Boeing speeds into AA06 on a road to redemption

Singapore Air Show » 2006
November 30, 2006, 9:46 AM

Boeing employees who remember the sorry state of the airline industry and, frankly, their company during the last Asian Aerospace exposition in 2004 should savor this moment. A more rapid and complete recovery from the depths of fiscal malaise and corporate disfunction seems hard to imagine.

Fresh off a record sales year that saw it book orders for 1,002 commercial airplanes, the company has come to this Singapore show with a stride of confidence not seen since the heady days following the certification of the first 777 airliner. Today, as the 787 model builds upon an early order base more solid than even Boeing imagined at the start of the program, the scandals, project failures and corporate downsizing that characterized the company’s recent history suddenly seem distant, as if relegated to a bad dream.

Of course, the company’s fall from grace felt all too palpable as the crowds began to gather for the last Asian Aerospace event, when news broke that Boeing would lay off some 100 employees at its 767 Tanker conversion site in Wichita, Kansas, after then-CEO Harry Stonecipher decided to slow production until the U.S. Department of Defense finished its investigation into improprieties surrounding a U.S. Air Force contract for 100 airplanes.

Just two months earlier the company fired CFO Michael Sears and Darlene Druyan, the former U.S. Air Force procurement official since sentenced to nine months in jail for helping Boeing win billions of dollars in equipment contracts in exchange for her $250,000-a-year job and lying about it to investigators. Two weeks after the departure of Druyan and Sears, who himself received a four-month jail sentence, Stonecipher replaced Phil Condit as CEO and promised to enforce a new ethical code at the company–one that he would eventually break by carrying on a relationship with a female subordinate.

But as chaotic as things had become for Boeing in the months leading up to Asian Aerospace 2004, the period would prove a pivotal one. Still feeling the full effects of 9/11, the SARS epidemic and the second Iraq War, the airline business remained mired in recession, further encouraging Boeing’s shift in focus away from its commercial manufacturing base and toward more military pursuits.

In the commercial realm, Boeing said it would transform itself from a product manufacturer into a “systems integrator,” leaving more design and assembly work to suppliers and cutting the number of its own employees dramatically. In 2002 and 2003 Boeing laid off 40,000 employees, half of them around Washington state’s Puget Sound region, the center of the company’s commercial aircraft business.

Making its first international airshow appearance since its board issued authority to offer the new 7E7 Dreamliner in December 2003, Boeing would use AA04 as a platform to demonstrate to the world–and particularly the region to which Boeing Commercial Airplanes traces so much of its customer base–its commitment to reversing its spiraling business fortunes and reputation. With the let-downs of the defunct 747X and Sonic Cruiser programs still fresh in the minds of shareholders, Boeing’s executives knew the Dreamliner had better succeed. As many of them freely admitted, the company’s credibility depended on it.

787 Leads Boeing Resurgence

Two years later, the airplane now known as the 787 has helped lead a sales resurgence that for the first time in history saw Boeing collect more than 1,000 orders in a year and reclaim from Airbus the sales value title after a half-decade of placing second to its European rival. Although by the end of the year Airbus reported orders for some 50 more airplanes, Boeing captured significantly more of the big-jet market, including December’s landmark contracts from Qantas for forty-five 787s and Hong Kong’s CR Airways for 10 of the composite twinjets.

By that time Boeing had just dealt Airbus another serious blow in Asia when Cathay Pacific announced it planned to order twelve 777-300ERs and lease another four from International Lease Finance Co. Although Cathay said it would also lease four A330-300s, Boeing pointed to the 777 order as another vote for two-engine airplanes over four-engine designs at a time fuel costs accounted for more and more of an airline’s operating expenses. Airbus can try to downplay that line of reasoning, but order figures over the past couple of years make Boeing’s point hard to dismiss. Last year Boeing booked orders for 155 triple-sevens, while the A340 attracted orders for a relatively paltry 15 examples.

In the midsize market, the 787 program ended 2005 with orders from 23 customers for 291 airplanes, 235 of which came last year alone. By the start of this year, Airbus’ answer to the 787, the new A350, had drawn firm orders for 87 examples. With orders last year for just 20 of the biggest of big-ticket items–the A380–only a wildly successful year for the single-aisle A320 family would allow Airbus to even approach Boeing’s estimated $120 billion in bookings, as the European consortium logged orders worth $95.9 billion.

Of course, deliveries, not orders, produce revenue, and Airbus once again topped Boeing on that score last year, by a count of 378 to 290. The bulk of both companies’ shipments consisted of single-aisle airplanes, but given the nature of more recent orders, Boeing can soon expect midsize and widebody jet deliveries to account for a bigger share of its income. In fact, finding  early enough delivery slots for 787 prospects has become one of Boeing’s biggest concerns.

The company has already raised its delivery projections somewhat, from 96 to 112 airplanes by the end of 2009. As of now, official plans call for building seven airplanes a month by mid-2009, in which case most anyone placing an order today would have to trade positions with other customers to take delivery before 2011. But Boeing hopes that studies under way now will show that it could raise rates to 14 a month by the second quarter of that year. For that to happen, Boeing would not only have to build a second assembly line, it would need to ensure that no link in the supply chain will falter.

“You can never tell; [bottlenecks] can be anywhere in the supply chain,” said Boeing vice president of 787 development Walt Gillette. “The whole industry does not have the capacity that it had a decade and a half ago.”

Still targeting “mid-2008” for U.S. and European certification, Boeing continues to promise first delivery to Japan’s All Nippon Airways during the agreed-upon month, said Gillette. He declined to identify the month in question, however, citing “a matter of a contractual relationship between ANA and Boeing.”

In any case, the rest of the region’s 787 customers will no doubt keep close tabs on the program’s progress, including any change in ANA’s delivery plans. Generally considered the commercial air transport industry’s last legitimate growth market, Asia carries a lot of clout and its airlines wield plenty of influence with both Boeing and Airbus. Aside from financial penalties, slip-ups such as Airbus’ six-month delivery delay of the A380 to Singapore Airlines can cost a company prestige–something perhaps even more valuable here than in the West.

For Boeing, the 787 has already done much to restore some of the luster its reputation has lost over the past decade. Asian airlines, which account for more than half of the airplane’s order base, have certainly bet on the company’s capacity to deliver what it has promised. To a large extent, Boeing can thank them for its remarkable turnaround. Now comes the time to show their confidence wasn’t misplaced.   

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