As he had been at 3M, McNerney became the first outsider to run the Boeing Company. And he had acquired broader business experience both within and beyond the industry than his predecessors there. “A corporate superstar,” said the Seattle Times in its report on the appointment. On June 30, the day McNerney’s decision was announced, investors sent Boeing’s share price up $4.29, or 7 percent, to close at a four-year high. On the same day, 3M’s share price fell $3.74, or 4.9 percent.
Perhaps better than anyone, McNerney would be able to set about ridding Boeing’s corporate culture of the mold that had set in over the past decade. In Toulouse a year earlier, John Leahy, an American who is a senior vice president of Airbus and the remarkably successful director of its sales operations, talked about Boeing’s quest for a leader and the possible candidates, starting with McNerney. “We light candles in the hope that he stays at 3M,” Leahy said.
Cautionary voices within Airbus who had warned at about that time, when the company was riding high, against reading too much into its good news had turned out to be right. One of them was Jean Pierson. In June 2004, retired and sitting on his boat in Corsica, he said, “Arrogance has changed camps now. It is in Toulouse. But it is harder to be number one and easier to chase number one. Our product strategy was easy, because there was nothing to protect. When you have a full product line it is different. Do you protect what you have, or do you build a new airplane. Do I protect? Or do I invest?”14
One year later, in almost the same words, Henri Courpron, who was then president and CEO of Airbus North America and is now senior vice president for procurement and a figure who resembles Pierson in attitude and style, said: “We failed to manage being number one. We told ourselves it would be more difficult to be number one than to try to be that. And we were right. It is more difficult. The problem in managing a lead is that you look back, not forward. We got caught looking back. When we killed the 767 with the A330, Boeing began looking ahead. We didn’t.”15
CHAPTER TWO
Trading Places
THE THINKING THAT SHAPES air travel has changed, as have the companies that are most directly involved with it. Besides Boeing and Airbus, they include the suppliers of smaller regional aircraft, the airlines of the world, and the three big engine makers—GE Aircraft Engines, Rolls-Royce, and Pratt & Whitney (United Technologies).
Their ritual mantra used to be HIGHER, FASTER, FARTHER. Airbus actually affixed a sticker with those three words on the tails of several A320’s earmarked for United Airlines. (In the early 1990s, Airbus surprised itself, not to mention Boeing, by selling these airplanes to its competitor’s most conspicuously loyal customer.) Not long afterward, however, the fashion began to change. The premium on speed, for example, shifted to an outcry for efficiency, a euphemism used by airlines that were beset by difficulties and were insisting on airplanes that cost less to operate. High-speed flight, it seemed, was strictly for the military. Airlines couldn’t make a living that way. The demise of the Concorde proved it, as had the failure of Boeing’s Sonic Cruiser program in 2002.
Holding down “seat mile costs” meant designing airplanes with the right number of seats for certain airlines and their route structures, thereby maximizing the chances of being able to fill these seats with customers. It meant blending airframes and engines in a way that would control fuel burn and produce other economies.
Boeing and Airbus are both bent on shoring up positions in the section of the market where each is weakest (or not even present). With its behemoth, the A380, Airbus has challenged Boeing’s long-run dominance in the so-called very-large-aircraft market that the 747 had provided. And Boeing, after an absence of fifteen or so years from its core business, is developing another market-driven better mousetrap. The company’s radically different new airplane was at first called the 7E7, the E standing for “efficiency.” It was then rechristened the 787, a more logical designation for a stable mate of Boeing’s first long-haul jet airliner, the 707, and its latest, the 777. Many Boeing executives studiously refer to the 787 as the Dreamliner, an artful nickname that a few of Airbus’s public relations people admit to envying and even worrying about.
The 787 is intended to erase Airbus’s huge advantage in the medium-range segment of the airline market, partly by offering lower operating costs than today’s other airplanes. The 787, Boeing says, is based on a new approach that will keep design and production costs low and improve the fuel and aerodynamic efficiency of the plane. The 787 will also heighten comfort by offering larger windows and higher humidity in the cabins. It will be a “game changer,” Boeing people say. They could be right.
