane was forecasted to enter
venture, and the discussions were nothing more than a service in 2006 with Singapore Airlines. The A380
ploy to keep Airbus from developing its own plane.25 would have 2 passenger decks, more space per seat
After Boeing withdrew, Airbus started to talk and wider aisles. It would carry 555 passengers in
about offering a competitor to the 747 in 1995. The great comfort, something that passengers would ap-
plane, then dubbed the A3XX, was to be a super- preciate on long transoceanic flights. According to
jumbo with capacity for over 500 passengers. Indeed, Airbus, the plane would carry up to 35% more pas-
Airbus stated that some versions of the plane might sengers than the most popular 747–400 configura-
carry as many as 900 passengers. Airbus initially es- tion, yet cost per seat would be 15–20% lower due
timated that there would be demand for some 1,400 to operating efficiencies. Concerns were raised about
planes of this size over 20 years, and that develop- turnaround time at airport gates for such a large
ment costs would total around $9 billion (estimates plane, but Airbus stated that dual boarding bridges
ultimately increased to some $15  billion). Boeing’s and wider aisles meant that turnaround times would
latest 747 offering—the 747–400—could carry be no more than those for the 747–400.
around 416 passengers in 3 classes. Airbus also stated that the A380 was also de-
Boeing responded by drafting plans to develop signed to operate on exiting runways and within
new versions of the 747 family. The 747–500X existing gates. However, London’s Heathrow airport
and the 747–600X. The 747–600X was to have a found that it had to spend some $450 million to ac-
new (larger) wing, a fuselage almost 50 feet longer commodate the A380, widening taxiways and build-
than the 747–400, would carry 550 passengers in ing a baggage reclaim area for the plane. Similarly,
3 classes and have a range of 7,700 miles. The smaller 18 U.S. airports had reportedly spent some $1  bil-
747–500X would have carried 460 passengers in 3 lion just to accommodate the A380.26
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
The 787
Boeing announced that it would not proceed with While Airbus pushed forward with the A380, in
the program. The reasons given for this decision March 2001, Boeing announced the development of
included the limited market and high development a radically new aircraft. Dubbed the sonic cruiser,
costs, which at the time, were estimated to be $7 bil- the plane would carry 250 passengers 9,000  miles
lion. There were also fears that the wider wing span and fly just below the speed of sound, cutting 1 hour
of the new planes would mean that airports would of transatlantic flights and 3  hours of transpacific
have to redesign some of their gates to take the flights. To keep down operating costs, the sonic
aircraft. Boeing, McDonnell Douglas (prior to the cruiser would be built out of low weight carbon-­
merger with Boeing) and the major manufacturers of fiber “composites.” Although the announcement cre-
jet engines all forecast demand for about 500–750 ated considerable interest in the aviation community,
such aircraft over the next 20  years. Airbus alone in the wake of the recession that hit the airline in-
forecasts demand has high as 1,400 aircraft. Boe- dustry after September 11, 2001, both Boeing and
ing stated that the fragmentation of the market due the airlines became considerably less enthusiastic.
to the rise of “point-to-point” flights across oceans In March 2002, the program was cancelled. Instead,
would limit demand for a super-jumbo. Instead of Boeing said that it would develop a more conven-
focusing on the super-jumbo category, Boeing stated tional aircraft using composite technology. The
that it would develop new versions of the 767 and plane was initially known as the 7E7 with the “E”
777 aircraft that could fly up to 9,000  miles and standing for “Efficient” (the plane was renamed the
carry as many as 400 passengers. 787 in early-2005).
Airbus, however, continued to push forward In April 2004, the 7E7 program was formally
with planes to develop the A3XX. In December launched with an order for 50 aircraft worth
2000, with more than 50 orders in hand, the board $6­  ­billion from All Nippon Airlines of Japan. It

