After the collapse of the Sonic Cruiser concept, Boeing has bold plans to ask suppliers to take larger risk-sharing stakes in the 7E7 project
Airline mistrust of the economics of high speed - not the technology - killed the Sonic Cruiser. This time, with the 7E7, Boeing has got to get it right if the company wants to still be building civil airliners 20 years from now. It already insists the 7E7 will be 20% more efficient than its Airbus competitor, the A330.
Now, Boeing's ambitious plans, spelled out at the Paris air show last week, to require that suppliers take a much bigger risk-sharing stake in the 7E7 programme - even to the extent of becoming shareholders in a standalone business entity - could give the world's biggest aerospace company the chance it needs to drive down production - and ownership - costs of the twinjet.
If successful, the venture could see Boeing regain the initiative it has lost to its European rival, which at Paris pulled further ahead in the 2003 orders race with a clutch of deals spearheaded by the A380 purchases by Emirates and Qatar Airways. But the initiative could also see Boeing leapfrog Airbus - light years ahead of Seattle when it comes to the way it assembles aircraft - in terms of production efficiency.
The automotive industry learned the lesson years ago that reforming its manufacturing methods was key to driving down the unit cost of cars. Sixty years or so after Henry Ford instigated the first step change in the sector by introducing his moving production line, the USA's and Europe's lumbering auto giants began in the 1980s and 1990s to hand greater responsibility for chunks of the vehicle to their suppliers.
These vendors built their own assembly facilities next to or even inside their customers' factories so they could deliver their product "just in time" to the point on the assembly line where and when it was needed. It meant the car manufacturers could shed billions of dollars of costs while manufacturing cars faster and with fewer faults and interruptions, and while passing development and production costs to their suppliers. It also meant they did not have to have parts sitting in their storerooms and on their balance sheets for any longer than absolutely necessary.
The aerospace industry is fundamentally different, but the principles are the same. Boeing is seeking fewer, deeper and longer relationships with its partners on the 7E7. It wants to secure long-term contracts with systems integrators that will share the risks of developing the aircraft and, in return, share in the financial success of the aircraft over its lifetime. By gambling their investors' cash in the early years, suppliers can guarantee their shareholders a steady flow of revenue for more than a generation.
Risk-sharing on aircraft programmes is not a new phenomenon. Manufacturers, led by Bombardier and Embraer, have successfully pioneered the approach in recent years, on both business and regional jets. Airbus has signed up risk-sharing partners for the A380. However, no manufacturer has gone as far as Boeing could go if it follows through on some of the more ambitious and innovative initiatives it is studying as it builds both the business case and the business model for the 7E7.
The 7E7 will be the first Boeing airliner to reach the launch decision point since the company balanced its commercial and defence business portfolios and moved its headquarters out of Seattle to neutral Chicago. Boeing Commercial Airplanes, now half of a much larger company, faces a tougher task in getting approval for a new airliner. Its success will depend to a great extent on the strength of the supplier support it can garner, not just in the USA, but globally.
For the business case to succeed, Boeing knows it must reduce not only the acquisition cost of the aircraft, but also its operating and maintenance costs. One way to do this is to get suppliers to guarantee reliability rates and repair costs that will give the customer the lowest and most predictable ownership costs through the aircraft's life.
For the business model to succeed, Boeing will have to persuade its partners to share the long-term revenue-generation potential of the aircraft. But this will require a leap of faith in the industry.
Every mid-size aerostructures maker or systems supplier worth its salt says it has ambitions to move up the value chain to be a system integrator rather than a component vendor. It is time for all of the supplier industry - not just its biggest players - to recognise that it must share in the risk of new aircraft development if it wants to reap the rewards.
Source: Flight International