Development costs are uncertain but will be high. A figure of $8 billion has been waved around by Boeing, but that has to be a lowball estimate, since the less advanced 777, the company’s last LCA, is judged to have cost nearly $14 billion to develop. But Boeing left itself a hard choice: either quit the commercial aircraft business altogether or build a very advanced airplane, one that would appeal strongly to a wide variety of airline customers.
Going forward with the Dreamliner, said Walter Gillette, who was then Boeing’s vice president for engineering, “is the biggest step we have taken in 50 years.”1 With this airplane, Boeing has radically altered—indeed revolutionized—its approach to designing, building, and financing new products. Its role is that of “systems integrator,” coordinating the design and development efforts of a group of largely non-U.S. partners.
Never before had Boeing outsourced the responsibility for a wing; the wing and the flight deck are the clever parts of any airframe. “We Build Wings,” Boeing once proclaimed to the world. It regarded itself, probably correctly, as without peer in designing wings and building them within tight budgetary constraints, a prowess of which T. Wilson was manifestly proud.
That was then, however. The major responsibilities for designing and building the 787 wing have been outsourced to Japan. Together, three Japanese companies, backed by their government, are at least as directly involved in building the 787 as Boeing itself. They are known as the “three heavies.” Mitsubishi Heavy Industries is doing a large part of the work on the wing, along with Fuji Heavy Industries, which will build the center wing box and integrate the wings with the plane’s landing gear. Kawasaki Heavy Industries is building a section of the fuselage behind the cockpit as well as the trailing edges of the wings.2
Briefly, Japan is becoming a risk-sharing partner responsible for creating 35 percent of Boeing’s first new airplane in thirteen years. In addition, Italy’s chief aerospace firm, Alenia, and an American company, Vought, are doing much of the work on the fuselage panels.
Japan’s role is controversial. Boeing’s engineers are in the main hostile to “farming out tribal knowledge,” as some of them put it. The Japanese have never built a wing for a big airliner, and no one has developed a wing box made of composites for such an airplane. Actually, Boeing says, half of the 787’s primary structure, including the entire fuselage, will be built of composites, an industry first.
Composites are a class of materials that include fiberglass, Kevlar, and other fibers, notably carbon fiber. These are held in shape by a hardened resin, usually epoxy. The composites offer advantages: they are lighter and stronger; they don’t corrode or fatigue as metal does. The 787’s fuselage skin will be a single piece of layered carbon fiber reinforced plastic (or CFRP) in place of several hundred sheets of aluminum. CFRP will also be used to build the floor beams, and the frames from nose to tail. Most of the center section of the airplane’s wing will be made of CFRP as well. This section is considered the “keystone” that holds the airplane together. The outboard wing box, the airplane’s strongest structure, will be made mostly of CFRP. Other parts of the 787—too numerous to mention—will be built with composites too.
“Building a wing is an art,” says Gordon McKinzie, who for many years managed United Airlines’ new technology division and was closely involved in his company’s selection of new aircraft, mo
st of them Boeings. “Building it out of a new material is a major challenge. If anyone told a Boeing guy a few years ago the company would try it, he’d have said, ‘Over my dead body.’ And I never thought I’d see the day when Boeing was farming out the engineering. Boeing hates losing control. It used to be called a schedule-driven company.”3
In the past, Boeing’s approach to building its airplanes was conservative, pragmatic, and self-sustaining. Besides the wing, however, Boeing is depending on suppliers, European and American, along with Japan’s heavies, to build several of the 787’s other sections. In outsourcing, Boeing is really doing what once would have been unthinkable: copying the Airbus model. But Airbus has made a virtue of necessity. None of its member countries possessed a major Americansize aerospace company. But each of its companies insists on having a share in building the airplanes. So Airbus has spent close to thirty-five years creating a network of suppliers and coordinating it. And at least half of Airbus’s A350 will consist of composites, although of a different and less challenging type than Boeing is using.