DESIGN SERVICES OF
# 108137    Cust: Cengage    Au: Hill Jones   Pg. No. 400
25843_case29_ptg01_hr_C390-C405.indd 400
C/M/Y/K S4-CARLISLE 1/30/12 2:58 PM
 Case 29:  Boeing Commercial Aircraft in 2011 C401

was the largest launch order in Boeing’s history. 787, and in 2005 some 232 orders. Another 85 or-
The 7E7 was a twin-aisle wide bodied, two-engine ders were booked in the first 9 months of 2006 for a
plane designed to carry 200–300 passengers up to running total of 373–well beyond break even point.
8,500  miles, making the 7E7 well suited for long In December 2004, Airbus announced that it
haul point-to-point flights. The range exceeded all would develop a new model, the A350, to compete
but the longest range plane in the 777 family, and directly with the 787. The planes were to be long
the 7E7 could fly 750 miles more than Airbus’ clos- haul twin-aisle jets, seating 200–300 passengers, and
est competitor, the mid-sized A330–200. With a fuse- constructed of composites. The order flow, how-
lage built entirely out of composites, the aircraft was ever, was slow, with airlines complaining that the
lighter and would use 20% less fuel than existing A350 did not match the Boeing 787 on operating
aircraft of comparable size. efficiency, range or passenger comfort. Airbus went
The plane was also designed with passenger back to the drawing board and in mid-2006, it an-
comfort in mind. The seats would be wider, as would nounced a new version of the A350, the A350 XWB
the aisles, and the windows would be larger than in for “Extra Wide Body.” Airbus estimated that the
existing aircraft. The plane would be pressurized at A350 XWB would cost $10 billion to develop and
6,000 feet altitude, as opposed to 8,000 feet, which enter service in 2012, several years behind the 787.
is standard industry practice. Airline cabin humidity The two-engine A350 XWB will carry between 250
was typically kept at 10% to avoid moisture buildup and 375 passengers and fly up to 8,500 miles. The
and corrosion—but composites don’t corrode, so hu- largest versions of the A350 XWB will be competing
midity would be closer to 20–30%.27 directly with the ­Boeing 777, not the 787. Like the
Initial estimates suggested that the jet would cost 787, the A350 XWB it will be built primarily of com-
some $7–8  billion to develop and enter service in posite materials. The “Extra Wide Body” is designed
2008. Boeing decided to outsource more work for to enhance passenger comfort. To finance the A350
the 787 than on any other aircraft to date. Boeing XWB, Airbus stated that it would seek launch aid
would build some 35% of the plane’s fuselage and from Germany, France, Spain and the UK, all coun-
wing structure. The trio of Japanese companies that tries where major parts of Airbus are based.30
worked on the 767 and 777, Mitsubishi Heavy In-
dustries, Kawasaki Heavy Industries, and Fuji Heavy
Industries, would build another 35%, and some Trade Tensions
26% would be built by Italian companies, particu-
larly Alenia.28 For the first time, Boeing asked its ma- It is impossible to discuss the global aerospace indus-
jor suppliers to bear some of the development costs try without touching on trade issues. Over the last
for the aircraft. 3 decades, both Boeing and Airbus have charged that
The plane was to be assembled at Boeing’s wide their competitor benefited unfairly from government
bodied plant in Everett, Washington State. Large sub- subsidies. Until 2001, Airbus functioned as a consor-
assemblies were to be built by major suppliers, and tium of 4 European aircraft manufacturers: one Brit-
then shipped to Everett for final assembly. The idea ish (20.0% ownership stake), one French (37.9%
was to “snap together” the parts in Everett in 3 days, ownership), one German (37.9% ownership), and
cutting down on total assembly time. To speed up one Spanish (4.2% ownership). In the 1980s and
transportation, Boeing would adopt air freight as its early-1990s, Boeing maintained that subsidies from
major transportation method for many components. these nations allow Airbus to set unrealistically low
Airbus’ initial response was to dismiss Boeing’s prices, to offer concessions and attractive financing
claims of cost savings as inconsequential. They terms to airlines, to write off development costs, and
pointed out that even if the 787 used less fuel than to use state-owned airlines to obtain orders. Accord-
the A330, that amount was equivalent to just 4% of ing to a study by the United States Department of
total operating costs.29 However, even by Airbus’ cal- Commerce, Airbus received more than $13.5 billion
culations, as fuel prices were starting to accelerate, in government subsidies between 1970 and 1990
the magnitude of the savings rose. Moreover, Boeing ($25.9  billion if commercial interest rates are ap-
quickly started to snag some significant orders for plied). Most of these subsidies were in the form of
the 787. In 2004, Boeing booked 56 orders for the loans at below-market interest rates and tax breaks.

