The Dreamliner Dream Turns Sour. What are the Implications for the Global Air Travel Industry?

February 11, 2013

Boeing 787 Dreamliner

by Pikay Richardson and Tudor Rickards

On Friday January 18th all Boeing 787s were grounded by the Federal Aviation Authority of the United States, after an emergency landing in Japan had intensified the security and safety concerns of the aircraft. Shares in Boeing took a dive.

The Big Dream Turns Sour

This was a serious blow to the company following earlier problems to the Dreamliner, including, a fire, a battery explosion and a fuel leak. Aviation agencies around the world followed suit and grounded all other 787s. For All Nippon Airways, the airline with the biggest Dreamliner fleet, the brake problem was the third hitch in as many days. Shares dropped by more than 3% after the ban.

The troubles for the Dreamliner began in November 2010, when a fire broke out in an avionics bay during a test flight and forced an emergency landing. By this time, the plane had already had a three-year delay in its delivery deadline, which led to increased costs, order cancellations and much concern in the airline industry. Some airlines that had staked their future operations on the Dreamliner.

Boeing’s reputation is also on the line. The Dreamliner project had generated a great amount of hype for its claims of quality, innovativeness and fuel efficiency. Indeed, the Dreamliner had been touted as the great new business hope for Boeing and for its commercial airline customers. Boeing drew attention to the Dreamliner’s high-tech composite fibre body, which reduces weight and thereby improves fuel efficiency significantly. In commercial aviation, fuel costs constitute a substantial proportion of total costs and any weight-reducing innovation drops straight to the bottom line.

New order books were high, topping 848, with 50 delivered and in service, clocking about 100 flights per day by December 2012. In the event, All Nippon Airways and Japan Airlines, with 24 of the 50 delivered, had their fingers most badly burnt . Not insignificantly, passenger confidence in the aircraft and its use declined.

As observed by Patrick Smith of The Atlantic:

“this is a huge and costly black eye for Boeing and its customers. But it could have a lot been worse. The grounding came pre-emptively before anybody was seriously hurt or killed. It is also helpful that the problem, as we understand it so far, is fixable. Burning batteries are serious, but this isn’t a structural defect which will end up costing billions”

Prospects and Implications

Where does this unfortunate episode leave Boeing’s future business, reputation and leadership in the commercial aviation industry? That depends on how long it takes to fix the problems and in consequence, how long this grounding continues. There may well be wider implications for air travel, aircraft manufacture and innovation in aircraft systems, competition and of strategic leadership in the duopoly of Boeing and Airbus.

Based on the separate analysis and forecast of the future development of aviation and air travel, and in consequence, demand for aircraft, Boeing based its future on mid-sized point-to-point travel that necessitated mid-sized 250-seater type aircrafts.

Airbus, on the other hand, forecast demand for more hub-based travel, requiring bigger aircraft, hence the development of the 550-800-seater double-decker A380. The A380 is increasingly establishing itself. Emirates has ordered 30, and has plans for 90 more. It recently opened a A380-dedicated terminal [6th January 2013]. Implementing either of The competing strategies will result in interesting challenges in the immediate and longer-term.

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Airbus delays as A380 production continues to stall

June 1, 2008

Delays to Airbus flagship A380 came as no surprise to anyone following the extended story of this mega-engineering project. Do we have a tale of a jumbo jet turning into a white elephant?

The extended case against former Boss Noel Forgeard rumbles on. This may still be harmful to the company. But the production struggles associated with the A380 persist, and seem more likely to prove commercially damaging.

When a project starts badly there seem to be inevitably further problems right down the line. How much of this due to the complexities of project management? How much to leadership or lack of it?

The company said the latest delays were due to problems moving from the initial production phase, responsible for the first 25 aircraft, to a more intensive production line. No details were given about the financial implications of the announcement.

“The extent of the additional costs will be influenced by the actual production and delivery scenario,” Airbus said.

Airbus – which is part of aerospace group EADS – now plans to deliver 12 planes this year, instead of the 13 expected. In 2009, 21 A380s will be supplied to carriers against the previous plan to deliver 25. Deliveries for 2010 would be discussed with airlines in the coming weeks.

A scale-up problem?

Further light is thrown on the delay by Aerospace reporter James Wallace

The latest delays will affect planes that are delivered in 2009 and 2010. These are what Airbus calls its “Wave 2” A380s, in which new automated production methods will be used that eventually will streamline the production process. The first 25 A380s are essentially being wired by hand, and problems with the wiring bundles caused the earlier major delays.

Wallace writes with insight about the pressures facing the rival firms Boeing and EADS. He recalls with some nostalgia how

Thirteen years ago [dating back from May 15th 2008] Boeing Co. delivered the first 777 to United Airlines — on schedule to the very day it had been promised years earlier. But meeting schedules for the next generation of jets from Boeing and Airbus, with all the advanced technology and new production methods, has proved impossible.

The A380 production lines are struggling, but Wallace offers even more gloomy expectations for the challenges facing the rivals and their next generation promises for the 787 (Boeing) and A350 (Airbus/EADS).

Commenting for the Herald Tribune, Caroline Brothers outlines the press conference call from Thomas Enders which briefed on the delay.

Because of rising fuel prices, the delivery slowdown will hurt airlines seeking to get the most efficient aircraft onto their flight schedules. Enders declined to estimate the financial impact of the delay until Airbus completed discussions with its customers. Emirates, Singapore Airlines and Qantas are all expecting deliveries this year. Air France-KLM and Lufthansa are expected to receive the A380 in 2009.