Instead of building its new airplanes, Boeing will assemble their various parts. Close to 70 percent of the 787’s parts are being made outside the United States. Most of them will be conveyed to the Puget Sound area in huge cargo aircraft. Boeing expects to be able to snap the parts together in just three days.
AIRBUS AND ESPECIALLY Boeing each gambled massively on two new airplanes that represent radically different approaches to the market. There is probably no precedent for such a divergence. The A380, because it can carry a huge number of passengers, is designed to fit within the hub-and-spoke pattern of air travel that the big airlines have favored. An A380 could take 550 passengers from Tokyo to, say, Los Angeles or New York, where many of them would then transfer to flights going to Denver, Phoenix, Cleveland, and so on. And, Airbus argues, this superjumbo airplane will be cheaper to operate than other aircraft, partly because it will burn less fuel per passenger. Its operating costs are expected to be 15 percent below those of Boeing’s 747.
Boeing had the better strategy. Until recently, an airplane’s range was equated with its size; the bigger it was, the farther it was expected to travel. But with today’s more advanced technology, that needn’t be the case. Boeing’s 787 will carry half as many passengers as the A380 between cities set equally far apart, but will carry them directly from one point to another—from Tokyo, say, to Denver, Phoenix, or Cleveland—with no intermediate stop in a hub airport.
In arguing that its Dreamliner is more responsive to current market trends than the A380, Boeing is right. Flying on a double-aisle airplane eighty-five hundred miles point to point—rather than from one hub to another and then transferring, which lengthens travel time for passengers bound for smaller places—is certain to have a strong appeal for travelers, especially those who can afford to pay for that convenience. They can also avoid the risks of missing a connecting flight or losing a bag.
Boeing also feels that it can benefit from what seems to be a trend toward small airplanes. Jeff Shane, undersecretary of the U.S. Department of Transportation, notes the vast and growing array of regional aircraft, as well as business and private jets. “I see a sky darkened by dentists,” he says half seriously.4
As for the leviathan, the A380, it may be too big for today’s market, or may have come along too soon. The Airbus claim is that this new airplane and the thinking behind it will be fully vindicated over a period of five to twenty years. With airline traffic expected to triple over the next twenty years (also Boeing’s estimate), Airbus argues that a superjumbo-sized platform will be the only sensible way to move so many people. There probably won’t be any new airports at the major hub cities or more room to expand existing facilities; the carriers will be unable to schedule more flights into the existing space, the reasoning goes, since airports can absorb only so many takeoffs and landings in one day; indeed, air traffic control is said to be saturated in most large airports.
Right now, one in every nine flights at Heathrow, for years the world’s busiest international airport, is made by a 747 jumbo. But introduction of the bigger A380 will supposedly allow 10 million more passengers to fly to and from the airport with no increase in flights. Boeing disagrees, arguing that the A380 flights between major hubs won’t reduce congestion because they will create large networks of connecting flights.
Another Airbus argument is that thanks to new technologies, the A380 will take up less landing and takeoff space than the 747 even though it is bigger. Not only was it designed to fit into all the same airports, it will fit into the eighty-meter box on runways that is a standard airport requirement.
The market for the A380 is believed to lie mainly in Asia. Singapore, Hong Kong, Shanghai, Taipei, Sydney, Seoul, and perhaps Tokyo are expected by Airbus to become hubs connecting fully loaded A380 flights to London and New York. Gradually, some of those cities will be served by A380 flights to other major cities, including Los Angeles.
Airbus people concede that the 787 should be a very successful airplane. And it will be if Boeing’s radical business plan for the venture leads to deliveries of the plane close enough to contractually agreed specifications and close enough to contractually agreed delivery dates.
In the end, both new ventures may succeed, even if there have never been two such different airplanes competing in an airline market that is even more chaotic than usual.
