Boeing had to make tough decisions as unforeseen global events undermined its commercial business. Yet optimism about the future is growing as the company sets its product strategy and finds new way of cutting costs
Boeing is a global name because of its commercial aircraft business - whether it likes it or not. While the massive effort to broaden its image in line with its expanded military and space portfolio is slowly paying off, the public perception of the company remains closely tied to the fortunes of Boeing Commercial Airplanes (BCA).
Despite accounting for only 54% of the company's 2002 revenues of $54 billion - and 45% of the $49 billion in sales expected this year - the commercial business has, Boeing believes, a disproportionate influence on its share price and overall valuation. The drastic downturn in the civil market has not been good news for Boeing or for BCA, which has also struggled to present a cohesive vision of its future.
The decision not to launch a major 747 derivative, the cutting of 32,000 jobs, and the rise and fall of the Sonic Cruiser have combined to fuel speculation that Boeing is preparing to leave the commercial airliner business altogether within a decade - rumours the company strenuously denies.
It has been a miserable period for hard-pressed Seattle-based BCA, absorbing the successive body blows of the post-11 September airline meltdown, the Iraq conflict and the SARS virus. Steadying the ship and plotting a course for friendly waters is chief executive Alan Mulally, who openly accepts the massive challenges facing his company. "This is the biggest recession in the history of mankind, and nothing is selling very well, but it is going to come back," he says, pointing to a chart showing the steady growth in air traffic since 1971.
With the exception of slight dips coinciding with the 1991 Gulf War and 1997 Asian financial crisis, and the saucer-shaped impression of the present crisis, the slope shows uninterrupted growth. The upward trend is expected to resume in 2004, providing the solid basis for Mulally's irrepressible optimism about a long-term passenger growth rate of 5%, and 6% for cargo. But he has more specific tactical and strategic reasons to be cheerful.
Tactically, BCA is making dramatic strides in modernising its manufacturing. Strategically, the company appears to have settled on how to match its future family of products with the anticipated growth of point-to-point travel - the phenomenon of fragmentation much vaunted by Boeing.
BCA has relentlessly reduced cycle times and costs during the downturn, and almost miraculously achieved positive operating margins of 7.1% on revenues of $28 billion in 2002. Although both are forecast to be lower in 2003, with predicted margins reduced to 4.5-5.5% and revenues to around $22 billion, the trend shows signs of turning upwards in 2004. The results are even more remarkable given the dramatic drop in aircraft deliveries, from 527 in 2001 to 381 in 2002. Deliveries for 2003 are forecast to be around 280, and between 275 and 300 in 2004, SARS permitting, with a gradual stabilisation at the upper end of this range out to the end of the decade.
Although efforts to cut delivery flow time and costs had been under way since the mid-1990s, the two-year crisis has put renewed vigour into the company's Lean Global Enterprise initiative. Boeing's focus has been on the 737 line because of the consistently high production demands on the family, even through the depths of the current recession. The original three lines at Renton have been consolidated into one moving line with the ability to make 21 aircraft a month. Flow time has been cut by 52% from 27 days to 13, "and I think we can get to three," says Mulally, who believes the moving-line concept can eventually be applied to all models in 2005-2006.
"It is just like the Toyota production process - it drives everything, including flow time and simpler parts," says Mulally. "Lean, lean, lean. That's why we've chosen lean as the overlying process, rather than six-sigma or anything else. It's all about shorter cycle times and less effort, and the best thing about it is there's no limit to it."
Although the 737 line has made dramatic strides, Mulally believes the all-new 7E7 is the best opportunity for introducing revolutionary manufacturing processes with the promise of unheard-of short cycle times. "It is our job to continuously improve because it fits with our goal of improving the productivity of the entire transportation system, not just the aircraft," he adds. "That way it's more affordable to fly, and everyone benefits."
Figures for the moving line appear to back up the benefits of lean. Inventory in the 737 assembly process is now 64% lower than when three lines were in operation, and work in process is 52% down. The same improvements are being realised in engine build-up (a Boeing responsibility), which has seen a flow time reduction of between 20% and 86% across all models, and a massive 78% inventory cut. Lean also embraces fewer and simpler parts, such as the newly introduced 737 monolithic bulkhead, which is easier to install, is 7% lighter, costs 9% less and has 49% fewer parts.
While BCA gets its house in order to make aircraft profitably, even at much lower production rates, it is also clearing up the uncertainty in its product development strategy that has confused the marketplace in recent years. The long-term focus is now fixed on a product portfolio based on three main family members - the 737 for the 100- to 200-passenger range, the 7E7 for the 200- to 300-seat category, and the 777 for 300 to 400-plus passengers. Production of the 717, 757, 767 and 747 will continue to meet demand, says Boeing, but the long-term plan is to simplify manufacturing by reducing the model mix.