DESIGN SERVICES OF
# 108137
25843_case29_ptg01_hr_C390-C405.indd 401   Cust: Cengage    Au: Hill Jones   Pg. No. 401 C/M/Y/K S4-CARLISLE 1/30/12 2:58 PM
 C402 Section B:  Corporate Level Strategy Cases

The subsidies financed research and development where the 787 is to be assembled, and more than
and provided attractive financing terms for Airbus’s $1 billion in loans from the Japanese government to
customers. Airbus responded by pointing out that 3 Japanese suppliers, who will build over 1/3 of the
both Boeing had benefited for years from hidden 787. Moreover, Airbus was quick to point out that
US government subsidies, and particularly Pentagon a trade war would not benefit either side, and that
R&D grants. Airbus purchased some $6 billion a year in supplies
In 1992, the 2 sides appeared to reach an agree- from companies in the United States.
ment that put to rest their long-standing trade dis- In January 2005, both the U.S. and EU agreed to
pute. The 1992 pact, which was negotiated by the freeze direct subsidies to the 2 aircraft makers while
European Union on behalf of the four member states, talks continued. However, in May 2005, news reports
limited direct government subsidies to 33% of the suggested (and Airbus confirmed), that the jet maker
total costs of developing a new aircraft and specified had applied to 4 EU governments for launch aid for
that and such subsidies had to be repaid with interest the A350, and that the British government would
within 17 years. The agreement also limited indirect announce some $700 million in aid at the Paris Air
subsidies, such as government supported military Show in mid-2005. Simultaneously, the EU offered to
research that has applications to commercial air- cut launch aid for the A350 by 30%. Dissatisfied, the
craft, to 3% of a country’s annual total commercial U.S. side decided that the talks were going nowhere,
aerospace revenues, or 4% of commercial aircraft and on May 31 the United States formally filed a
revenues of any single company on that country. Al- request with the World Trade Organization (WTO)
though Airbus officials stated that the controversy for the establishment of a dispute resolution panel
had now been resolved, Boeing officials argued that to resolve the issues. The EU quickly responded by
they would still be competing for years against sub- filing a countersuit with the WTO claiming that U.S.
sidized products. aid to Boeing exceeded the terms set out in the 1992
The trade dispute heated up again in 2004 when agreement.31
Airbus announced the first version of the A350 to In early-2011, the WTO ruled on the complaint
compete against Boeing’s 787. What raised a red by Boeing, and on Airbus’s counterclaim. The WTO
flag for the U.S. government was signs from Airbus stated that Airbus had indeed benefitted from some
that it would apply for $1.7 billion in launch aid to $15  billion in improper launch aid subsidies over
help fund the development of the A350. As far as the the prior 40 years, and that this practice must stop.
United States was concerned, this was too much. In Boeing, however, had little time to celebrate. In a
late-2004, U.S. Trade Representative Robert ­Zoellick separate ruling, the WTO stated that Boeing, too,
issued a statement formally renouncing the 1992 had benefited from improper subsidies, including
agreement and calling for an end to launch subsidies. $5.3  billion from the United States Government to
According to Zoellick: “since its creation 35  years develop the 787 (the WTO stated that most of these
ago, some Europeans have justified subsidies to Air- subsidies were in the form of payments from NASA
bus as necessary to support an infant industry. If to development space technology that subsequently
that rationalization were ever valid, its time has long had commercial applications. Both sides in the dis-
passed. Airbus now sells more large civil aircraft than pute are engaged in the process of appealing these
Boeing.” Zoellick went on to claim that Airbus has rulings, which could drag out for years.32
received some $3.7 billion in launch aid for the A380
plus another $2.8 billion in indirect subsidies includ-
ing $1.7  billion in tax payer funded infrastructure The Next Chapter
improvements for a total of $6.5 billion.
Airbus shot back that Boeing, too, continued to Huge financial bets have been placed on very dif-
enjoy lavish subsidies, and that the company had ferent visions of the future of airline travel—­Airbus
received some $12  billion from NASA to develop- with the A380 and Boeing with the 787. By mid-
ment technology, much of which has found its way 2011, Airbus had delivered 51 A380s and had a
into commercial jet aircraft. The Europeans also backlog of 236 on order. The rate of new orders
contended that Boeing would receive as much as had been slow, however; Boeing orders of 827 787s
$3.2  billion in tax breaks from Washington State, have had a backlog. Airbus also hedged its bets by