IN DECIDING to build the 787, Boeing was behaving, in effect, as the company had in its braver days. Its calculation was that starting in 2008, when the 787 would be available, Airbus would be competing against it with the A330-200, the very airplane that had ousted Boeing from the middle market. But by then, that airplane would be middle-aged, offering less range and fewer technology-related sweeteners than the 787.
Boeing got Airbus’s full attention. The 787’s operating costs seemed certain to be lower than those of any other airplane, chiefly because a new state-of-the-art engine, along with the composites and the airframe’s shape, would cut those costs substantially. And for the first time in fifteen years or so, Airbus reacted to Boeing. Competing against the 787 would oblige Airbus to fashion a better midsize airplane of its own. The question was, how much better? Would investing in an improved version of the A330-200 be enough? Or would the market snub a derivative and show a strong preference for two new look-alike airplanes, one of which might kill the other? Inevitably, there began to be talk of the fratricidal conflict that Lockheed and McDonnell Douglas had brought on with the L-1011 and the DC-10.
A simple derivative appeared to offer some advantages. It could be powered by new engines of the kind Boeing would be hanging on the 787 and thereby cut fuel costs. But with fewer of the 787’s less basic refinements, a new Airbus could have been offered to airlines at a more attractive price, possibly for as much as $20 million or so less per copy. Also, this improved version of an existing airplane, the A330-200, would have had far less lead time than a wholly new model. It might have been available no more than a year later than the 787, or even around the same time if the 787’s progress lagged, as seemed quite possible.
On December 10, 2004, Airbus made known its intention to begin offering the new Airbus, christened the A350, to launch customers. The announcement was made by Noel Forgeard, who was still CEO at the time. Among the points he could plausibly make was that the A350 “is in the unique position of being a full member of a comprehensive airliner family, hence benefiting from an unmatched level of commonalty.” Forgeard was reminding potential customers that commonalty saves money all around, and in this case should further improve prospects for shortening the A350’s lead time. It could also shorten the complex process of getting a new airplane certified by government agencies as airworthy. Airbus reckoned, or hoped, that a big part of its customer base would choose the A350 over the 787, both because of the commonalty issue and because sibling aircraft in the A320 and A330 families had given satisfaction.
Still, the case for a derivativ
e was far from obvious. A choice that confronts suppliers relentlessly is whether to create a new airplane or build an improved version—a derivative—of an existing model. The clear preference among experienced Airbus and Boeing people is for the higher-cost option—new equipment. The biggest gain, they say, is made with “a clean sheet of paper,” the industry’s standard term for an airplane that isn’t “backward compatible,” a term used by aeroengineers. A new model normally offers better technology and improved fuel economy. It is likely to have more credibility but not to have an expensive heritage. And it can be harder to justify the costs of changing an existing production line.
Boeing had hoped to book two hundred or so firm orders for the 787 before the end of 2004. It sold just eighty-six, fifty to All Nippon Airways (ANA), the launch customer, and thirty to Japan Airlines, an order completed just before the end of the year. By then, however, Airbus was using the A350 to play with the heads of airlines. Exactly what sort of airplane would its A350 be? What Airbus was talking about appeared to be neither a clean sheet of paper nor an improved A330-200, but instead a blend of both. The blend, however, lacked definition. In what direction was Airbus tilting?
The cutting edge of the Boeing-Airbus competition had shifted to Asia several years before, and Boeing counted on various airlines in the Near East and Far East to buy the Dreamliner. They, unlike most of their European and American counterparts, could afford the airplane. And it was—is—a good fit for the route structures of several Asian carriers. But, they all wondered, might not the A350 be an equally good fit, or almost as good, and, given the Airbus family’s commonalty, have fewer teething problems? And might not the A350 arrive with a better price?
Airbus wasn’t dispensing much hard information, just enough to raise questions of that kind. “Guerrilla marketing” was a term used by some analysts to describe the tactic. But it caused airlines in Asia and elsewhere to hesitate. They wanted to be able to compare the pros and cons of buying Boeing’s new midrange airplane with the features of the almost new Airbus.
Boeing Versus Airbus Page 4