Definition of the 7E7 as a pivotal element of the BCA roadmap appears to be a turning point for the company. It was also important to move quickly to fill the apparent void left by shelving the Sonic Cruiser, even though to Boeing the two projects are essentially the same. "It is the same aircraft, it is the same market, the same size. We got it right," says Mulally, who rejects assertions that the Sonic Cruiser squandered time, money and effort. "We didn't waste a single dollar," he says, while conceding that Boeing is still having trouble getting the message through that it simply swapped speed for efficiency.
To Nicole Piasecki, vice-president business strategies and marketing for BCA, the definition of this message is as important as the launch of the 7E7 itself. The 'name the plane' contest launched with AOL Time Warner is part of Boeing's decision to "be more bold, more visible," she says. "We have to be committed to the industry, and there's a sense out there that we weren't. We still have to stay focused on what we're good at. So as much as we've identified various opportunities, we can't get wanderlust." Piasecki, meanwhile, sees the downturn as a key opportunity to invoke major surgery on other aspects of BCA. Through a project known internally as the 'Go To Market' initiative, BCA is tackling a raft of issues to improve the company and the way it does business. "We need to get more efficient, structural, streamlined and consistent across every single interface with the customer," she says. "The downturn gives Boeing the chance to come up with better answers at one time. For example, how do we reduce the bureaucracy? Frankly, we have been told by some customers that it is easier to do business with Airbus."
Do the right thing
"In the near term, the real challenge is what kind of behaviour can the two manufacturers provide to 'do the right thing'? Nothing is of greater importance to this industry than the supply and demand balance between Airbus and Boeing. We are talking about how to operate in an industry that is essentially a duopolyÉand hopefully we are in a new era," says Piasecki, referring to Boeing's criticism of the European manufacturer's rising production rates in the face of the ongoing airline crisis.
On the sales side, Toby Bright, executive vice-president sales, says Boeing's "relationships are probably better than they were two years ago", despite the fact the market has taken "one hit after another". He says the company's fleet strategy is "getting a lot clearer now, and the 7E7 will help with that view - it articulates a long-term strategy of simplification". For the immediate future, Bright's mission is "to fill up the existing product line". The priority is the dwindling 757 backlog, and protecting the model until market conditions improve. "I think it has real potential in China, and the inclusive tour carriers are still talking to us about the aircraft. But without the US domestics playing in it, we have to ask ourselves if we can wait for the US airlines to come back…and even if they do, will it fit into the new business model?"
The 717 may be in for a renaissance, says Bright. "In the last six months, we've seen more activity on the 717 than since the start of the programme. Airlines think that size of aircraft works better for them in a post-recovery market than it did before. We hope to make progress in the next few months." At the other end of the scale, the future of the 747 is increasingly tied to the recovery of the all-important Asian market, he says. "We were in conversation in February with several Asian airlines and all of them have been put on hold. The freighter is key, and I think we can get through this cycle."
Sales of the 737 remain buoyant, meanwhile, largely due to the continued popularity of the model with low-cost carriers such as Southwest and Ryanair, while the US Air Force's lease of 100 767 tankers is expected to underpin that line for several years. Demand for the 777 also remains solid, with the current sales emphasis on filling a few open production slots in the second half of 2004. Active and recent campaigns for the 777, many involving a mix of -200ER, -200LR and -300ER versions, include airlines in India, Pakistan, Dubai and Qatar.
With the 7E7, says Mulally, BCA is likely to begin emerging from an investment hiatus that has been interpreted as a misplaced fixation on share price and short-term gain. "The plan has always been for a balanced company portfolio, which is less volatile, for long-term growth," he says. "We're not completely there. So this is just an interim time because it is a really tough period [for commercial aircraft]. Boeing is still certain to invest for the long term and there are no thoughts to 'McDonnell Douglasize' Boeing. [BCA] is great value and Boeing is continuing to invest in it."
The decline, and ultimate disappearance, of McDonnell Douglas has been blamed on a reluctance to risk investing in renewing its commercial aircraft product line. The presence on Boeing's board of two former McDonnell Douglas executives, Harry Stonecipher and John McDonnell, has sparked speculation that the drive for diversification at the expense of the investment in BCA could let history repeat itself. Mulally denies this and suggests the board is likely to back the 7E7 on the basis of strong market interest. "The 7E7 is risky, but we've done it over and over before, and we feel really comfortable we can do it one more time."
Source: Flight International