DESIGN SERVICES OF
# 108137    Cust: Cengage    Au: Hill Jones   Pg. No. 402
25843_case29_ptg01_hr_C390-C405.indd 402
C/M/Y/K S4-CARLISLE 1/30/12 2:58 PM
 Case 29:  Boeing Commercial Aircraft in 2011 C403

announcing the A350 XWB, and after a slow start Aircraft plant for $580 million. Vought had been in a
the aircraft has amassed some 567 orders. joint venture with the Italian company, Alenia Aero-
Both companies have had substantial produc- nautical, to make fuselage parts for the 787. Vought
tion problems and faced significant delays. In mid- had not been able to keep up with the demands of
2006, Airbus announced that deliveries for the A380 the program and Boeing’s acquisition has seen it as
would be delayed by 6  months while the company a move to exert more control over the production
dealt with “production issues” arising from prob- process, and inject capital into Vought.
lems installing the wiring bundles in the A380. Esti- In another development, Boeing quietly launched
mates suggest that the delay would cost Airbus some the 747–8 program in November 2005. This plane
$2.6  billion over 4  years.33 Within months, Airbus is a completely redesigned version of the 747 and
had revised the expected delay to 18  months, and incorporates many of the technological advances
stated that the number of A380s it now needed to developed for the 787, including significant use of
sell in order to break even had increased from 250 composites. It will be offered in both a freighter and
to 420 aircraft. The company also stated that due to intercontinental passenger configuration that will
production problems, it would only be able to de- carry 467 passengers in a 3-seat configuration and
liver 84 A380 planes by 2010, compared to an origi- have a range of 8,000 miles (the 747–400 can carry
nal estimate of 420 (in fact it delivered only half of 416 passengers). The 747–8 will also use the fuel ef-
this amount).34 ficient engines developed for the 787, and will have
Boeing ran into a number of production and de- the same cockpit configuration as the 737, 777 and
sign problems with the 787 that resulted in 5 de- 787. Development costs are estimated to be around
lay announcements, pushing out the first deliveries $4 billion. By July 2011, Boeing had orders for 78
more than 3 years. For the 787, Boeing outsourced 747–8 freighters and 36 passenger planes. The first
an unprecedented amount of work to suppliers. This deliveries occurred in late-2011.
was seen at the time as a risky move, particularly Looking forward, the primary issue confronting
given the amount of new technology incorporated both Airbus and Boeing is what to do about their
into the 787. As it turns out, several suppliers had aging narrow bodies planes, the A320 and the 737
problems meeting Boeing’s quality specification, sup- respectively? These aircraft are the workhorses of
plying substandard parts that had to be reworked or many airlines comprising some 70% of all units
redesigned. The issues included a shortage of fasten- produced by the 2 manufacturers. Strong demand is
ers, a misalignment between the cockpit section and expected for this category in the future. Boeing esti-
the fuselage, and microscopic wrinkles in the fuse- mates that over the next 20 years, airlines will buy
lage skin. In addition, Boeing found that it had to 23,000 single aisle jets worth some $1.95  trillion.
redesign parts of the section where the wing meets Ideally, both Boeing and Airbus would probably pre-
the fuselage. Boeing executives complained that their fer to wait for a few more years before bearing the
engineers were often fixing problems “that should R&D costs associated with new product develop-
not have come to us in the first place.”35 ment. The argument often made is that this will give
Some company sources suggest that Boeing erred time for new technologies to mature, and make for a
by not managing its supplier relationships as well as better aircraft at the end of the day. However, events
it should have. In particular, there may have been have conspired to force their hands.
a lack of ongoing communication between Boeing First, new engine technologies developed by Pratt
and key suppliers. Boeing tended to throw design & Whitney reportedly increases fuel efficiency by
specifications “over the wall” to suppliers, and then 10–15%. Airlines want these new engines on their
was surprised when they failed to comply fully with aircraft, but doing so requires some redesign of the
the company’s expectations. In addition, Boeing’s A320 and 737. The wings of the 737 in particular,
dependency on single suppliers for key components are too low slung to take the new engines, so Boeing
meant that a problem in any one of those suppli- would be required to do some major redesign work.
ers could create a bottleneck that would hold up Second, there are several potential new entrants
production. into the narrow body segment of the market. The
In an attempt to fix some of the supply chain is- Canadian regional jet manufacturer, Bombardier,
sues, in 2009, Boeing purchased a Vought Industries is developing a 110–150 seat aircraft that makes