The report also suggested that Air France might take a particularly hard hit. Now that’s something worth watching out for. Surely political influences on EADS are not being exercised in a direction which disadvantages French interests?

Acknowledgement: Image from M Puddy’s excellent Aerospace website


Boeing loses Mega-Contract to Northrop Grumman

March 1, 2008

boing-kc-135.jpg

The US Air Force announces it is to award a giant procurement contract to Northrop Grumman and its European partners. Boeing had been expected to win the estimated $40 billion of business for delivery of mid-air refuelling planes for the US military. The decision seems likely to raise questions of factors that influenced it

Northrop Grumman has snatched a $35 billion Air Force contract to build refueling planes in a surprise victory over Boeing, the company that has supplied such tankers for 50 years.

The Los Angeles-based Northrop Grumman and its partner in the competition, the European Aeronautic Defence and Space Co. of France, plan to do most of the tanker assembly work in Mobile, Ala., some frame work in Europe and the refueling systems at Northrop Grumman’s new facilities in Bridgeport, W.Va.

“The tanker is the number one procurement priority for us right now,” General Duncan McNabb, vice chief of staff for the Air Force, said Friday [February 29th 2008] in announcing the bid winner. “Buying the new KC-45A is a major step forward and another demonstration of our commitment to recapitalizing our Eisenhower-era inventory of these critical national assets.”

The contract gives Northrop Grumman an opening to further future billions of dollars because the Air Force wants to replace its entire fleet of 600 refueling tankers. For EADS, the maker of Airbus planes, the victory is an entry into the lucrative U.S. military market.

The Loser without doubt is Boeing

Business Week makes it clear, and even points to an explanation

The decision represents a major coup for a European aviation behemoth—and a major blow for Boeing, considering that the business was firmly in its grasp four years ago but slipped away in a scandal that led to the departure of the company’s chief executive. … Nevertheless, there was outrage in Washington State, where Boeing’s commercial jetliner operations are based. “We are shocked that the Air Force tapped a European company and its foreign workers to provide a tanker to our American military,” Senator Patty Murray (D-Wash.) said in a statement. “At a time when our economy is hurting, this decision to outsource our tankers is a blow to the American aerospace industry, American workers and America’s military.”

Scandal? What scandal?

The scandal story can be traced back to events over the last six years.

The Decatur Daily account paints the gruesome details

Boeing Co. CEO Harry Stonecipher, brought back from retirement 15 months ago to boost the aerospace manufacturer’s tainted image, has been forced out because of a new ethics scandal involving an affair he had this year with a female company executive.

In a stunning announcement that left the exact circumstances behind the ouster unclear, Boeing said Monday the 68-year-old president and chief executive officer had resigned at the board’s request a day earlier for improper behavior while carrying out the consensual relationship.

The emergence of another ethical flap is an embarrassing jolt to a company that had been trying to put two years of scandal behind it.
Stonecipher’s predecessor, Phil Condit, resigned Dec. 1, 2003, as a result of the defense contracting controversies that ultimately sent two Boeing executives — ex-Air Force procurement official Darleen Druyun and chief financial officer Mike Sears — to prison.

These controversies resulted in the U.S. Air Force suspending Boeing for about 20 months, the longest such suspension of a large defense contractor in procurement history.
Boeing had thousands of documents belonging to Lockheed Martin Inc., documents the Air Force said gave Boeing an unfair advantage in bidding for rocket contracts.

As the LA Times put it

The surprising award [to Northrup] is likely to add to one of Pentagon’s more sordid and tangled procurement scandals that evoked the wrath of a presidential candidate and led to prison sentences for two Boeing executives.

The European Dimension

In Europe the coup was hailed as a success for EADS, partnering Northrop Gumman. American commentators noted Northrop Grumman as LA based, and partnering EADS.

Louis Gallois, EADS chief executive, said on Friday night the contract was a ”breakthrough for EADS” in the biggest defence market in the world. ”To win against Boeing is just great,” he told the FT.

As recently as Friday afternoon the EADS team had been convinced that Boeing would take the contract. Mr Gallois, about to leave Paris for a mountain holiday, said he had simply not believed his ears when informed at 10.25pm local time last night. ”I think it is the best contract I have won in my life.”

So Louis was as surprised as commentators outside the company.

In America more is made of the role played by Ronald Sugar, CEO of said international firm Nothrup Grumman. Mr. Sugar is a business leader who has operated largely away from the headlines.

As well as a successful business career he is extremely well connected through his efforts for prestigious charities, including the post of national fundraising chairman of the Pearl Harbor Memorial Fund. He is a past Chairman of the Aerospace Industries Association, and earlier was appointed by the President of the United States to the National Security Telecommunications Advisory Committee. He is a national trustee of the Boys & Girls Clubs of America, a director of the Los Angeles Philharmonic Association and a trustee of the University of Southern California.

The Morphing of International Companies

The differing treatments of the story around the globe is instructive. Globalization is acquiring its special features. One is the capacity of a global firm to represent itself somewhat selectively. Retention of ambiguity is made easier when international contracts are operated from a consortium. In the United States, a consortium arrangement may be presented as American as Apple Pie, while in Tokyo as Japanese as Sushi …

So in this instance, in America, emphasis is placed on planes that will be built in America. In France, the venture is French-led.

I am reminded of international business executives who hold several passports, more for convenience than deception. They avoid the double-sided business card in two languages in favour of several cards, each with a specific corporate location, and often with different job handles for the executive.

Acknowledgement

The image is from the industry journal Space Mart