'Change is good' has become something of an unofficial mantra in the offices and on the factory floor of Boeing. Sometimes whispered through gritted teeth, sometimes just a shared joke, it is an acknowledgement between colleagues that their company has been all about change in the past year. A new product line, new faces and an unprecedented ramp-up in production have left many of them struggling to remember what a 'routine' workday means.
Now 80 per cent of the world's commercial airline fleet are Boeing products, following the completion of the Boeing/McDonnell Douglas merger. In order to meet its goal of capturing the lion's share - around 65 per cent - of the available market over the next 10 years, the company has more than doubled its production rate from 18 aircraft a month to 38, with the intention of reaching 43 a month by the end of the second quarter 1998, and delivering more than 500 aircraft in that year. 'In order to do that in today's highly competitive marketplace, you have to be quick and you have to be nimble,' says Boeing Commercial Airplane's vice president of international sales, Seddik Belyamani.
Boeing found that sprint a little exhausting late in 1997, when it was forced to shut down its B747 and B737 production lines temporarily to allow breathing space for suppliers to catch up with the frenetic activity. The result was a $1.6 billion pre-tax charge to cover production disruptions and late-delivery charges. A further $1 billion charge is anticipated in 1998, while late deliveries to some customers will trickle through 1999.
Boeing chairman and chief executive officer Phil Condit admits that, had it been able to predict fully the problems associated with such a steep ramp-up, the company might have done things '. . . a little differently.' On the whole, however, he can live with the problems. 'It was clearly a decision that had risk with it and we knew it would stress the supplier chain,' says Condit. 'Obviously, this is not a situation that we like. However, I think that had we known what was ahead of us we might have modified our production rate slightly, but we would have still made the same basic set of decisions. Our goal clearly is to be responsive to our customers and we see a long-term very stable production rate. I am overall very optimistic.'
Meanwhile, Boeing Commercial Airplane's president, Ron Woodard, is convinced that most of the production problems have been solved as the company enters 1998. 'We are firmly of the opinion that we now have the workforce in place for today's production challenges,' he says.
The consensus seems to be that 1997's production problems were merely hiccups in the larger picture of what Boeing is trying to achieve, and no long-term damage has been done to either the company or its reputation with customers.
'Did they make the right decision to go as aggressively as possible to extend capacity?' asks Wolfgang Demisch, analyst at Bankers Trust in New York. 'My answer would probably be "yes". I don't think I would do anything but wholeheartedly endorse the decision. Could they have done a better job getting everyone else ready? Maybe, maybe not. But the increase in costs is only 5 per cent, which is not astronomical. It's not as if the whole business fell apart; it is just symptomatic of the pain they are going through. The good news is that it is only 5 per cent; the bad news is that it is 100 per cent of their earnings - it highlights the relative small earnings compared with other industries.'
For Boeing, 1998 will be about concentrating on a whole new set of production challenges relating to the merged family of Boeing and McDonnell Douglas aircraft.
Hinting at some of the stress that built up through 1997, Woodard dismisses any notion that the company might have announced its decisions on the merged product line sooner. 'We unfortunately are not blessed with infinite wisdom, like some people seem to be,' he retorted at a press conference. 'It was 4 August before the merger happened and we became privy to the data and sales efforts associated with all those products. I think we have reacted remarkably quickly. I consider this a very prompt response to the needs of our customers.'
Not that the decisions announced in early November held any real surprises. No-one expected the MD-80 and MD-90 to be given new leases of life, although the fact that Boeing intends to market both the passenger and cargo variants of the MD-11, even though it expects 80 per cent of demand to be for freighters, attracted some interest. Nor has the company ruled out development of an extended MD-11, referred to as the MD-12. 'We are certainly looking at that product. We are always evaluating the airplanes in our current production line against other products and looking at future possibilities. It will be in our pile of future products to think about,' he says.
Overall, Woodard predicts a 'long and successful' life for the MD-11 and as many as 300 new orders over the next 20 years. His more vexing questionmark hangs over the newest and smallest Douglas product, the MD-95.
According to Woodard, the only firm commitment to the MD-95 is the 50 aircraft ordered by the sole customer to date, AirTran Airlines. Woodard will not even be drawn on the question of the 50 options that AirTran holds, even though the airline's president, Joseph Corr, has repeated several times recently that he intends to exercise those options.
While Boeing clearly sees potential for the MD-95, as well as the possibility for developing smaller and larger variants, Woodard's caution is palpable. 'The MD-95 does appear to offer the potential to be a very successful product in the 80-100 seat category,' says Woodard. 'It would fit very well in the Boeing line and from the technical, performance and payload points of view, it has very few shortcomings. So the chances are that it has potential to be a real contributor to the overall Boeing family. But the key is would we have a programme that is financially viable? It is our classic challenge. There are very real and serious discussions with our customers going on to understand what is the volume of the long-term market. Our problem is, and always will be, what will the marketplace pay for the product?'