DESIGN SERVICES OF
# 108137
25843_case29_ptg01_hr_C390-C405.indd 403   Cust: Cengage    Au: Hill Jones   Pg. No. 403 C/M/Y/K S4-CARLISLE 1/30/12 2:58 PM
 C404 Section B:  Corporate Level Strategy Cases

extensive use of composites to reduce weight. This interest from airlines, racking up over 1,000 orders
will reduce operating costs by about 15% compared by August of 2011.
to the older 737 and A320 models. Known as the These developments have presented Boeing with
CSeries, as of June 2011, Bombardier had 133 firm a major strategic dilemma. Should they continue to
orders for this aircraft plus options for an additional evaluate what to do with the 737, perhaps waiting a
129. The first CSeries aircraft are expected to enter few more years before making the heavy investment
service in 2013. associated with redesign. This would allow them to
In addition, the Commercial Aircraft Corpora- design a high technology successor to the 737 that
tion of China (Comac) has announced that it will would incorporate many of the technologies devel-
build a 170–190 seat narrow-bodied jet. Scheduled oped for the 787. Alternatively, should they jump
for introduction in 2016, this will compete with the into the fray now, and offer a redesigned version of
larger 737 and A320 models. The European low cost the 737 that can utilize new engine technology?
airline, Ryanair, has entered into a co-development In a sign of how Boeing’s hand may be forced, in
agreement with Comac and has talked about a 200+ July 2011, Boeing announced a large new order from
plane order that could be as high as 400. Formerly, American Airlines for 200 narrow-bodied aircraft.
Ryanair had been a Boeing customer. Boeing must Boeing agreed to fit half of these aircraft with new
decide how to confront these growing threats. engine technology, a requirement that will necessi-
Responding to these threats, Airbus in late- tate substantially higher R&D spending. At the same
2010 announced that it would introduce a rede- time, American Airlines announced that it would
signed version of the A320 that utilizes the Pratt & buy 260 A320 aircraft from Airbus, half of which
Whitney engine. Known as the A320NEO (New will be A320NEOs. This will be the first order from
Engine Option), the offering has garnered strong American Airlines for Airbus since the 1980s.36

Endnotes
1 Boeing Website. 14 This material is drawn from an earlier version of the Boe-
2 Airbus Website. ing case written by Charles W.L. Hill. See C.W.L. Hill,
3 J. Palmer,“Big Bird,” Barron’s, December 19, 2005, 25–29; “The Boeing Corporation: Commercial Aircraft Opera-
www.yeald.com/Yeald/a/33941/both_a380_and_787_ tions,” in C.W.L. Hill and G.R. Jones, Strategic Manage-
have_bright_futures.html ment, third edition (Boston: Houghton Mifflin, 1995).
4 G.J. Steven,“The Learning Curve; From Aircraft to Space Much of Boeing’s history is described in R.J. Sterling,
Craft,” Management Accounting, May 1999, 64–66. Legend and Legacy (St Martin’s Press, New York, 1992).
5 D. Gates, “Boeing 7E7 Watch: Familiar Suppliers Make 15 S.  Browder, “A Fierce Downdraft at Boeing,” Business
Short List,” Seattle Times. Week, January 26, 1988, 34.
6 The figures are from the International Airline Travelers 16 M.A.  Cusumano, The Japanese Automobile Industry
Association (IATA). (Cambridge, Mass.: Harvard University Press, 1989); Ohno
7 IATA, “2006 Loss Forecast Drops to US$1.7  billion,” Taiichi, Toyota Production System (Cambridge, Mass.:
Press Release, August 31, 2006. Productivity Press, (1990); J. P. Womack, D. T. Jones, and
8 “Turbulent Skies: Low Cost Airlines,” The Econo- D. Roos, The Machine That Changed the World (New
mist, July 10, 2004, 68–72; “Silver Linings, Darkening York: Rawson Associates, 1990).
Clouds,” The Economist, March 27, 2004, 90–92. 17 J.  Gillie, “Lean Manufacturing Could Save Boeing’s
9 Air Transport Association, The Economic Climb Out for Auburn Washington Plant,” Knight Ridder Tribune
U.S. Airlines, ATA Economics, August 3, 2011 (accessed Business News, May 6, 2002, 1.
on ATA Website). 18 P.V. Arnold, “Boeing Knows Lean,” MRO Today, Febru-
10 Data from the Air Transport Association at www.air- ary 2002.
lines.org. 19 Boeing, “Converted Farm Machine Improves Produc-
11 Boeing, Current Market Outlook, 2011. Archived on tion Process,” Press Release, July 1, 2003.
Boeing’s Website. 20 P.V.  Arnold, “Boeing Knows Lean,” MRO Today,
12 Airbus’ Website. www.airbus.com/en/myairbus/global_ ­February 2002. Also “Build in Lean: Manufacturing
market_forcast.html. for the Future,” on Boeing’s Website www.boeing.com/
13 Presentation by Randy Baseler, Vice President of Boe- aboutus/environment/create_build.htm.; J.Gillie, “Lean
ing Commercial Airplanes, given at the Farnborough Manufacturing Could Save Boeing’s Auburn, Washing-
Air show, July 2006. Archived at www.boeing.com/ ton Plant,” Knight Ridder Tribune Business News, May
nosearch/exec_pres/CMO.pdf. 6, 2002, 1.

