Is The Boeing Company's Dream Still Intact?
Boeing's 787 Dreamliner jet with unparalleled fuel efficiency, speed similar to the fastest twin-aisle airplanes, and superior flying comfort was a dream come true. No surprises that when Boeing launched the program in April 2004, it received a record number of orders. There were 60 customers from six continents who booked more than 1,000 airplanes for an astronomical $240 billion. Boeing set a target of selling 3,300 Dreamliners by 2030.
The dream run soon turned into a nightmare with the first delivery delayed by more than three years to September 2011 , owing to recurring issues with parts. Since then there's been a series of problems -- sometimes with brakes, electrical fire, fuel leaks, or hydraulics, and most recently with the wings. The costly repairs and delays have put the program's profitability at risk. Meanwhile, rival Airbus is looking to catch up while Boeing's busy repairing faulty batteries. Can Boeing overcome the glitches?
In the past 15 months, the Dreamliner has suffered several embarrassments, including a three-month grounding after the lithium-ion batteries of two planes overheated in January 2013 . A couple of months back, Japan Airlines' Dreamliner's power cell was found to be releasing smoke at the Tokyo airport.
ANA Boeing 787 Dreamliner. Source: Wikimedia Commons
Last month, an Air India Dreamliner had to make emergency landing due to a technical snag in the cockpit panel. The plane was said to have issues with the engine. However, General Electric, which exclusively designs 787 engines for the Air India fleet, disagreed. A GE spokesperson said that the GEnx Engine was operating perfectly; it was the ram air turbine that caused the emergency.
The latest in the series of setbacks is the discovery of cracks in the wings of 40 Dreamliners . Mitsubishi makes these wings for Boeing, and the cracks could have resulted from changes in the manufacturing process. Boeing has saved face to some extent as none of the faulty wings have gone to customers, but it still has to foot the repair bill .
Much at stake
Boeing expected margins to be in the low single digits on the first 1,300 Dreamliners that it delivers. With the wing cracks, this will get stiffer. There's a twist, however: Boeing follows "program accounting" whereby it calculates future profits as a differential of total costs incurred and total revenue earned over the entire program period, and apportions the same over the contract period.
A recent Wall Street Journal report stated that if Boeing booked profits as the differential between current revenue and current costs, the Dreamliner program would have incurred a loss of $69 million in the first nine months of 2013. In the same report, Joseph Nadol, analyst at JPMorgan Chase, said his estimates show that Boeing lost $45 million per 787 Dreamliner shipped in the third quarter on an average selling price of $115 million.
Apart from the cash drain, the Dreamliner woes could mean that rival Airbus may land some deals for its widebody aircraft. The A330 and the A350-800 that Airbus will start delivering from 2015 are designed to contend with Boeing's 787 Dreamliners. The A330 can accommodate more passengers than 787, but it lags the latter in range. The A350-800 will chip in with range and give Dreamliners a solid contest.
Boeing's dream is alive!
The Dreamliner's problems may look overwhelming, but all is not lost. In a positive development , the Federal Aviation Administration has pronounced that the 787 "meets its intended level of design safety" following a review that it jointly undertook with Boeing after the battery overheating incident last year. This announcement could make a big difference in carriers' choice of aircraft makers for new orders.
With a backlog of over 900 planes and $150 billion in future revenue at stake, Boeing realizes that the 787 program is too big to be unprofitable. The company is coming up with new strategies to cut costs and boost productivity. Boeing estimates that for the profits to be in the league of 777s, it has to sell approximately 2,500 787s, and in order to do that, it has to increase the production rate. Boeing hopes to make 12 Dreamliners a month by 2016, up from the current 10, and increase this to 14 a month by 2020.
The company's also accepted that earlier it didn't monitor its suppliers that strictly, but it's tightened the monitoring process, and plans to increase the ratio of in-house work to outsourcing.
Boeing is now asking for big concessions from its suppliers and the company has made it clear that if they don't agree then they could end up on the company's "no fly" list. In this context, it would be interesting to see how the upcoming price talks between Boeing and Spirit Aerosystems go. The latter provides the Dreamliner's forward fuselage and leading edges, and negotiations will soon start for the 787-9 and -10 models. Spirit has recently written off losses of $700 million owing to the disruptions in the 787 program.
Foolish last words
There's no denying that the Dreamliner program is one of Boeing's most critical missions, and the progress has been bumpy so far. But the FAA verdict and the company's new strategies could be a turning point. If that happens, Boeing's dreams could take off again soon.
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