Demisch has picked up on Woodard's caution. 'I think it is pretty clear that this is a go-ahead under duress programme,' he says. 'But when you finish building 50 airplanes, then if you are not at the bottom of the cash investment, you are very close to it. So if you then finish the product line at that point, you maximise your loss.' He estimates the loss in this case would be around $3 billion, of which three quarters would be shouldered by programme partners.
By contrast, however, Woodard's deputy, Tom Schick, sounds much more positive about incorporating the MD-95 into the Boeing line-up. 'We think if we can do this right, it is an ideal plane to fit into the Boeing family,' he says.
Of much more general concern to former McDonnell Douglas customers, says Schick, was the issue of future support for their aircraft. 'Their main concern was ongoing product support,' he says. 'We have historically been viewed by not only ourselves, but by our customers and competitors, as having the finest support in the industry. What we are saying is that we will work as hard on the Douglas products. Today, they are all Boeing products and we don't see any difference happening in our efforts.' Schick points out that 'Boeing' products now include over 1,000 DC-3s - some of them over 60 years old - that are still in service and for which Boeing now assumes service responsibility.
According to Boeing's director of product marketing, Joseph Ozimek, this blanket approach towards support for all former Douglas aircraft has already won the company praise from the airlines. 'They are very impressed by the fact that we have said we will support all McDonnell Douglas airplanes the same as the Boeing airplanes,' he says. 'Boeing support is first class and when people hear that they are getting that, the reaction is very positive.'
According to Ozimek, the company's dominant position has not made the marketplace any less bloody. 'Nineteen ninety-seven was an exceptionally good year for Boeing from the point of view of selling Boeing products,' he says. 'We have announced some very important orders around the world. But I think it has also been a very tough year. No sale came easily. We spent long and hard times fighting our competitors.'
Referring to one subject where the views of Boeing and Airbus are the most disparate, Ozimek says he remains convinced there is not a sufficient market to justify launching a very large aircraft yet, either new or a B747 derivative. His chief concern is to make sure any product Boeing might develop is the correct one. In this case, Boeing is prepared to let Airbus take the first risk, he adds.
'In this business, it is not necessarily important to be there first. As long as you are there, you win,' he says. 'These products are not like toothpaste, where if the customer doesn't like the stripe, you just take it out. These are billion dollar investments and you have to get them right first time.
'This is a consumer product, but there are not many customers who buy them. So you have to get it right and if getting it right means being second, we would be happy to have Airbus claim they were first and we followed.'
Ozimek says that Boeing is merely using reasonableness as the basis for its cautious attitude towards a very large airliner. Over the past 30 years, he points out, the company has produced 1,250 B747s of which 80 per cent are operated by just 25 airlines. If the Airbus forecast for a marketplace for 1,440 is correct, he argues, then each of those 25 airlines is going to order around 60 aircraft. 'But the 18th largest operator of 747s in the world has fewer than 20. I want to see the movie of someone going to Tower Air and telling them they need 60 of these planes. How does this pass the test of reasonableness?'
Ozimek acknowledges that there 'clearly' is a market for an aircraft larger than the B747-400, but if Boeing pursues this he believes it will be with a -400 stretched to offer up to 100 more seats and a seat mile cost reduced by between 5 and 10 per cent. 'Unless the market dramatically alters, we won't pursue a new airplane,' he says.
Keeping an eye on that future market is Tim Meskill, Boeing's project director of marketing requirements. Meskill believes the next slowdown in demand will begin in 2003, but remains confident of the nearer-term market, chiefly because of one unmoveable date - the US Stage 3 noise regulation compliance deadline at the turn of the century. 'That is where the big orders are coming from in the US,' says Meskill.
The new year, he adds, will be something of a status quo in terms of orders, but an important year for information gleaning. The company will keep a close watch on the Asian marketplace and the rate at which airlines take up options - something that does not usually become clear until mid-year. By then, Meskill believes, Boeing should have gathered sufficient evidence to check its predictions for post-1999.
An increasing problem for forecasters, says Meskill, is that with the worldwide installed fleet approaching 12,000 aircraft, even a 1 per cent swing away from predictions amounts to 120 aircraft. 'That is a major change to our production plans. Potentially, it's a huge problem and we have got to learn how to deal with it. Forecasting does not get rid of the uncertainty. The issue is how to deal with that uncertainty. Our supply chains have to be capable ahead of when we need them. Lines of communication need to be improved,' says Meskill, adding that shortened production cycle times will help.
Fred Klein, president of Virginia-based GRA Aviation Specialists, agrees. 'Shortened production times will help knock some of the tops off the peaks and valleys; they will help to mitigate the cycle problems,' he says. 'But I don't think anything will ever stop the ups and downs of the cycle. Most of the players are still seized by airplane madness. Yes, they can help mitigate the cycle, but the business cycle will continue for as long as I can see ahead.'
The need to be quick and nimble, in other words, will continue to be paramount. And probably the only thing that will not change over the next few years will be the need to change.
Source: Airline Business