DESIGN SERVICES OF
# 108137    Cust: Cengage    Au: Hill Jones   Pg. No. 404
25843_case29_ptg01_hr_C390-C405.indd 404
C/M/Y/K S4-CARLISLE 1/30/12 2:58 PM
 Case 29:  Boeing Commercial Aircraft in 2011 C405

21 J.  Gillie, “Lean Manufacturing Could Save Boeing’s 30 D.  Michaels and J.L. Lunsford, “Airbus Chief Reveals
Auburn Washington Plant,” Knight Ridder Tribune Plans for New Family of Jetliners,” Wall Street Journal,
Business News, May 6, 2002, 1. July 18, 2006, A3.
22 P.V. Arnold, “Boeing Knows Lean,” MRO Today, Febru- 31 J.  Reppert-Bismarck and W. Echikson, “EU Counter-
ary 2002. sues over U.S. Aid to Boeing,” Wall Street Journal, June
23 M.  Mecham, “The Lean, Green Line,” Aviation Week, 1, 2005, A2; United States Trade Representative Press
July 19, 2004, 144–148. Release, “United States Takes Next Steps in Airbus WTO
24 Boeing, “Boeing Reduces 737 Airplane’s Final Assembly Litigation,” May 30, 2005.
Time by 50 Percent,” Press Release, January 27, 2005. 32 N. Clark, “WTO Rules U.S. Subsidies for Boeing Unfair,”
25 The Economist, “A Phony War,” May 5, 2001, 56–57. New York Times, March 31, 2011.
26 J.D. Boyd, “Building Room for Growth,” Traffic World, 33 Anonymous, “Airbus Agonistes,” Wall Street Journal,
August 7, 2006, 1. September 6, 2006, A20.
27 W. Sweetman, “Boeing, Boeing, Gone,” Popular Science, 34 Anonymous, “Forecast Dimmer for Profit on Airbus’
June 2004, 97. A380,” Seattle Times, October 20, 2006, Web Edition.
28 Anonymous, “Who Will Supply the Parts?”, Seattle 35 J. Weber, “Boeing to Rein in Dreamliner Outsourcing,”
Times, June 15, 2003. Bloomberg Business Week, January 16, 2009.
29 W. Sweetman, “Boeing, Boeing, Gone,” Popular Science, 36 Staff Reporter, “American Airlines Orders 200 Boeing 737s,
June 2004, 97. 260 More from Airbus,” Associated Press, July 19, 2011.

DESIGN SERVICES OF
# 108137
25843_case29_ptg01_hr_C390-C405.indd 405   Cust: Cengage    Au: Hill Jones   Pg. No. 405 C/M/Y/K S4-CARLISLE 1/30/12 2:58 PM